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Jacob Zuma still in power: what it means for the South African rand.

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Leading a country is one of the biggest responsibilities an individual can bear – and with great responsibility, comes great criticism. With the proliferation of social media giving people a collective public voice that’s as loud as it’s ever been, instant reactions (be they negative or positive) carry a lot of weight. As a result, it’s become easier to push out those leaders who corrupt their responsibilities and warrant the criticisms thrown at them. There are however, as FXTM’s Nikola Grozdanovic writes, some notable exceptions.

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A majority vote calling for the end of a leadership is virtually meaningless under dictatorships, or ‘Not Free’ nations, and political watchdog Freedom House reports that close to 50 countries fall into this category today. In democracies, on the other hand, they usually leave the leader in question with (at best) a permanent stain on their record. And that’s just after one vote. Remaining safe after two motions is practically unheard of, which is why Jacob Zuma’s astonishing resilience in South Africa (a ‘Free’ nation according to Freedom House) is nothing short of a miracle.

The president’s ability to remain in power after no less than eight votes of no confidence is no positive miracle by any means, but rather one that has the stench of an inherently flawed political structure, designed to keep unpopular leaders in power. A vote of no confidence should be political anathema for a leader, as it’s the most direct way of saying that he or she is unfit for leadership, and the currency markets adapt to the situation accordingly. The rand experienced a 0.9% boost right before the vote and experts predicted a big rally should Zuma get ousted, but it wasn’t meant to be. On 8 August, as soon as news hit that Zuma survived, the USDZAR predictably dipped to 13.2174.

Despite claims of foul play against Zuma and some of his high-ranking officials, the regime is still in place. All the more surprising considering that back in April, when Zuma fired the respected Finance Minister Pravin Gordhan, Fitch and S&P (Standard and Poor’s) downgraded the wounded South African economy to junk status. As the country continues to show substandard results in the three major areas that are known to concern investors – economic prosperity, monetary policymaking and the political system – a fully fleshed-out economic recession lingers at its doorstep. Rumours of state capture and the wrestling match between leaders only adds to the challenge facing the country.

However, considering the rand’s quick recovery after the tiny dip, some forex trading experts have taken a more practical view on South Africa’s beleaguered state of affairs. They claim that economies are not just pinned to exchange rates movements, especially those like South Africa, because of their heavy links to commodities. One need only look at the period between 2011 and 2015, as an example. A weakness in the rand was sustained by a dip in commodity prices and general workforce strife which slowed down productivity.

Even while Gordhan’s sacking and sovereign debt downgrades affected the decline of the rand, South Africa still has an abundance of resources and the possibility to flourish under the right government. In July 2017, economic traffic in terms of transactions substantially picked up on a year-on-year basis, as recorded in the latest BETI (BankservArica Economic Transactions Index). Fragile inflation helped the index to reflect growth even if it was still on the slow side in quarterly and monthly terms.

Twenty one of the last 43 months have seen declines in the BETI, with one month recording no change and the other 21 months showing growth. This demonstrates that, while South Africa’s economy is looking sluggish and Zuma’s stubbornness continues to keep the rand uninspired, the country is only teetering on the edge of a full-blown recession. Providing the Treasury delivers another interest rate cut, the South African economy will be given a desirable boost as people have a tendency to spend more with lowered interest rates.

So, while political upheaval and ratings downgrades affect the rand, popular belief states that the South African economic makeup and its reliance on commodities will keep longstanding currency devaluation at bay. This recent attempt at ousting Zuma is solid evidence to support this belief; it took all of three days after the vote for USDZAR to rally back up and reach its highest August high so far, at 13.4480.

 

 

Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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