The rand fell sharply following reports of continuing disagreement between the DA party and President Cyril Ramaphosa about Cabinet posts in the new Government of National Unity (GNU).
Financial markets are on edge over the composition of the Cabinet, as it will give an indication of whether the ANC intends to share power meaningfully with parties including the DA, notwithstanding that both parties claim to be more investor friendly. In addition, at the start of this week, emerging market currencies were on the back foot due to a stronger dollar and indications the US Federal Reserve would keep rates higher for longer.
Yesterday evening, the rand, which had strengthened to under R18 per dollar last Wednesday following optimism about the announcement of the formation of the GNU, was trading at R18.52 per dollar, over 1.5% weaker than its previous close. That put it on course for the lowest close since June 14 and the worst performance among developing-nation peers this week, Bloomberg reported.
It’s been nine days since Ramaphosa was sworn in and he still doesn’t have a functioning Cabinet as talks continue between the ANC and DA over its composition. Traders worry the delay this time might lead to a less desirable outcome from the markets’ perspective, even though the ANC said on Wednesday that an announcement would be made within 48 hours.
Momentum Investments’ macro research unit said the establishment of the GNU could nevertheless provide a boost to confidence in the country, in the promise of continued economic reform efforts and an improvement in governance and accountability.
Media reports yesterday suggested that the DA was expected to get Cabinet positions in return for supporting Ramaphosa’s re-election as president, but Ramaphosa had backtracked on an offer to give the DA the trade, industry and competition ministry. The DA was also apparently unhappy about the offer of only six Cabinet posts, given its level of voter representation.
“Further delays to the Cabinet announcement will only cause jitters to multiply and feed the impression that the GNU is stumbling at the first hurdle,” Louw Nel, senior political analyst at Oxford Economics, told Reuters.
The JSE’s Top-40 index was last down around 0.38%.
Bianca Botes of Citadel Global said in a note the rand would likely remain in cautious terrain while the Cabinet negotiations played out and with no decision in the bag yet, the rand was likely to take its cues from the global market.
Emerging market currencies had started the week on track for their worst first half of the year since 2020, pushed lower by an unexpectedly strong dollar and an unwind in a popular trading strategy across Latin American markets, but the trend was less severe in South Africa, where the rand was yesterday trading much in line with where it had at the start of January.
Bloomberg cited Sebastien Barbe, the head of EM research at Credit Agricole CIB: “The composition of the government is the foremost. Even if this ANC-DA alliance has been already priced in, DA having significant economic ministries could see some upside for the rand.” Over the long term, the South African Reserve Bank hinting at possibly lowering the inflation target suggested “possibly rates higher for longer – potentially be rand supportive as well when it happens”, said Barbe.
The Bank of America said in a note that the instability within the ANC-DA coalition was a critical factor contributing to the weakening of the rand. With the upcoming US presidential debates on June 27, the risks to emerging market currencies, including the rand, were heightened.
“Unlike the robust appreciation of emerging market foreign exchange witnessed during Ramaphoria, current conditions suggest a weaker performance … This report highlights that even if political stability is maintained, further rallies in both bonds and foreign exchange are limited.”