Rand cheers Zuma exit
South African president Jacob Zuma resigned late on Wednesday evening, bringing to an end his near nine-year long tenure and leaving the nation’s leadership in the hands of recently elected ANC leader, Cyril Ramaphosa.
The rand strengthened to a two and a half year high after Zuma stepped down, if only to avoid a planned vote of no confidence to be held on Thursday.
The rand traded at R11.72 in the morning session on Thursday, as the country prepares itself for Ramaphosa to be sworn in as its president.
“Global markets are smiling on South Africa, being the second African country in a matter of months to take a stand against corrupt leadership and skewed politics. Should SONA and the budget speech go down without too much criticism, one can almost assume that Moody’s will hold off from downgrading South Africa’s credit rating for the time being,” said Bianca Botes, corporate treasury management at Peregrine Treasury Solutions.
Botes said that the rand is expected to trade in a narrow range leading up to the budget speech next week, with some favourable movements expected as Cyril Ramaphosa gets handed the official title of president of the Republic.
Lullu Krugel, an economist at PwC, said that markets had by and large already priced in president Zuma’s resignation by the time he announced his leave of office. Krugel said that some political stability would ease the rand’s volatility, with its range expected to narrow in the short term.
Traders couldn’t be happier to see the end of the Zuma’s era, wrote Bloomberg. The 75-year-old leader had driven Wall Street to wit’s end in recent years amid ratings downgrades, declining growth and a string of scandals, it said.
And news of his resignation sent the rand to its highest level since February 2015, following weeks of maneuvers by the ruling African National Congress to remove him from office.
“This is a very big relief,” said Shamaila Khan, director of emerging markets at AllianceBernstein. “Institutions had been deteriorating rapidly.”
Bloomberg noted that Ramaphosa may be sworn in as president on Friday, citing a schedule released by Parliament earlier. “The ANC said it wants a quick transition so Ramaphosa, a 65-year-old lawyer and one of the richest black South Africans, can move to fulfill pledges to revive the struggling economy, clamp down on corruption and rebuild its image ahead of elections scheduled for mid-2019,” Bloomberg said.
While the rand had already rallied in anticipation of Zuma’s resignation, a recovery in risk assets should propel the currency even higher, one analyst told Bloomberg. Erik Nelson, a currency strategist at Wells Fargo: “There’s been this expectation for months now that eventually he would be removed from office.”
He said optimism had been priced in after Ramaphosa came to power and expectations for Zuma’s removal climbed. “There are still large challenges on the economic, fiscal, and political fronts. I wouldn’t say Zuma being removed is a panacea,” he said.
He expects the rand to gain steadily amid dollar weakness. “This was already priced in,” he said about the muted market reaction.
Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman said there is a risk that the rand will weaken Thursday as investors “buy the rumor and sell the fact”.
The pressing challenge now facing Ramaphosa is to turn the tide on negativity towards South Africa, stated Craig Kiggen, a regional head at financial services firm, Citadel.
He said that the good news is that there are certain changes which can be implemented reasonably swiftly. “It’s not the politics per se that’s the issue; rather it’s the volatility and the lack of clarity that’s the problem. Now that the ANC electoral conference is behind us, we can hopefully look forward to far greater political clarity and stability.
“We have already seen the rand showing some measure of strength in the wake of the ANC conference and this gives us hope for the next level of confidence building. Inward investment into a country is an excellent indicator about what the world is thinking about the investment opportunities within the context that they are looking to invest in,” he said.
“From an economic and a political perspective, we need to let the markets know what’s going on and give them direction. Confidence enables and encourages foreign investment which has a ripple effect through the economy. It affects the currency, it has a knock-on effect on inflation and it in turn has a knock-on effect on confidence.
“Thus if Ramaphosa and the ANC are able to offer greater political stability while delivering policy certainty to encourage foreign investors, 2018 could be the year that finally turns South Africa around and sets it on the road to fulfilling its potential,” said Kiggen.
Read: Ramaphosa’s ‘fantastic plan’ to deliver 3% GDP growth in 2018
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