Rand on edge; other emerging markets firm

Emerging stocks flirted with new five-month highs yesterday and currencies mostly firmed versus a tepid dollar, except for the South African rand which fell before the president’s annual state of the nation address.MSCI’s emerging equity benchmark gained 0.4%, lifted by solid gains in China and elsewhere in Asia while bourses in South Africa and Turkey rose around 0.5%.The rand weakened as much as 0.5% against the dollar at one point ahead of President Jacob Zuma’s annual speech where he is expected to outline government plans to improve the economy and could also announce a cabinet reshuffle.“Investors in emerging markets overall are still cautiously optimistic,” said Paul Fage, senior emerging markets strategist at TD Securities.“The rand is the biggest mover today... the one person the market has their eye on is what happens to finance minister (Pravin) Gordhan and I can’t believe Zuma would be crazy enough to get rid of him, even if there is no love lost between the two,” he said.Zuma has downplayed the prospect of a significant reshuffle but investors remain nervous given the importance of reform to lift the country’s sluggish growth rate and avert ratings downgrade to sub-investment grade. Uday Patnaik, head of emerging debt at Legal & General noted a potential improvement in growth prospects this year.But he remains neutral on the credit, adding: “This Zuma issue, we don’t know what he wants to do, there is still a chance they get junked in summer and it depends on what he does.” Mexico’s peso also booked losses ahead of a central bank meeting which may raise interest rates by 50 basis points to 6.25% to stem accelerating inflation fanned by currency falls and a gasoline price hike.However, Russia’s rouble, buoyed by higher oil prices, strengthened 0.3% against the dollar, Turkey’s lira struggled 0.1% higher and most Asian currencies also firmed. In central Europe, Romania’s leu edged lower but was set for its biggest weekly gain in a year despite hundreds of thousands of Romanians taking to the street to protest a government decree to decriminalise some graft offences.“We don’t think this will result in a full blown political crisis...but the stand-off between the government and the protesters will go on for the time being,” said Andreas Schwabe, senior economist at Raiffeisen Bank International in Vienna. Schwab said overly optimistic economic growth forecasts in the draft budget were more worrying.“The budget deficit will be higher than 3%, maybe 3.5% and that would be above the threshold the European Union and the Commission wants to see,” he said.