Rand forecast to soften further

All eyes on Hawks, Gordhan

RAND weakness lies ahead, according to economists, while local markets this week will be guided by developments in the long-standing feud between the Hawks and Finance Minister Pravin Gordhan.

The rand plummeted last week and reversed recent gains after the Hawks summoned Gordhan in what was generally seen as a precursor to his arrest in relation to the establishment of a covert unit at the SA Revenue Service (Sars). Gordhan was the Sars commissioner between 1999 and 2009.

Mamello Matikinca, a First National Bank economist, said having lost almost a full rand to the dollar last week, even the encouraging trade figures due this week were unlikely to drive the rand stronger.

The rand on Friday showed glimpses of relative strength against the dollar. On Friday, the rand was R14.21 to the dollar just after 10am but strengthened to R13.96 around 4.20pm. It was R14.06 at 5.11pm.

Despite the expression of support for the finance minister by President Jacob Zuma and his deputy Cyril Ramaphosa last week, speculation continued that the investigation was politically motivated. Prior to the new political tensions and uncertainty about Gordhan’s fate, the rand was the best-performing emerging market currency this year.

Investec’s chief economist Annabel Bishop said the rand had plummeted from around R13.45 to the dollar on the general risk-on sentiment towards emerging markets since the latter part of May to R14.32 on the unexpected news Gordhan could be criminally charged.

She said if Gordhan was unable to complete his term, and his replacement was not seen as able to deliver the degree of fiscal consolidation required, the rand could weaken towards R19 to the dollar and R25 to the pound as foreigners offloaded South African portfolio assets – with up to 40 percent of these bonds and equities estimated to be held by non-residents.

The rand/dollar exchange rate just after 10am on Friday

Bishop said: “If credit rating agencies believe that the degree of fiscal consolidation currently outlined in the budget for the next few years is at a real risk of not materialising, then it becomes very likely that South Africa’s credit rating will drop to speculative grade. A sub-investment grade She said the risk then was that a downward spiral developed, where higher borrowing costs and rising fiscal debt ratios to gross domestic product would result in more deterioration in government finances, leading to the extreme down case of a sovereign debt default.

In such a situation, the rand would probably move towards R30 and R40 to the dollar.