Rand, banks and bonds hit as Zuma fires Gordhan

South African president Jacob Zuma’s dismissal of his well-regarded finance minister Pravin Gordhan triggered a sharp market reaction on Friday, as bond yields jumped and bank shares declined.

The rand was on course for its worst week since 2015, down 7 per cent against the dollar since Monday as analysts expect imminent downgrades to the country’s credit ratings.

The FTSE/JSE Africa Banks Index slid as much as 7.7 per cent on Friday, its biggest one-day drop since December 2015 — the last time President Zuma sacked his finance minister.

South Africa’s government bonds were among the most heavily traded in European secondary markets on Friday, as the country’s Treasury failed to complete a planned sale of short-term debt.

Yields on the country’s 10-year debt, which rise when prices fall, jumped almost 50 basis points this week, to 8.857 per cent. That includes two daily rises of more than 30bp, and a brief 21.5 bps rebound on Thursday.

1. President Jacob Zuma replaces finance minister with unknown backbencher
2. Pravin Gordhan appointed new finance minister
3. Media leaks reveal Mr Gordhan received a letter from the Hawks, a special police force, questioning him about a South African Revenue Service unit
4. The Hawks accuse Mr Gordhan of failing to meet deadlines to answer its questions
5. South Africa’s presidency denies Mr Gordhan faces arrest over the investigation
6. Mr Gordhan says he will not comply with a request to appear before an investigative unit of the police
7. Mr Gordhan summoned to face fraud charges
8. President Zuma fires Gordhan as finance minister in late-night cabinet reshuffle

The firing of Mr Gordhan — which was announced late on Thursday night along with the purge of eight other cabinet ministers caps a tumultuous week for South African investors that began with the president abruptly calling back his finance minister from a set of meetings in London on Monday.

According to Peter Attard Montalto at Nomura, even after Friday’s selling, the market’s assessment of South African assets was looking too optimistic.

“This is an attack on the institution of the National Treasury and as such will trigger multiple downgrades . . . Zuma believes he is, and we think he is, much stronger than the market thinks he is. The market has a lot of catching up to do still I think to the reality on the ground.”

Analysts say the extent of the fallout in financial markets will now depend in part on how credit rating agencies react to the cabinet changes. Mr Gordhan has been seen as key to the country’s success in preserving its investment grade rating.

Timothy Ash, an emerging markets specialist at BlueBay Asset Management, said that the reshuffle was a “huge move by Zuma,” which meant the president was “taking the reformers and markets on, head on”.

Mr Zuma and Mr Gordhan have been at loggerheads for months, with the latter’s insistence on fiscal discipline and taming inflation frustrating his boss’s spending plans.

South Africa’s central bank on Thursday kept its benchmark interest rate at 7 per cent, but warned that Mr Zuma’s battle with his finance minister threatened to undermine that fight against inflation.

Koon Chow, a currency strategist at UBP, said that “Zuma’s decision is likely to make a Moody’s downgrade on the 7 April from Baa2 to Baa3 all but certain. Moreover, the decision has a high probability of pushing S&P and possibly Fitch to downgrade South Africa to sub investment grade around the midyear review time.”

The testing week for the rand comes as emerging market currencies enjoy a stellar quarter, thanks to signs of strength in the global economy, buoyant trade flows and signals from the US Federal Reserve that it will raise interest rates in a measured way.

Mr Ash of BlueBay pointed to this backdrop for what he described as a “modest” reaction in the foreign-exchange market. “Working in Zuma’s favour is the supportive market backdrop — investors at present want to be long EM risk . . . This could support South African markets at least in the short term.”

Despite this week’s turmoil, the rand remains up just over 2 per cent against the dollar for the year.

Additional reporting by Hudson Lockett, Joseph Cotterill and Richard Blackden