Rand volatility rises ahead of South African election

Rand traders are starting to look to next year’s South African election, betting that it will bring with it whipsaws in the value of the currency.

The rand’s one-year implied volatility — the options market’s estimates of price swings over the life of the contract — has shot up from three-year lows reached last month.

It has risen about 70 basis points to 15.8% since July 13, one of the five highest among emerging markets monitored by Bloomberg — in league with the ruble, lira, and Argentine peso, which are being buffeted by political ructions.

The ruling African National Congress faces its toughest electoral test yet amid tensions over nationwide blackouts, shoddy government services, accusations of rampant corruption and widespread poverty and unemployment.

The market is considering various scenarios for the outcome of next year’s vote, including the ANC retaining its majority or possibly losing support to just below 50%, Annabel Bishop, chief economist at Investec, said at a Bloomberg event in Johannesburg on Tuesday.

“What we are concerned about is that we may get coalitions that can’t work together that possibly have policies that are too opposing,” Bishop said. “And, of course, what we all hope, is that we get a stable government.”

While the largest opposition party, the Democratic Alliance, has struggled to capitalize on the discontent, a number of smaller parties have seen an uptick in support as voters seek an alternative.

The ANC has lost majority control over key municipalities, including the economic hub of Johannesburg and the capital, Pretoria.

But coalitions in local government have been marred with chaos and instability, making it almost impossible to govern efficiently.

South Africa is working on a framework that will outline how coalition governments should be constituted and operate to help stabilize fractious municipalities and ensure national and provincial administrations aren’t derailed by infighting should no party win outright control in next year’s elections.

“The politically noisy environment does create some negativity from an investor-sentiment perspective. And, of course, that could worsen,” Bishop said. “So, in the case of a coalition, we would need to see who the ANC goes into it with and hope it’s seen as supportive of business.”