Rand weakens on political risk, credit downgrade fears

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April 5, 2016 4:39 PM

Zuma has the backing of the African National Congress (ANC), which he secured on Friday after apologising for his failure to repay some of the $16 million spent on his private Nkandla home because it was based a bad legal advice.

South African rand notes in a file photo. REUTERS/Siphiwe Sibeko

South Africa's rand weakened on Tuesday as President Jacob Zuma faced a vote in parliament to remove him from office for failing to uphold the constitution, and a warning by the central bank that the risk of a credit ratings downgrade had increased.

Zuma has the backing of the African National Congress (ANC), which he secured on Friday after apologising for his failure to repay some of the $16 million spent on his private Nkandla home because it was based a bad legal advice.

The motion to remove Zuma is likely to fail in the assembly where the ruling party enjoys a comfortable majority, with 62 percent of the 400-seat assembly.

The rand also lost ground after the South Africa Reserve Bank (SARB) said late on Monday that a reduction in the sovereign credit rating of Africa's most industrialised economy would hit the currency hard and push short-term interest rates up by about 80 basis points, while longer-term bond yields would probably rise by around 104 basis points.

At 0704 GMT, the rand traded at 14.9075 per dollar, 0.73 percent weaker from Monday's New York close.

"The SARB’s detailed analysis of the impact of a rating downgrade to sub-investment grade is getting some attention," Rand Merchant Bank analyst John Cairns said.

"But note that most of this is arguably already in the price: we know our offshore yields are already trading at levels consistent with junk. We cannot measure how much of a downgrade is priced into the rand — our guess is most but not all."

Standard & Poor's and Fitch rate South Africa's debt just one notch above junk status as it grapples with depressed commodity prices, political upheavals and an economy that is barely growing. Moody's has it one notch higher, but on review for a downgrade.

"Today’s vote to impeach President Jacob Zuma will almost certainly fail. But efforts to oust the president will continue, potentially distracting political attention from South Africa’s dire economic situation," said Capital Economics in a note.

In fixed income, the yield for the benchmark instrument due in 2026 added 11 basis points to 9.255 percent.

Stocks open lower, with the JSE securities exchange's Top-40 index down 0.8 percent.

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