Markets reel as Gordhan probe deepens

Pravin Gordhan. File picture: Mxolisi Madela

Pravin Gordhan. File picture: Mxolisi Madela

Published Aug 24, 2016

Share

Johannesburg - South African markets were left reeling after an investigation surrounding the country’s finance minister took a new twist.

The rand fell to a three-week low against the dollar and domestic government bond yields climbed by the most since December after a news website said that Finance Minister Pravin Gordhan had been summoned to report to police on Thursday. Yields on government dollar debt jumped to a three-week high and the cost of insuring the securities against default climbed, while banking shares headed for the biggest drop since June 27.

The latest development signals a deepening rift between Gordhan and President Jacob Zuma, whose ruling African National Congress called at the weekend for the national budget to be “reprioritised” as the party tries to win back support after a drubbing in local-government elections earlier this month. Gordhan has pledged to cap spending and debt as he battles to stave off a credit-rating downgrade to junk.

“The threat that Finance Minister Gordhan will no longer be able, or perhaps willing, to continue in his position is now real,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in an e-mailed note. “Expect further volatility today and the risk bias is now clear.”

Read also:  Gordhan determined to stay

Gordhan received “correspondence” from a special police unit known as the Hawks, and is getting legal advice, Treasury spokeswoman Phumza Macanda said after the Daily Maverick said on Wednesday the finance minister and four former tax officials had been asked to report to the unit’s office on Thursday. Gordhan was informed he would receive a “warning statement” given to accused persons before they are charged, the news website reported, without saying where it got the information.

The rand declined as much as 1.2 percent on Wednesday before trading 0.1 percent weaker at 14.0182 per dollar by 10:30 a.m. in Johannesburg, extending Tuesday’s 3.1 percent plunge and heading for the weakest level since June 28. Three-month implied volatility climbed 110 basis points to 19.02 percent, indicating that options traders anticipate wider price swings in coming months.

Yields on benchmark government bonds due December 2026 surged 42 basis points to 8.94 percent, the most since Zuma roiled markets in December by firing then-Finance Minister Nhlanhla Nene and replacing him with a little-known lawmaker. The cost of insuring South African debt for five years using credit-default swaps rose 9 basis points to 240 as yields on dollar bonds due September 2025 climbed 19 points to 4.07 percent.

‘Early days’

“If we do see the arrest and removal of Mr. Gordhan from office then you can bet the market will start to aggressively price in a rating downgrade,” Warrick Butler, head of emerging-market spot trading at Standard Bank Group, said in an e-mailed note. “I guess what is mostly surprising is that we didn’t see the rand weaken more; early days perhaps.”

The Sunday Times newspaper reported in May that Gordhan may face dismissal and arrest on espionage charges for setting up the South African Revenue Service’s National Research Group to spy on politicians including Zuma. Gordhan denied any wrongdoing and said he was being harassed by people intent on manipulating the justice system for political gain, while Zuma’s office denied there was a rift between him and the finance minister.

Read also:  SA Inc’s health at risk over Gordhan issue

Gordhan served as head of the tax authority before his first term as finance minister from 2009 to 2014. He was reappointed to the position in December.

BLOOMBERG

Related Topics: