The rand tanked on Monday after the Public Protector recommended changes to the Constitution that would see the removal of a clause to protect the currency.
Public Protector Busisiwe Mkhwebane announced her findings after her investigation into the South African Reserve Bank’s assistance to Bankorp between 1985 and 1995, which Absa bought in 1992. She wants Absa to repay R1.125bn, a move the bank refutes as it believes it has paid all money owed.
However, her big remedial action was a recommendation that the Portfolio Committee on Justice and Correctional Services change the Constitution.
It “must initiate a process that will result in the amendment of section 224 of the Constitution, in pursuit of improving socio-economic conditions of the citizens of the republic, by introducing a motion in terms of section 73(2) of the Constitution in the National Assembly and thereafter deal with matter in terms of section 74(5) and (6) of the Constitution”.
She wants section 224 of the Constitution to read:
“The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are protected.
“The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, while ensuring that there must be regular consultation between the Bank and Parliament to achieve meaningful socio-economic transformation.”
Mkhwebane’s suggestion removes reference to “protect the value of the currency”, Bloomberg told traders on Monday.
The Constitution currently states: “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.”
Opening Pandora’s box
Nomura economist Peter Montalto said the rand is taking a knock because it’s “not a good headline … it’s a live wire issue”.
“Even if a change here is not likely to actually occur, the risk of it is important to markets and ratings agencies,” he said in an emailed comment to investors.
“This is quite unusual that a Public Protector has been so specific on changing the Constitution or indeed be so radical on transformation.”
“This is touching the real last Pandora’s box,” he said. “Note, whilst the PP is meant to be independent she is widely viewed as a Zuma loyalist.
“I don’t think this is going to happen in the short to medium run. The ANC cannot really muster the support to change the Constitution in Parliament and would require a two-thirds majority.
“What the worry is here is that actually it’s much, much easier than that. You just need a new MPC (monetary policy committee) mandate, which is done by a letter from the FinMin to MPC and can be done technically at any time.
“I do not think (Finance Minister Malusi) Gigaba is going to do that, but this raises the risk and promotes the idea in public debate about how secure this last bastion of an institution is.
“The SARB is also one of few ratings positives for the ratings agencies,” he said. “The very fact this issue is being raised and the SARB dragged into the debate is negative.
“However, I see the SARB leadership strongly and resolutely defending their independence and existing mandate including via court action if necessary.”
By Matthew le Cordeur for News24
Markets have reacted to events at the African National Congress National Executive Committee meeting in Johannesburg over the weekend.
The rand gained considerable strength when news emerged that a vote of no confidence had been tabled.
But it quickly retreated when the motion failed.
Economist Dawie Roodt says the rand is inextricably linked with President Jacob Zuma’s fate.
“It is interesting to watch financial markets because quite often, one can actually see how Jacob Zuma is doing by simply watching the exchange rate of the country.
“What has happened though over the weekend, as soon as it became clear that there would be a debate on the future of Zuma, the rand actually appreciates very strongly against most other currencies.”
Meanwhile, Zuma has come out swinging following the failure of a motion of no confidence in him.
The motion was tabled at the ANC NEC meeting over the weekend.
It failed to garner the necessary support to carry.
Zuma attacked his critics in the NEC in his closing address, saying he knows those who want him to step down are pushing an agenda of foreign forces and he’s warned them to stop.
Three sources in the ANC NEC have told Eyewitness News that Zuma was hard-hitting and furious when he gave his closing remarks at the NEC meeting, responding to those who called on him to step down.
It is understood that the president told the NEC meeting that those who wanted him to resign are pushing an agenda of foreign forces.
The sources say the furious president told the meeting that he was poisoned with the intention of being killed and warned that he knows who is plotting against him and where they get the money from.
It’s understood he also told the meeting that he can’t be blamed for the party’s loss of key metros, saying it was the ANC’s failure to manage regional dynamics that resulted in the poor showing at last year’s polls.
By Clement Manyathela for www.ewn.co.za
The rand was slightly weaker against the dollar on Tuesday afternoon, in volatile trade.
The local currency weakened to R13.71 to the dollar in earlier sessions, but improved to R13.58 in intraday trade.
Local political uncertainty and a ratings review by ratings agency Moody’s were the main risks the rand was facing.
In April‚ Fitch Ratings and S&P Global Ratings downgraded SA’s debt to “junk” status after President Jacob Zuma fired Pravin Gordhan as the finance minister in a Cabinet reshuffle.
