Zuma Going But Not Gone Leaves Traders Divided on Rand's Future

(Bloomberg) -- For about five minutes, the world’s most volatile currency barely budged as a top leader of South Africa’s ruling party made the announcement that everybody had been waiting for: President Jacob Zuma has been ordered to resign.

Then the rand started giving up the day’s gain as traders digested the statement read by African National Congress Secretary-General Ace Magashule: the party hasn’t given Zuma a deadline to comply, leaving the country’s leadership crisis unresolved and investors unsure about prospects for the currency. Cyril Ramaphosa, leader of the ANC and Zuma’s designated successor, is still waiting in the wings.

Unless Zuma decides to resign soon, the ANC may have to order its lawmakers in parliament to approve a motion of no confidence in the president. The political impasse already forced the unprecedented postponement of last week’s scheduled annual state-of-the-nation address and may imperil the presentation of the budget next week, with Moody’s Investors Service poised to cut the country’s local-currency credit rating to junk.

That would spark the exit of the country’s bonds from Citigroup Inc.’s World Government Bond Index, resulting in capital outflows as funds that track the gauge are forced to sell, and pressure on the currency. The rand weakened 0.4 percent to 11.9841 per dollar by 3:45 p.m. in Johannesburg, paring its advance in the past three months to 21 percent.

Read more here about the latest twist in the Zuma saga

Here’s what investors and analysts are saying about the latest developments:

• Reezwana Sumad, Johannesburg-based analyst at Nedbank Group Ltd.:
  • “If this extends for more than a week without a resignation, the market could become quite fatigued, and this will likely be negative for the rand in the near term”
• Zaakirah Ismail, a fixed-income analyst at Standard Bank Group Ltd. in Johannesburg:
  • “The rand has been awaiting key policy signposts amid policy uncertainty and has been trading in somewhat overvalued territory in the hope that the political environment would become more certain before key events such as the SONA and budget. However, delays in certainty stemming from the politics will see the rand discount its gains based on these views while key events which are meant to be important policy signposts hang in the balance”
• Natalie Rivett, London-based senior emerging-market analyst at Informa Global Markets Ltd.:
  • “We expect to see a softer bias prevail for the rand should it look as though a Zuma exit will be dragged out further.  Latest comments from the ANC have done little to suggest otherwise, with no deadline provided, while the possibility that Zuma will have to be removed through a parliamentary motion appears more likely now”
  • “Still, with Zuma’s days as president ultimately numbered, we would expect the rand to stay rangebound, with limited upside past 12.20”
• Manik Narain, head of emerging-market foreign-exchange at UBS Group AG in London:
  • “We have to see this in the context of how things have evolved since Ramaphosa won in December. Since then we’ve seen that he has proven to be stronger than one initially expected. He has made significant changes, he has prevented Zuma from making the State of the Nation address.”
  • “As much as there is mild disappointment in the market as this news has broken, the market is taking the big picture as positive for South Africa, while Ramaphosa is strengthening his grip over the ANC, and Zuma looks like he’s hanging on for dear life. He’s probably only managed to buy a little bit of time. This hasn’t changed our view of South African assets.
  • “The focus should now turn to next week’s budget announcement. South Africa is still battling to maintain its local-currency investment-grade status. There’s between 2.5 percent and 3 percent of GDP of portfolio flow at risk if it loses its investment grade”
• Jaap Meijer, head of equity research at Arqaam Capital Ltd. in Dubai:
  • “The ANC wants Ramaphosa to take over as soon as possible ahead of the 2019 elections, though Jacob Zuma has not been given a hard deadline and ANC has not discussed a no confidence motion today The rand has strengthened almost 20 percent since October following the appointment of Cyril Ramaphosa, who is more centrist, investor-friendly and pragmatic than his predecessor”
  • “Bond markets are likely to remain firm though we keep an eye on the U.S. 10-year. We see room for 10-year South African bond yields to fall as well, as South Africa’s bond yields trade at a premium of 150 basis points to its inflation rate differential. We, therefore, expect 10-year bond yields to fall from 8.6 percent to 8.25 percent by year-end”
• Simon Quijano-Evans, emerging-market strategist at Legal & General Investment Management Ltd. in London:
  • “The wind of change came to South Africa in December and it will not change direction now. The rand’s price action since early December shows that the wind of change from the new ANC leadership is a strong positive for the country’s economy. Today’s ANC statement shows that the direction remains in place”

--With assistance from Arif Sharif

To contact the reporters on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net, Dana El Baltaji in Dubai at delbaltaji@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Robert Brand

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