South Africa now has the most volatile currency in the world

There is no doubt that South Africa has been through the economic wringer in recent months and that the volatile fiscal policies of current government have materially impacted the long term health of the rand.

It now shares the unwanted title of the “world’s most volatile currency” with Turkey and Russia, and early April saw Standard and Poor’s (S&P) downgrade government bonds to a BB+ rating. Fitch Ratings followed suit with a downgrade a few days later, while J Morgan unhitched South Africa from its bonds and gauges.

Then for good measure, on 9 June Moody’s downgraded the government from Baa3 from Baa2. The government’s senior unsecured short term program rating was also downgraded to (P) P-3 from (P) P-2.

The rating at least recognises that South Africa still has some significant strengths that continue to support its creditworthiness, but there are growing downside risks.

More recently, on 15 June, the South African government added to rand woes by declaring that it would introduce a new law that will force mining firms to restructure to ensure they have 30 per cent black ownership within twelve months. The rand tumbled by 2 per cent and saw R30bn shaved off its market capitalisation.

As a result of this economic fallout, South Africa’s economy has slipped into a recession for the first time since 2009, after it contracted for a second quarter. According to Statistics SA, Gross Domestic Product receded an annualised 0.7 per cent in the first quarter from a contraction of 0.3 per cent in the previous three months.

Political uncertainty is perhaps the biggest hindrance to growth in South Africa. Economics and politics are intrinsically linked, and President Jacob Zuma’s actions affect the economic stability and outlook of the rand almost daily.

His rule has seen a market once touted as one of the best emerging economies turned into an international soap opera. The country has seesawed between optimism and despair since the departure of their charismatic and competent leader, Nelson Mandela. The Zuma era has brought with it nothing short of chaos, ably assisted by a revolving door of finance ministers.

Holding the reins of the Treasury now sits the former home affairs minister, Malusi Gigaba, who has very little usable experience in finance. Adding to doubts that he is fit to lead the ministry is the fact that he has expressed hints of radical economic transformation in the form of redistribution policies – in other words, expropriating land and other resources.

It is little wonder that Gigaba’s appointment sent the rand into a free fall. The currency lost 10 per cent against US dollar in the two weeks following the cabinet reshuffle, an unwelcome occurrence for an economy that grew barely 1 per cent in the last year.

There was yet another cabinet reshuffle on 2 June, causing more ripples in the rand. Now that Moody’s has downgraded South Africa, investors across the globe are waiting to see if they will lose their spot on the Citi World Government Bond Index – one of the largest and most traded indices in the world.

Current estimates suggest exclusion from local indices could result in the sale of $2.4bn in South African foreign bonds, while investors would be expected to sell a further $6-8.5bn.

Jameel Ahmad, FXTM’s VP of Corporate Development and Market Research, says underlying sentiment towards rand is bearish.

The currency held up better than expected following the Fitch downgrade, but we are likely to see more turmoil – certainly until Gigaba’s fiscal policies are known and whether the new mining regulations are going to pass muster.

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