Rand plummets as South Africa’s political risk soars

The rand has weakened further to R19 to the US dollar, reflecting the heightened political risks investors see in South Africa.

South Africans went to the polls on 29 May 2024, where they voted to make the biggest change to South Africa’s politics since 1994.

For the first time in 30 years, the ANC lost its majority, necessitating the ruling party to form a coalition with opposition parties.

While many called for an ANC/DA coalition, the ruling party chose to form a Government of National Unity (GNU), with the parties forming part of this union still unclear.

Various political parties, while able to join the GNU, have shown differing responses. Some initially stated that they would not join, while others are awaiting the details of the agreement. 

While the approach has generally been seen as sensible, market concerns linger on the length of the process, and the commentary coming out from various parties has also had some market impact.

This has added to the elevation of political risk and, therefore, rand weakness.

Investec chief economist Annabel Bishop said that just ten days after South Africa’s national election, the rand has run up back to R19.00/USD.

President Ramaphosa has expressed the need “for multiparty cooperation and multi-stakeholder collaboration if we are to overcome the severe challenges that confront our country” in a GNU. 

“The purpose of the government of national unity must be first and foremost to tackle the pressing issues that South Africans want to be addressed,” he said.

Bishop said markets are seeking political stability in the country’s governance and policies, including the need for fiscal consolidation, independence of the Reserve Bank and the judiciary, free markets, and protection of property rights.  

“While the election process itself has been declared free and fair, there has some complaints from smaller parties, with court action beginning, while the risk of severe civil unrest in KZN again is a concern,” Bishop said.

Other factors 

South Africa’s benchmark bond has also seen some weakness in its yield post-election. The markets are concerned that a left-leaning coalition could increase borrowing and deficits, which has also added to rand weakness.

The rand saw some comparative, mild strength at the end of last week as the US saw stronger than anticipated non-farm payroll figures, allaying some fears of a weakening US economy and pushing up the US GDP Q2 2024 growth expectations. 

However, the US unemployment rate ticked up to 4.0% y/y, from 3.9% y/y also for May, which was seen as indicating that the labour market was not overheating in the US. The data, in combination, were instead supportive of a soft landing.

The key event in the US this week will be the Federal Open Market Committee meeting on Wednesday. 

The Fed is expected to keep its interest rate unchanged, but Bishop said the markets will focus on the accompanying statements to judge if a softening in tone has occurred. 

Expectations on the US interest rate cutting cycle have slowed down, with less than a 100% certainty in markets seen for a cut at the January meeting next year, as the US rate cut cycle is both delayed and weakened, adding to rand depreciation. 

“The rand will remain beholden to both global and domestic events, with parliament due to see its first sitting of the new dispensation just after the middle of the month, and President Ramaphosa expected to be voted in again as President,” Bishop said.