Rand pushes to two-month low amid domestic political uncertainty
Questions over the composition of the next cabinet and concern over the state of Eskom weighs on the rand, which has weakened past R14.60/$
The rand extended losses against the dollar on Tuesday afternoon, falling to a two-month low, as local political uncertainty took its toll.
ANC deputy president David Mabuza was earlier sworn in as an MP, just days after President Cyril Ramaphosa announced a delay in composing his new cabinet.
This uncertainty was weighing on the currency, analysts said, with the rand by far the worst-performing emerging-market asset on Tuesday. Uncertainty over the US-China trade war persists, but local developments are also weighing on sentiment.
Eskom CEO Phakamani Hadebe resigned on Friday and the future of the embattled power monopoly, as well as the extent to which it will require state financial support, are still open to questions.
At 2pm, the rand had lost 1.21% to R14.6023/$, 1.21% to R16.3454/€, and 1.1% to R18.4996/£. The euro was flat at $1.1194.
The benchmark R186 government bond had weakened, with the yield rising 2.5 basis points to 8.42%. Bond yields move inversely to bond prices.
Any inclusion of Mabuza raises concerns about a slower pace of policy reform, said Monex Europe emerging-markets currency analyst Simon Harvey, although other issues are weighing on the rand, including Eskom and the US-China trade war.
“If Mabuza is vice-president in the executive, it does reduce the legitimacy of Ramaphosa, from an outsider’s perspective,” said Harvey. The next few weeks will be key, in terms of the composition of Ramaphosa’s cabinet, but the rand is likely to be under some pressure.
“We were looking at the rand at about R14/$ just after the election, but this is looking like a bit of a stretch,” said Harvey. SA’s situation was not dissimilar to that of recent elections in other emerging economies, such as India and Brazil, where markets initially favoured the results but this sentiment waned after it became clear that politicians had over-promised a little.
North-West University politics expert Theo Venter said that in terms of the rand, both Eskom and the future of Pravin Gordhan are likely to be watched far more carefully than Mabuza’s political position.
“The best Ramaphosa can do with the cabinet is have a majority of people looking in the same direction as he is looking, but he will have no choice but to accommodate others,” said Venter. Ramaphosa’s cabinet is likely to be 60% to 70% of his own choice, and the rest the result of political compromise.