Will the rand recover?

The market has seen big movements the past week, after the recall of former Finance Minister, Pravin Gordhan, from his business trip and then subsequently after he got axed. 

Following this news and the ratings downgrade by Standard & Poor’s (S&P) Global to junk status (BB+ from BBB-)and our local currency rating to BBB- from BBB, the ZAR has lost around 8% of its value versus the USD.

The good
However not all analysts are negative about the appointment of Malusi Gigaba as Finance Minister. “The newly appointed finance minister has a credible track record in his previous portfolio of home affairs, seen by the rollout of the new ID cards etc., that has gone smoothly,” said Wichard Cilliers, director and head of dealing at TreasuryOne.

However, Cilliers acknowledged that Gigaba’s loyalty to Zuma will probably remain resolute. “He [is] still very much a President Zuma supporter and we will need to wait and see if he will be influenced in any way. Only time will tell in this instance.”

Cilliers says that the good news is that the currency has been fairly stable after the initial lost ground. He expects the rand to regain some lost ground, however, unless there are more nasty surprises. This still could come in the form of rival ratings agency Moody’s reducing South Africa’s to junk status, in line with S&P’s sentiments.

The bad
“The market is obliviously very jittery to news headlines, so this can have a negative impact on the ZAR again. Rating agency and fiscal stability is of the utmost importance and if the Finance Minister remains prudent about over spending, this will have a positive across the board. Foreign investors are still buyers of SA bonds and for now it looks like we can maybe see the currency become stable again,” added Cilliers.

The ugly
While the rand may recover somewhat following the downgrade and the cabinet reshuffle the aftershocks of the downgrade will be felt for years to come still. “The effects of a downgrade will be felt in the long term as borrowing costs and import prices (due to a weaker currency) increase resulting in rising inflation which would lead the Reserve Bank to hike interest. That’s quite a crude explanation of the knock on effects, but the inevitable result would be higher costs for average citizens. To pile on the gloom, according to S&P’s ratings history it takes an average of seven to eight years for countries to regain investment grade status,” said Phillip Pearce, dealer at TreasuryOne.

To find out how the downgrade affects you, click here: http://www.justmoney.co.za/articles/.