Rand rollercoaster as South Africa is on the edge

Rand volatility surged as the leaders of South Africa’s two main political parties continued negotiations to resolve a dispute over the national budget.

The split between the African National Congress and the Democratic Alliance over Finance Minister Enoch Godongwana’s spending plan has raised investor anxiety about a potential fracture in the ruling alliance.

They’re concerned that a collapse of the current administration risks opening the way for the ANC to seek support from leftist parties such as the populist Economic Freedom Fighters to continue governing.

“Failure to reach a deal would endanger not only the passage of the budget but also the durability and efficacy of the government of national unity in its current, centrist form,” said Anne Frühauf, managing director at risk adviser Teneo.

The rand gained 0.2% R18.36 per dollar by 3:34 p.m. in Johannesburg on Tuesday, after trading as much as 0.3% stronger and 0.6% weaker earlier in the day. 

Overnight implied volatility for the dollar-rand pair climbed to a four-month high, suggesting traders are hedging for price swings in the rand as a parliamentary vote on the budget looms on Wednesday. 

The premium of options to sell the rand over those to buy them widened to the most since June, as traders added bearish bets against the currency.

The DA sounded an optimistic note after its leader, John Steenhuisen, held talks with President Cyril Ramaphosa, the head of the ANC.

In return for its support on the budget, the DA — the largest party after the ANC — has demanded a signed agreement that gives the party a greater say over economic policy.

“The DA leader and the president had a very good meeting,” DA national spokesman Willie Aucamp said by telephone. “Negotiations are ongoing.”

Parliament’s finance committee began considering the fiscal framework — which establishes economic policy, revenue projections and limits on government spending — on Tuesday morning and is expected to vote on it later in the day.

The process allows political parties to propose amendments to the budget legislation, including the removal of a proposed increase in the value-added tax rate — a key sticking point between the DA and the ANC.

The DA presented its objection to the proposed tax hike on Tuesday afternoon.

Despite the differences, the DA said ahead of the parliamentary-committee meeting that it was optimistic that a deal with the ANC is still possible.

“The conversation between the ANC and the DA is constructive and ongoing,” the DA’s spokesman for finance, Mark Burke, said in an interview with Johannesburg-based broadcaster Newzroom Afrika. 

ANC chief whip Mdumiseni Ntuli sounded a more cautious note, saying that while there is broad consensus about the budget in its current form, that doesn’t include the DA. ANC Secretary-General Fikile Mbalula echoed that sentiment in a briefing to reporters.

“We think now there is a basis for us to have an agreement with everyone, not only with the DA, but everybody in the GNU and even beyond, those who agree with us,” he said in televised remarks.