With a further downgrade of the rand to dollar exchange rate around the corner as a result of the country’s political instability and the increased pressure on Pravin Gordhan’s (Finance Minister) job security, things could get worse.
If speculations are anything to go by, the Rand is on its way to junk status and it’s happening faster than the economists can predict.
As at August 2016, the rand gained some strength against the dollar and traded at 13.7. However, the rate was never stable as it kept on fluctuating, strengthening some days and weakening on other days.
Many blame the finance Minister for what they feel is his inability to do a good work like his predecessor who was axed by Zuma did.
Taking a closer look at rand denominated government bonds, which saw a slump of about 2.9% in relations to the dollar this month, it is clear that money managers want an end to the Gordhan case, so the financial market can move forward.
Despite the prevailing circumstances, the government’s effort to keep the situation contained has proven difficult.
The media on the other hand is not buying this, as a repeat in history is closer than we think. Since Jacob Zuma did the same with Nhlanhla Nene (former finance minister), kicking him off his seat even when top ANC officials were against the move.
There have been various predictions on how this could affect the rand to dollar, while a few still have hope in the current situation, more financial experts are estimating a drop in the rand as high as R 20 against the dollar, as we come to the end of 2016.
Could Things Get Worse?
With South African bonds already losing money for foreign investors, and a further prediction of a 30% downslope of the rand to dollar, things could actually get worse.
Furthermore, as the controversy over who controls the country’s finance stretches, importers will soon be faced with some reduction in profits.
With major tension in the government, the spotlight is firmly focused on Gordhan, but the major question everyone is asking is: What is the political agenda behind the attack on the minister?
The Minister is respected by many, as his continued commitment to his office saved South Africa from a credit downgrade this year.
The Minister’s efforts on reducing the country’s debt and excess spending at a time when the president’s allies in the ANC are calling for a re-prioritization of the budget, following setbacks in local-government elections has only made things more difficult for him.
The state of the South African economy, which affects the rand to dollar curve, all comes down to what happens to Pravin Gorghan. According to reports, the Minister could be arrested in a case of increased allegations of political bickering in the ANC party. If this happens, there is a 50% chance that the rand will head towards a decline, making it lose its value against the dollar by 30% or more.
With the controversy already going on, the rand has lost its value by R 1 against the dollar in a matter of days. The decline in the rand was also impacted by the US Federal Reserve chairperson, after his speech on Friday. He argued all operators to push the dollar up, which goes without saying; a strong dollar weakens the rand.
It doesn’t look good for the country today, though it may seem all fun and games for the power hungry, the constant negative news regarding the rand is only driving things to the ground. Serious caution needs to be taken and the case against the finance minister handled right, via the appropriate channels.