Moody’s was expected to visit SA in May, before announcing its country rating in the weeks thereafter.
At 3.33pm‚ the rand was at R13.6367 to the dollar from Monday’s R13.6135‚ at R14.8489 to the euro from R14.8805 and at R17.6230 to pound from R17.6191.
The euro was at $1.0889 from $1.0931.
By Reitumetse Pitso for www.businesslive.co.za
After then finance minister Nhlanhla Nene was axed in December 2015, the rand weakened dramatically. This time around, however, despite the even worse news of Pravin Gordhan’s axing and SA’s downgrade to junk status, the rand has proved remarkably resilient.
How do we square this? Are the markets getting so used to bad news coming out of SA that they have stopped reacting to it? Or is there some other factor at play?
Before President Jacob Zuma’s cabinet reshuffle on March 30 the rand was trading at R12.40/$. In the following two weeks it weakened by roughly R1.50 against the dollar. But at the time of writing, it had reversed almost one-third of its losses, firming by 50c to trade at R13.40/$.
What is evident is that the local news flow — dominated by mass protests against Zuma and a growing clamour for his resignation — certainly doesn’t justify the biggest rand rally in six months.
“Total rand losses of a mere R1 seem remarkably limited given all that has happened,” says Rand Merchant Bank (RMB) currency strategist John Cairns.
Dollar weakness and better Chinese trade data appear to have triggered the latest rand gains, but far more interesting is the currency’s longer-term outlook.
Surprisingly, given how much SA’s prospects have darkened, Cairns has not downgraded his rand forecast of R13/$ for the year end. Of course, the situation remains in flux and RMB could still change its rand forecast. But for now, Cairns says there are two positive factors RMB believes might offset the negatives.
First is the significant narrowing of SA’s current account deficit. This has been caused mainly by slowing imports due to falling domestic demand and firmer exports following the recovery in commodity prices.
RMB expects the deficit to average 2.8% this year compared with an average of 3.3% in 2016 and 4.4% in 2015. This will take significant pressure off the rand.
Second, a more positive growth outlook in advanced economies has contributed to a more favourable environment for emerging markets and commodity currencies as a whole. As a result, foreign capital inflows into SA’s bond market have held up remarkably well.
The favourable external backdrop helps to explain why the market reaction to SA’s recent downgrades has been more benign than experienced by other countries when they lost their investment-grade status.
“We continue to feel that the external backdrop is restricting far bigger losses on our local markets,” says Cairns, “It seems a rising tide lifts even half-submerged boats.”
Efficient Group chief economist Dawie Roodt is also sticking to his year-end rand forecast of R13/$.
Both Roodt and Cairns are assuming that Zuma will stay on as president this year and that there will be no further dramatic political negatives or further downgrades to SA’s local currency rating.
Like Cairns, Roodt made this forecast many months before Zuma reshuffled his cabinet and caused many to wonder if SA’s democratic project had permanently run aground. So the fact that he hasn’t lowered his forecast also bears scrutiny.
Roodt has a remarkably successful track record in correctly predicting the rand, having won the 2016 Sake24 economist of the year award for the accuracy of his forecasting against that of more than 30 other economists.
His forecast that the currency would average R13/$ in the final quarter of 2015 was the closest to the actual figure of R13.09/$.
Roodt looks set to be closest to the pin again this year, with a forecast of R14/$ for the final quarter of 2016 compared with the actual figure of R13.91/$.
In January 2016, when he made this forecast, the rand rose to a new record high of almost R18/$ during intraday trading as the markets battled to digest the axing of Nene.
“Everyone said I was crazy,” chuckles Roodt. “Some said the rand would be R20/$ by the year end.”
He bases his rand forecasts on the observation that on a 35-year view (1980-2015), the rand has on average been roughly 50% undervalued against the US dollar on a purchasing power parity (PPP) basis (see graph).
The easiest way to understand the theory of PPP is to use The Economist’s Big Mac index. It was invented as a light-hearted tool to make it easier to compare the misalignment of exchange rates between countries. It was never intended as a precise gauge, explains the magazine, but rather a fun way of explaining PPP.
In January 2017, the price of a Big Mac burger in the US was $5.06. In SA it was R26.32. At the prevailing exchange rate of R13.95/$ at the time, a Big Mac in SA cost only $1.89.
So according to the “raw” Big Mac index, the rand was undervalued by almost 63% against the US dollar on a PPP basis.
