Pravin Gordhan
Johannesburg - The rand's bullish rally recently against the dollar came to an abrupt halt on Monday, slumping nearly 2 percent after President Jacob Zuma ordered Minister Pravin Gordhan and his team to cut short their international investor road show and head back home.

On Monday, the Treasury said Gordhan would comply with Zuma’s directive.

Fears that Gordhan could be on his way out in a rumoured cabinet reshuffle sparked panic in the market, with the banking index closing 3.05percent lower at 7688.31 points.

The Banking Association of South Africa managing director Cas Coovadia said they were deeply concerned about Zuma’s decision. Coovadia said business, government and labour had made significant progress in the last 18 months in building confidence among investors and rating agencies.

He said road shows were an essential element of building confidence. “This action by the Presidency rolls back the progress we have made as a country,” Coovadia said. “It also militates against the imperative of ensuring political and policy certainty.”

He said said a potential outcome of this action could be a consideration by rating agencies to downgrade South Africa to sub-investment grade status. “This would be very negative for banks and other corporates, whose ratings would follow the sovereign.”

Earlier in the day the rand weakened as much as 1.9percent against the dollar and was 1.6percent weaker at R12.6299 at 2.23pm, while the government’s rand-denominated bonds due in 2026 fell, driving the yield 22 basis points higher to 8.59percent, the biggest jump since October.

The rand traded at its strongest levels since June 2015 in early morning trade, at one stage reaching R12.3146 to the dollar before backtracking to R12.7425 by 5pm. The rand has been the best-performing emerging markets currency over the last year, strengthening 23percent against the dollar.

The recall comes at a critical juncture after South Africa narrowly escaped being downgraded to junk status last year.

Global ratings agencies, Standard & Poor’s (S&P) and Fitch both ranked the country’s sovereign ratings one notch above junk, with Moody’s ranking it two levels higher. Moody’s is scheduled to visit the country next month, with S&P expected to visit in June.

Econometrix chief economist Azar Jammine said the uncertainty created by the cancellation of the road show had far reaching implications for the rand and inflationary outlook. “The inflationary pressures which are currently receding due to the strength of the rand will renew and nullify the rationale for reducing interest rates,” he said.

ETM Analytics analyst Manisha Morar said further weakening of the rand would be determined by the reasons on why Gordhan and his delegation were ordered to cut back the trip.

Nomura research analyst Peter Attard Montalto said the muted reaction on the cancellation of the roadshow suggested Zuma wanted to test the market on the possible reshuffle.

“The Presidency has seen such a strong rand and is wondering how much of a political shock it can take - they do watch these things closely. So far the market reaction has been very muted,” Montalto said.

Read also: No reasons for Gordhan's recall

The cancellation of the road show also came a day before a court battle was set to resume between Gordhan and the Gupta controlled company, Oakbay. Gordhan had approached the courts to seek an order that declares him not required to intervene on behalf of Oakbay over the closure of its accounts at several South African banks last year

Gordhan was re-appointed to the position in 2015 following the unceremonious sacking of Nhlanhla Nene in December of that year.

The rand plunged to a historical R16 against the dollar when Zuma named ANC backbencher David van Rooyen to replace Nene, with the banking index falling 18.54percent and financial stocks dropping 13.36 percent.

The market capitalisation of the JSE went down 1.49 percent to R11.18 trillion a loss of R169.6 billion.

Last year, when the National Prosecuting Authority said it would charge Gordhan with fraud, the rand weakened from R13.90 to R14.22 against the dollar minutes after the announcement. The charges were later withdrawn.

The South African Reserve Bank will on Thursday announce its interest rates decision. 

Additional reporting by Siseko Njobeni and Sechaba ka’Nkosi.