Will the rand 'bear' South Africa's growing uncertainty?

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Will the rand bear South Africas growing uncertainty?
South African's rand may fall further in the near future.

Dubai - Economy to remain mired in recession in 2017

By Matein Khalid

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Published: Sun 23 Apr 2017, 8:28 PM

Last updated: Sun 23 Apr 2017, 10:40 PM

South African President Jacob Zuma's decision to sack Finance Minister Pravin Gordhan after he dared to question his relationships with the corrupt Gupta brothers led to a sharp fall in the rand, acceleration of capital flight and a S&P sovereign debt credit downgrade to junk. Unfortunately, incompetence and endemic corruption in the Rainbow Nation means squat as long as Zuma packs the ANC with loyalists and Zulu tribal power brokers. Zuma will stay in power until the 2019 election and inflict other malign black swan decisions on South Africa. There is zero chance that Zuma will be replaced by a reformer. The ANC does not do reform.
The South African economy will remain mired in recession in 2017 despite the surge in gold, diamond and platinum prices and the epic slump in the rand since 2014. The ANC and the far-left trade unions will ramp up "crony capitalism" ahead of the election, symbolised by the madness of the trillion-rand Enskom nuclear energy plants scheme. Yet the plunge in the rand and the Johannesburg stock exchange has created new, profitable realities. I expect the South African rand to fall to 14 in the next three months as incoming Finance Minister Malusi Gigaba, a Zuma loyalist, lacks credibility in the City of London (which financed the great Rand gold/diamond strikes of the Victorian era that forged the colossus De Beers/Anglo American).
In any case, a populist ANC, a reserve bank unable to match Fed rate hikes and rising sovereign credit risk (Zuma/Malema risk) premium means the path of least resistance for the ZAR is lower against the US dollar. Gigaba will be forced to jettison Gordhan's fiscally-prudent 2018 budget, a scenario that could make the rating agencies go ballistic again. Economic populism, a loyalist cabinet, a socialist ANC elite, black empowerment, vested interest, a junk sovereign rating, a steep rise in borrowing costs in the international capital markets and the construction of nuclear power white elephants that could swallow 20 per cent of GDP anchors my belief that the South African rand, the currency of Azania (though not Agrabah!) is a short on any Gigaba inspired "relief rally".The time to bottom-fish in South Africa was in January 2016, on the eve of a 23 per cent rise in the rand as the trade deficit narrowed to three per cent and Gordhan's reforms was green-lighted by international bankers, the IMF and the World Bank. Now Zuma has won and Gordhan has lost. So it is Nkosi sikelel Iafrika. God bless Africa. My mantra de jour is cry the beloved country and short the beloved currency though only after consulting my Solomonic friend and financial oracle over lunch at Ustadi. Who benefits from a week rand? Sasol!
If the Turkish lira was my least-favourite emerging market currency long before Trump's Tomahawk missile strike on Syria and Erdogan's April 16 referendum, I was hugely bullish on the Mexican peso at 20. The Mexican peso has risen to 18.4 as I write, a phenomenal 18 per cent rise in only three months, a beneficiary of the Trump White House's failure to repeal Obamacare, a plunge in US Treasury bond yields, the prospect of only two more Fed rate hikes in 2017 and that Saudi Arabia will roll over last November's Opec quota cut pact in May.
I spent my sophomore year summer at Penn in Mexico City, staying at my aunt's house in Colonia Polanco, near Chapultepec Park and traveling from the jungle sea resorts of the Yucatan (Cozumel, Cancun, Merida) to the vastness of the ancient Aztec capital. A lifelong gift from that long-ago summer was a command of Urdu-accented Spanish (the Argentina call it Castilian but a world language is really a dialect with an army!) and a fascination with banking crises and global sovereign debt markets. So the real ballast behind the surge in the Mexican peso was not Trump, Ryan or even converted Nafta amigo Wilbur Ross but the 0.75 per cent rise in the Banco de Mexico's policy borrowing rate and the ascendency of the Goldman Sachs twins (Gary Cohn/Steve Mnuchin) as the US president's new financial capo di tutti capi. The Mexican peso can well rise to 18 before fears of a June FOMC rate hike again induce profit taking. So, hail to the lovely land of mariachi bands, Diego Rivera and Frida Kahlo, the most amazing, pre-Columbian art museum in the world, the Mayan pyramid of the magician at Chichen Itza, Coco Bongo at Cancun, the writers Carlos Fuentes and the great essayist of New Spain Octavio Paz. It is simply not possible to trade the currency of a nation I do not know or love!
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.


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