This made the rand the fourth most undervalued currency against the US dollar among 44 countries surveyed, after Malaysia (64.6% undervalued), the Ukraine (-69.5%) and Egypt (-71.1%)
Roodt bases his study of PPP not just on the Big Mac, but on a more representative basket of goods published as a series by Oxford Economics, one of the world’s largest data providers.
By this yardstick, the rand at R13/$ would be 54% undervalued, making Roodt fairly confident the currency will move back towards this level over time.
“I’m pretty sure the rand will come back. It always does, very strongly, but it never resets to purchasing power parity. It is always about 50% undervalued on average. So if it stays at R14/$, and inflation remains where it is now, then this would be an exception,” says Roodt.
Roodt, in fact, considers the rand at R14/$ to be a “screaming buy”, given that SA’s 10-year bond yield is highly attractive at 9% and that SA’s bond market is exceptionally liquid and well-integrated, so investors can get out quickly.
“Where can you get such an attractive yield with an undervalued currency at the same time?” he asks.
This explains foreign investors’ continued appetite for SA bonds, despite the highly uncertain political environment.
Based on Roodt’s PPP estimates, the rand has fared remarkably well during the current crisis compared with previous episodes.
In nominal terms, the rand dropped by just 12% in the first two weeks after Gordhan’s axing before pulling back sharply. In PPP terms the rand at its recent worst of R13.95/$ was just 56% weaker than parity.
By comparison, in 1985 after then president PW Botha’s famous “Rubicon” speech, in which he failed to announce the dismantling of apartheid, the rand nose-dived by 66% in nominal terms. It was the sharpest nominal decline in the history of the currency.
At its worst, the rand was 72% undervalued against the dollar but it recovered shortly thereafter, mostly because inflation accelerated.
During the 2002 rand crisis, contagion from the Asian financial crisis caused the rand to collapse by 47% in nominal terms. It reached an undervaluation low of 73% but again bounced back quickly, mostly because of a nominal exchange-rate correction, helped by some inflation.
The rand suffered another huge blow when Nene was axed. At its worst level of R18/$ it was 69% weaker than parity. The reasons for the rand’s fall were mostly political but, unlike now, unfavourable international forces were also at play.
At the time, fears were growing that China was heading for a hard landing. The deteriorating growth prospects of emerging markets, particularly for commodity-producing countries such as SA, caused persistent capital outflows from these markets.
Had the same global conditions been in place now, there is little doubt that the fallout from Gordhan’s axing and SA’s downgrade to junk would have been far more severe. This doesn’t mean the political and economic implications aren’t deeply worrying — only that Zuma’s timing was excellent.
By Claire Bisseker for www.businessday.co.za
The rand was weaker on Tuesday afternoon as it emerged that President Jacob Zuma had told senior leaders of the South African Communist Party (SACP) that he planned to fire Finance Minister Pravin Gordhan.
When the market learnt on Monday that Zuma had recalled Gordhan and his deputy, Mcebisi Jonas, from an investor trip to the UK and US, the rand nosedived from 20-month highs it scaled last week.
The president is reported to have told senior leaders of the South African Communist Party that he plans to dismiss the finance minister.
After hitting a fresh 20-month best level of R12.31 against the dollar in Monday’s opening trade‚ the rand plunged more than 3%, or 52c, to an intraday worst level of R12.8295/$ in the afternoon.
The rand also weakened against global majors and went from being the best-performing emerging-market currency to one of the worst-performing currencies.
Rand Merchant Bank (RMB) analyst John Cairns said further runs on the rand were possible but Monday’s rand losses were nothing compared with what happened in the worst-case Cabinet reshuffle scenario when former finance minister Nhlanhla Nene was replaced in 2015. At that time, the rand shed 150c immediately and 250c within a month.
Cairns said the best rand scenario for the day was for the rand to stabilise above R12.50/$ within a 30-cent range, the worst case scenario would be a Cabinet reshuffle.
At 11.30am the rand was at R12.9766 to the dollar from a previous close of R12.7616. It was at R14.0954 to the euro from R13.8647 and at R16.3203 to the pound from R16.0221.
The euro was at $1.0859 from $1.0864.
By Reitumetse Pitso for www.businessday.co.za
The rand broke through the important R13.20/$ resistance level to the dollar in late afternoon trade on Tuesday, and stands poised to crack R13 if the strengthening trend continues.
The rand failed to consistently break through R13.20/$ on four occasions since August.
