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Why I won't change my stance on the Rand

by Andrew Rissik | Aug 25, 2016
  • News broke on 23 August that the Hawks were preparing to serve Finance Minister Pravin Gordhan with papers notifying him of an imminent criminal charge. The market’s reaction was predictable: It panicked. In my opinion, however, this changes little on my long-term outlook for the Rand relative to the Dollar and the Pound.

    Things have simmered down in the last 36 hours. The Rand, while holding its ground, has yet to make back the losses from this fresh round of political interference. These moves in the currency are often caused by idiosyncratic South African politics. They can make even the hardiest Rand investor get queasy, but in reality, little has changed.

    “SARS Wars” or not, Rand fundamentals remain the same

    In the past two weeks I have spoken at four South African investor events and my message has been simple: Buy offshore whilst the Rand is strong and particularly in the UK where there is the added bonus of the Brexit dividend.

    Despite this mini-flash crash there is evidence that the Rand could still strengthen as much as 12.50 to the USD by October. Things have not radically changed in the last 36 hours and economic fundamentals still show the Rand is undervalued and attractive to foreign investors.

    This puts the currency in a somewhat unique phase: It’s strong enough for South Africans holding Rands to diversify offshore, while also allowing investors outside of the county to pile in on a relatively under-valued currency in an economy where interest rate yields are far better than in the developed world. However, the clock is ticking and one must not forget what’s driving the Rand right now: Yield-hungry money managers seeking quick returns in South African money markets.

    We have one of the highest money market rates in the world and the credit rating agencies are going to be visiting us again in December. If Gordhan vacates his position, the ratings agencies and money managers will take a dim view of our economic prospects and the Rand roller coaster will be at full tilt once again.

    Throw in some South African Government mischief and short-term wild swings again become a reality. My long-term view is to go short on the Rand and look for a diversification strategy that hedges against the Republic’s political risks.

    Gordhan comes out swinging

    The alarm bells have been rung and markets punished the Rand after the Hawks applied pressure to the Minister. Seemingly in retaliation Gordhan came out swinging last night and this morning and dismissed the special investigative unit’s request for his presence to be “without merit”.

    He said in a statement: “(I) do not intend to present myself for a warning statement for many considerations, both legal and given my other commitments. I remain committed to assist the Hawks in any bona fide investigation as stated in my statement.”

    Last night, during a live debate with Justice Malala on BDlive, the Minister took a swipe at SAA’s CEO and staunch Zuma-loyalist Dudu Myeni when he said: “Until now I was enjoying my evening and then he [Malala] brings up SAA. So, let me give you the diplomatic statement: We are working on it, Justice.”

    Gordhan added: “We are hoping we can make a good announcement [about SAA] shortly.”

    The Minister’s statements slowed the Rand’s slide. This morning it continued to hold on, but only just and it will remain extremely vulnerable to any other negative news around this issue. For now, however, it seems to be a stalemate.

    Only two weeks after being dropped by hundreds of thousands of voters at the local elections, and eight months after being punished by markets for inexplicably firing Nhlanhla Nene one would have hoped the ANC would learn its lesson. Unfortunately, the ANC seems more divided than ever. On the one side are the tendertrepreneurs, loyal to Zuma and their dodgy business allies; while on the other is the more moderate and market-aligned camp who lack the political clout to affect immediate change.

    The former group would do well to heed the Minister when he said last night: “I have a job to do in a difficult economic environment and serve South Africa as best I can. Let me do my job.” Let’s hope they keep their hands off Gordhan and National Treasury, for all our sakes.

    Andrew Rissik is the Director of Forex and International Projects at Sable International.

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