South Africa’s currency has taken a beating since it was revealed that finance minister Pravin Gordhan is facing criminal charges – but even more pain lies ahead.
According to several economists, the rand is in for a tough time in any scenario where Gordhan is targeted more fiercely.
Specifically, if it turns out that the minister is booted from his role at National Treasury, the rand could see itself at R19 to the dollar – or worse, depending on the subsequent fallout.
On Monday 22 August, news broke that Gordhan was sent a letter by the SAPS investigative unit the Hawks, to appear at their offices to make a warning statement – a precursor to formal charges.
In a matter of days, the value of the rand tanked against the dollar and other currencies, slipping over 5% on the news. By 30 August (a week later), the rand had lost over 7% of its value.
Gordhan’s legal council advised the minister not to appear before the Hawks, and a docket on the minister was handed over to the National Prosecuting Authority.
Rand pain incoming
According to Investec economist Annabel Bishop, speaking to Bloomberg, should Gordhan be removed as minister of finance, the rand would probably weaken by a further 30% and trade at around R19 to the dollar.
In an extreme-case scenario – where continued poor fiscal management pushes the country to default – the rand could tank massively, and even reach R30 to the dollar.
A Reuters poll saw 19 out of 23 economist predict that South Africa would be cut to junk status in December by at least one ratings agency (likely S&P Global). The median impact expected on the rand is an immediate 7.5% drop in value, the group said.
This would push the rand to around R16 to the dollar – not taking into account the long-term effects, which would not be positive.
Research analysts Nomura have pegged a ZAR/USD value of R17 to the dollar by the end of 2016, based on the volatile political situation (and an anticipated Cabinet reshuffle that would see Gordhan booted) as well as a likely rating cut to junk.
According to consensus among economists, junk status for South Africa is looking 80% likely (up from 70% before the Sars Wars saga hit headlines again).
‘No plans to boot Gordhan’
ANC deputy secretary general, Jesse Duarte, has gone on record to say that there has been no talk within the party of a Cabinet reshuffle, and she called on all South Africans to calm down and stop speculating.
However, when president Jacob Zuma infamously fired former finance minister Nhlanhla Nene, it came as surprise to everyone, including the ANC’s top officials.
According to Nomura, this time around, there is a well-constructed narrative around Gordhan – through the Hawks investigation and charges – that he is unfit for the position, providing the perfect excuse for the president to give him the boot.
Economists worry that, if Gordhan goes, he will be replaced by someone who is not as committed to fiscal discipline, and will rubber-stamp payments to SOEs and other draining ventures.