“The rand is firmly on the front foot for now and a break through R13 looks promising at this stage,” said TreasuryOne currency dealer John Moni.
He said the main driver was uncertainty in global developed markets.
“These include the looming presidential election in France, as well as the uncertainty created with the resignation of President Donald Trump’s national security advisor, Michael Flynn.”
At 3.40pm the rand was at R13.1055 against the dollar form R13.3351. It firmed to a 18-month best level of R13.07 in intraday trade.
The rand was at R13.9132 against the euro from R14.1319 and at R16.3531 against the British pound from R16.7046.
The euro was at $1.0616 from $1.0596.
The rand was also supported by a weaker dollar, which could not hold on to the firmer levels below $1.06 to the euro. It reached $1.0591 on Monday but slipped over $1.06 in late afternoon trade on Tuesday.
The emerging market strength in the currency markets came as investors awaited comments from US Federal Reserve chair Janet Yellen, who was scheduled to testify before the US congress later on Tuesday.
Yellen’s address to congress was expected to provide more information on the planned interest-rate increases in the US for the year ahead.
Other factors supporting the rand include somewhat of a reprieve in the dismal local unemployment data, with unemployment in the fourth quarter of 2016 improving to 26.5% from 27.1% in the third quarter.
“However, the unemployment rate was still higher when compared to the 24.5% in the fourth quarter of 2015,” Investec economist Kamilla Kaplan said.
By Maarten Mittner for www.businesslive.co.za
It’s anyone’s guess where the rand is headed.
Donald Trump’s US election victory has caught the world’s most volatile currency in a tug of war, with end-2017 forecasts ranging from a 9% gain to a 14% retreat against the dollar, estimates compiled by Bloomberg show.
That’s the widest distribution since at least 2006, when Bloomberg started tracking the data.
Working against the rand are concerns a Trump presidency will force the Federal Reserve to quicken the pace of interest rate increases, eroding the extra returns from riskier emerging-market assets.
At the same time, Trump’s plan to spend as much as $1trn on infrastructure has boosted commodities, which are South Africa’s main export earner, and prompted Goldman Sachs to recommend investors bet on higher prices next year.
The most bullish forecast for the rand, which envisages the currency at R13/$ at the end of next year, has a 60% probability, according to options data compiled by Bloomberg.
The most bearish prediction from the more than 15 analysts polled is for a level of R16.50.
The rand was trading 0.3% higher at R14.20 at 08:00 on Thursday.
“There is something going on in the rand that I cannot put my finger on,” says Umkhulu Consulting analyst Adam Phillips. “It tested 14.02 a couple of times yesterday in the morning session before the US durable goods number and the Fed minutes for November were released.
“Even the local CPI data should have been a pointer that rates will stay at current levels for some time,” he said. “The US durable goods was a kicker to see the rand move up to 14.28 at one stage, but the lack of liquidity has brought it back to 14.20.
“This is in contrast to the euro and the Japanese yen, which have sunk to new short term lows on the back of the USD powering ahead before the Thanksgiving holiday.
“I am not sure what today will bring: it could be quiet, but then the lack of liquidity could move it around.
“Maybe my finger should pay more attention to the Moody’s announcement for SA tomorrow. That is possibly why they are not selling more ZAR at the moment.
“If they don’t change their rating the market will be slightly paralysed until the S&P announcement on 2 December.
“If they did change their rating it will probably make it easier for S&P to downgrade and then the 14.75 level comes into play with 15.30 the next stop. If the ratings don’t move then an initial test below 13.80 will be on the cards,” he said.
By Xola Potelwa with Fin24
The rand returned to its strengthening path on Tuesday 16 August as a weaker dollar lent support.
US inflation data, which are due for release later in the day, will play a key role in the US Federal Reserve’s decision to hike rates, which will affect the dollar’s performance against other currencies.
Trading Economics expects US inflation to have held steady at 1% in July on an annualised basis.
UK inflation and other economic data are also due out on Tuesday. The data are expected to reflect the effect of Brexit on the economy.
“Inflation data are the biggest news for today as we’ll see if the UK and the US have been able to muster up any of it during July. I believe sentiment will drive the market today, and a test of R13.20/$ is on the cards,” TreasuryOne dealer Phillip Pearce says.
The rand has gained more than more than 15c in the past 24 hours against the dollar as well as advancing against the euro and the pound.
At 9.10am‚ the rand was at R13.2724 the dollar from R13.2993 at the previous close.
