Increased political and economic risks produce pain for the South African Rand.
Recent headlines that Finance Minister Pravin Gordhan is to appear before the courts having been indicted over allegations of fraud have revived concerns about his political survival, and with them about the political and financial stability of South Africa.
Seen as a safe pair of hands, if Gordhan falls, it is not expected to take long before the country’s tenuous investment-grade credit rating also falls, leading to a sharp outflow of foreign capital which will hurt the rand.
Although Gordhan has managed to gain the support of some powerful allies amidst allegations the charges are a plot hatched by President Zuma to discredit him, it is still not clear whether he can keep his position, and he is still scheduled to appear in court on November 2 to answer the charges.
As a result, Credit Suisse have downgraded their three-month forecasts for ZAR:
“Our South Africa economist forecasts that Moody’s will be the first agency to downgrade to junk by the end of the year.
“With South Africa still rated as investment grade by all three rating agencies, the scope for portfolio outflows ahead of the budget is now increasing.
“Option markets have already moved to reflect such risks,” remarks Shahab Jalinoos, Credit Suisse’s head of research.
Another source of pain for the rand is the weak price of gold and the rising price of oil, of which it is a net importer.
This has led the analyst team at Credit Suisse to make a call recommending the RUB/ZAR as a promising ‘buy’ candidate.
The South African Budget, which is scheduled for launch on Oct 26, is a further source of concern as, “it does not address the concerns that rating agencies have held with South Africa for the past few years," according to Jalinoos.
Credit Suisse are cutting their three month forecast for USD/ZAR to 15.00 from 14.50 previously.
Elsewhere, analysts at Lloyds Bank say the country's recent economic outperformance is not enough to offset the fact the currency is overvalued and the political risk associated with Finance Minister Gordhan.
Lloyds Commercial Banking’s Jeavon Lolay therefore anticipates a lower profile for ZAR going forward:
“Evidence of a modest improvement in underlying economic activity in recent months and a narrowing in the country’s current account deficit do little to shift our view that the currency is overvalued at recent levels.
“Granted, an escape from technical recession in Q2 puts the economy on a slightly firmer footing, but for us, this means little in terms of foreign exchange given the long-term structural issues facing the South African economy,” says Lolay.
Fig 1. Lloyds' Forecast