On Wednesday the South African rand fell to its weakest level since early July, which was caused by political uncertainty surrounding Finance Minister Pravin Gordhan.
The rand traded at R14.74 against the US dollar yesterday, a sign that investors are cautious about the country’s economic situation.
Earlier this month, the rand strengthened against major currencies, fuelled by a general strength in emerging market economies and successful local government elections.
The rand traded as low as R13.22 in mid-August, but this strength was snuffed out after news emerged that Gordhan was under fire from the Hawks.
As the debacle between Gordhan and the Hawks unfolded, the rand continued to weaken.
It is not surprising that investors are cautious about the country. The latest attack on the Treasury follows President Jacob Zuma’s shock decision in December 2015 to replace finance minister Nhlanhla Nene with the inexperienced Des van Rooyen.
After this, the rand plummeted to all-time lows, and Zuma was forced to replace van Rooyen with Gordhan.
Investors supported Gordhan, who previously served as finance minister, being in charge of the Treasury – and the rand started to strengthen.
However, this was short-lived. In February, the Hawks confirmed its investigation into Gordhan and former Sars employees.
While there was a period of relative calm in the run-up to the local government elections, it did not take long for Gordhan to come under fire again.
If the finance minister is booted from his position like his predecessor, the rand is likely to weaken further.
According to Investec economist Annabel Bishop, removing Gordhan would probably see the rand weaken by 30% and trade at R19 to the dollar.
Another challenge is the possible downgrade of South Africa’s credit rating.
A Reuters poll saw 19 out of 23 economist predict that South Africa would be cut to junk status in December by at least one ratings agency.
In an extreme scenario – where credit downgrades push our economy to default – the rand could tank massively.
To avoid ratings downgrades, political and economic stability is needed, along with economic growth and cost cutting – especially in state-owned enterprises.
However, this is unlikely to happen unless Gordhan remains finance minister.
How Zuma broke the rand
The graph below shows the volatility of the rand over the last year, which started after Zuma fired the finance minister in December 2015.