A Lacklustre Rand Weathers Zuma’s Vote of No Confidence

Tuesday, 22 August 2017 19:19

If you lead a country, criticism comes with the territory and even the world’s most charismatic leaders gather foes. Now that social media has given everyone a platform, we can see real-time reactions (good and bad) of the general public to their leaders’ decisions. This collective voice has a lot of clout, and the ousting of unsavoury leaders is becoming commonplace -- but there are always exceptions, says FXTM’s Samantha Robb, Staff Writer.

When we talk about leaders that refuse to be toppled, some classic examples are Zimbabwe’s President Robert Mugabe and Libya’s Muammar Qaddafi. The political watchdog, Freedom House, has reported that as many as 49 of the world’s nations live under a dictatorship. In the free world, however, when you hold the reins in a political party, it is a rarity to emerge unscathed from a vote of no confidence by your peers. To survive two rounds is virtually unheard of, and yet, the President of South Africa, Jacob Zuma, has weathered a staggering eight votes of no confidence against him in a country that has been labelled ‘Free’.

A motion of no confidence is a statement or vote that states that a person in a position of responsibility, is no longer deemed fit to hold that position. One or two votes would, in most cases, be enough to oust an errant leader, so when they survive eight, it could mean that there is a fundamental flaw in the electoral system, or there is an underlying agenda that supports this incompetent president and keeps them in power.

Despite allegations of foul play against the President and some of his ministers, the old guard is holding firm. As a result, the South African economy is being battered by ratings downgrades from two of the ‘big three’ ratings agencies; Standard and Poor’s (S&P) and Fitch. In the beginning of April, the country’s credit rating was downgraded to junk status after Zuma sacked the respected Finance Minister Pravin Gordhan. International investors have three major concerns in economic growth, fiscal policy and politics, and South Africa is falling short on all three. The country is in a technical recession, there is talk of state capture, and the political dog fight amongst the leadership is a massive challenge. The currency market is reflecting this upheaval with USDZAR trading at its lowest point by the end of March, and experiencing volatile swings before and after the latest vote of confidence.

Yet, some experts have taken a more pragmatic approach to their assessment of South Africa, stating that you cannot apply one theory to the movements in the exchange rates, especially given that the economy is heavily dependent on commodities. For example, sustained rand weakness from 2011 to late 2015 coincided with the downturn in commodity prices and unrest in the workforce that pushed down productivity.

The depreciation of the rand was materially affected by the sovereign debt rating downgrades and yet, South Africa has rich resources and the ability to thrive under the right leadership. This month, economic transactional activity in South Africa picked up in real terms on a year-on-year basis in July, according to the latest BankservAfrica Economic Transactions Index (BETI). The report indicates that this was due to weaker inflation and the index reflected growth, albeit slow on a quarterly and monthly basis.

In the last 43 months, 21 of the monthly changes in the BETI have seen declines, one month had no change, and the remaining 21 months showed increases. So, while the economy is lacklustre, it seems to be pulling back from a full-blown recession. If the Treasury follows up with another interest rate cut this year, it should give the economy a much needed boost; South Africans spend more when interest rates are low.

While politics and rating downgrades will move the Rand, despite potentially strong economic data, forex traders widely believe that South Africa has a strong enough infrastructure and commodity base to fend off long-term currency devaluation. After the initial dip of USDZAR immediately following news that Zuma survived the vote, the currency pair rallied back up to 13.4480 – its highest high in August so far.


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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This article was written by the trading professionals at FXTM, an regulated and reliable Forex brokers. For more in-depth market analysis, please visit FXTM at forextime.com.

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