South African rand’s upbeat mood to be short-lived, volatile 2017 expected

JOHANNESBURG (Reuters) – The South African rand’s gains after fraud charges against the finance minister were dropped will be short-lived, a poll showed, as concerns about possible credit rating downgrades and an African National Congress leadership election weigh.

The rand is expected to weaken around 8 percent to 14.65 per dollar in 12 months, according to a Reuters poll taken before prosecutors dropped fraud charges against Pravin Gordhan on Monday.

South Africa’s currency broke on the strong side of 13.50 after the news, climbing to its highest in over a month, and such healthy gains may give the poll a bearish edge.

But concerns still cloud South Africa’s outlook.

“I won’t say I would have changed (my forecast) after yesterday. It was not really based around the short-term developments, but more of an 18-month view,” said KADD Capital economist Elize Kruger, who submitted her forecasts last week.

Gordhan had been due to face charges on Wednesday that he fraudulently approved early retirement for a deputy tax commissioner and re-hired him as a consultant, costing the revenue service 1.1 million rand.

He is still being investigated for his role in setting up a surveillance unit at the tax department a decade ago.

The rand has been buoyant this year because of a strong appetite for risk in emerging markets, but it has lost out on consistent gains due to a spate of unsettling political news.

“I think we are going to have a lot of volatility and political noise, if the credit downgrade does not happen in December, I think we might not be out of the woods,” Kruger said.

An August Reuters poll, taken days after police summoned Gordhan over a suspected rogue unit in the tax service, suggested South Africa’s rating, which Standard & Poor’s is due to review in December, would be cut to junk status this year.

“The negative political dynamic is likely to remain until the ANC leadership contest next year and would likely weigh on the rand,” said Rafiq Raji chief economist Macroafricaintel.

“Likely U.S. Fed tightening over the time horizon is also a consideration.”

The ruling ANC is due to pick a successor to President Jacob Zuma as party leader in December 2017 as it prepares for national elections in 2019.

South Africa’s economy is expected to grow just 0.3 percent this year, according to a Reuters poll last month. The central bank estimates growth at 0.4 percent and the Treasury 0.5 percent.

KADD Capital said the main challenges remained unchanged. “South Africa will have to start do the right things, chasing economic growth and giving political certainty”.