It was at R14.9130 against the euro from R14.8750 previously‚ and at R17.1105 against the pound from R17.1329 previously.
The euro was at $1.1236, from at $1.1183 at its last settlement.
By Andries Mahlangu for www.bdlive.co.za
The 2016 Municipal Elections are happening today, with the political circus in overdrive as parties chase your all-important vote.
But how have Municipal Elections impacted the rand in the past?
What’s the difference between Municipal and General Elections?
General elections consist of a national and provincial vote. Nationally and provincially you vote for a political party (Proportional Representative or PR electoral system) to get seats in the national and provincial legislatures.
In municipal elections, you vote for a political party and a ward councillor (a mixed system of PR and ward constituency) to get seats at the municipal level. So it’s about selecting leaders for the country and province vs. selecting leaders for your city/town and local ward.
Which are more important, general or municipal?
If you think Municipal elections are note important, think again. Chances are your daily lives are more impacted by who leads your city/town/ward than who is leading the county. Think local road, refuse collection, rates you pay, sewerage and water.
What are the possible implications for the rand?
If previous elections (Municipal and General) are anything to go by, not much! Yes, we’ve seen little to no reaction in the currency market compared to previous elections. Does that mean elections are not important? Not at all, it just means that their immediate impact may be limited.
Why have elections had little impact in the past?
The real impact will depend on the policies set by the respected governing party. Policy takes a considerable amount of time to filter through the various levels of bureaucracy. Previous elections have been a near formality, with little to no real challenge to the ruling party. We’ve also seen relatively free, fair and peaceful elections in the past (and long may this continue).
What scenario could see rand improvement?
Free and fair elections with no violence/intimidation is really important. Considering all goes well come August 3rd, and opposition parties improve their showing, we could see the rand given a nice little boost.
What scenario could see rand weakness?
Any hint of violence/intimidation or elections that are not totally free and fair could impact negatively and cause a rand sell-off. Uncertainty/coalition governments in some of our larger metros could lead to a government in limbo and affect sentiment.
Source: Currencies Direct for www.currenciesdirect.co.za
The rand would be volatile but may strengthen if credit ratings agencies downgrade South Africa to junk status at year-end, says economist Dawie Roodt.
Credit ratings downgrades by the likes of Moody’s, Standard & Poor’s and Fitch loom large for South Africa amid a struggling economy.
Last Thursday, the South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) left interests rate unchanged at 7% but it cut the country’s 2016 growth forecast to 0%.
Economic growth, fiscal debt levels and political stability are variables that ratings agencies look at. But South Africa is struggling in all these areas, Roodt told Fin24.
Subsequently, South Africa’s luck could be up by year-end after the country narrowly dodged ratings downgrades to non-investment grade earlier this year, says Roodt.
“Based on these three variables, I think chances are very good that we’re going to see a downgrade,” Roodt told Fin24.
“Ironically, I think a downgrade will probably lead to an appreciating currency,” he adds.
The rand this year has already strengthened 8% against the US dollar after losing 26% of its value against the greenback in 2015.
While a downgrade could at first lead to a run on the rand, speculators may then eye a buying opportunity for what Roodt says is an “undervalued” currency.
“We have a very, very attractive and very well regulated and liquid financial market, especially the bond market,” Roodt told Fin24.
“So, if you get a downgrade, then institutional investors will probably take the money out of South Africa which will lead to a compression in the currency.
“But immediately the speculators are going to say listen, we’ve got a cheap currency, we’ve got very attractive yields in South Africa – let’s give it a go,” says Roodt.
While the rand could strengthen, the currency may also embark on a wild ride post downgrade.
“So, what we’re probably going to see is a stronger currency after the downgrade – not immediately – but soon afterwards. A stronger currency, but a much more volatile currency,” Roodt told Fin24.
The next round of ratings reviews for South Africa are expected to occur in December this year.
In June, ratings agency Fitch affirmed South Africa’s investment grade credit one notch above junk, but it warned that political and growth concerns should be addressed.
This followed rating reviews by Moody’s in May which affirmed South Africa’s ratings at Baa2/P-2 and assigned a negative outlook. Standard & Poor’s in June also affirmed its BBB- level with a negative outlook for South Africa.
Stats SA announced in June that South Africa recorded a negative growth rate of -1.2% in the first quarter of 2016, sparking fears of an impending recession.
By Gareth van Zyl for Fin24