Rand takes a hit as Mabuza back on track to be deputy president

As investors speculate who’s in and who’s out in President Cyril Ramaphosa’s cabinet, the market is clear on one contender.

Bloomberg reports that when David Mabuza appeared to rule himself out of being re-appointed as deputy president last week the rand made gains.

Now that he seems set to be re-appointed to the post, the currency is heading the other way.

While most lawmakers were sworn in last week, Mabuza asked for his appointment to the legislature to be postponed as he fended off accusations from the ANC’s integrity committee that he’d brought the party into disrepute.

That led to speculation he would be replaced as deputy president, as to hold the post one must be a member of parliament.

Mabuza has been linked to a succession of scandals while he served as premier of Mpumalanga, though he denies the allegations and has never been charged.

Reputational damage

Ramaphosa, who was inaugurated for a five-year term on May 25, is due to name his new cabinet later this week and is under pressure to rid the executive of individuals tainted by corruption allegations.

Bloomberg reports that Mabuza’s reappointment could set back Ramaphosa’s efforts to repair the reputational damage to the party after his predecessor Jacob Zuma’s scandal-marred nine-year rule.

“Investors worry that Ramaphosa will not be able to root out corruption from the top echelons of the government as promised, endangering his reform agenda,” said Per Hammarlund, the Stockholm-based chief emerging-market strategist at SEB AB.

The rand could reverse declines if Mabuza shows commitment to reform measures, he said.

“Buy the rumour and sell the fact is in full effect right now,” said Wichard Cilliers, a trader at TreasuryOne Ltd. in Johannesburg.

“It’s putting the rand under pressure because investors thought there was a chance that the cabinet would be cleaner. But we need to see the official news about Mabuza, the real deal about what his role will be.”

Revised growth prospects 

Adding to Ramaphosa and the rand’s woes is the possibility of weakening growth in South Africa.

On Tuesday (28 May), Bank of America Merrill Lynch said that it has lowered the country’s growth projections to 0.9% and 1.3% for 2019 and 2020.

It further estimates that output likely contracted by 2.0% in Q1 2019 as weakening global conditions coincided with domestic electricity shortages and mining sector disruptions.

“Merrill Lynch estimates that a 1% shock to China and G7 (ex-China) growth could impact domestic output by -0.6% and -1.3% respectively within a year,” said researcher Rukayat Yusuf.

“As markets await the cabinet reshuffle where positive reconfigurations could set the stage for some quick win reforms, potential growth still faces long term structural constraints.

“BofAML anticipates a 25bp cut from early 2020 when more clarity on fiscal, rand and Moody’s risks is expected.”

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