The scandal threatening the future of Cyril Ramaphosa\u2019s presidency rattled South Africa\u2019s financial markets this week and the instability risks inflicting more damage still on the country\u2019s currency and bonds.<\/p>\n
There\u2019s no obvious long-term successor to lead the country if the crisis ends up costing the president his job, so it\u2019s unclear what would happen to his reform agenda, which is aimed at kick-starting start one of Africa\u2019s largest economies.<\/p>\n
That, investors say, is a recipe for more outsized swings in the rand, which saw its implied volatility this week soar to a level last seen in 2020 when the global economy was reeling from the onset of the Covid pandemic.<\/p>\n
\u201cThe immediate focus remains on whether the president resigns or fights on,\u201d said Matete Thulare, the Johannesburg-based head of foreign-exchange execution at Rand Merchant Bank in a note to clients. \u201cRightly or wrongly, if he goes, voluntarily or otherwise, the rand will run again.\u201d<\/p>\n
When news broke that Ramaphosa could face impeachment due to a potential constitutional breach, traders responded by taking an ax to the currency and pushing the country\u2019s borrowing costs up by the most since 2015. The cost of insuring the debt against default jumped, and South African bank stocks posted the worst one-day loss in more than two-and-a-half years.<\/p>\n
The rand enjoyed a bit of respite on Friday, paring some of its weekly declines after Finance Minister Enoch Godongwana said there was just a 10% chance of Ramaphosa leaving office. African National Congress officials are expected to continue discussing the matter over the weekend, with investors eager for any updates.<\/p>\n
The nation\u2019s currency, which is often seen as a proxy for risk appetite in emerging markets, has lost about 9% against the dollar so far this year. The rand closed Friday at 17.5052 per dollar, and the yield on 10-year sovereign local bonds was at 11.3%.<\/p>\n
\u201cIt\u2019s a very fluid situation, and anything can happen still,\u201d said Brad Bechtel, a New York-based currency strategist at Jefferies. \u201cEven if he does resign, it won\u2019t change the broader backdrop in South Africa, which still has some challenges ahead of it.\u201d<\/p>\n
For Wells Fargo Securities strategist Brendan McKenna, the president\u2019s resignation could leave a gap in leadership that would stoke political risk and drag the nation\u2019s assets lower. But even a decision to stay could call the ANC\u2019s strength into question and lead to longer-term market pain, he warned.<\/p>\n
The scandal risks hurting the party\u2019s credibility, as Ramaphosa was once touted as a figure of anti-corruption, helping the rand to leap 27% between November 2017 and February 2018. He\u2019s since struggled to deliver on his reform agenda or ignite economic growth, with the country\u2019s jobless rate among the world\u2019s worst and major challenges stemming from the electricity sector.<\/p>\n
Goldman Sachs Group Inc. analysts also warned that the rand\u2019s recent weakening could extend even further if clarity remains elusive for a protracted period. \u201cA prolonged process might imply further downside FX risk,\u201d economists Andrew Matheny and Bojosi Morule said in a note.<\/p>\n