How No Confidence in Zuma Impacts the Rand

Chris Lee
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History is filled with examples of unpopular leaders staying in power regardless of how much criticism and disapproval they are met with. In today’s world, social media gives the public a vast platform from which they express their grievances with world leaders – and it’s effective, for the most part, writes Nikola Grozdanovic, FXTM Staff Writer.

Of the 195 countries analysed by Freedom House, an independent NGO that provides socio-political stats, 49 were classified as ‘Not Free’ (that is, ruled by dictatorships) whereas the rest fall into ‘Free’ and ‘Part Free’ categories. In ‘Free’ countries, characterised by democratic rights and freedom of the press, leaders can be ousted by votes of no confidence – literally a vote by the people’s representatives that states the leader in question is unfit for office. Surviving one such vote is hard enough, but South African president Jacob Zuma has survived no less than eight no confidence votes. A staggering record, especially in a country that has been designated as ‘Free’.

Questions naturally arise when an unpopular leader manages to stave off eight votes of no confidence. Such political bullet-dodging suggests that something in the South African electoral system is inherently flawed. With the way the ZAR has responded – shows signs of strength leading right up to the vote, and immediately dipping as soon as Zuma was proclaimed safe – it’s clear that the ongoing tensions in the political arena has naturally affected South Africa’s economic prosperity.

If accusations of foul play circling Zuma and his administration weren’t enough, two of the ‘Big Three’ credit ratings goliaths slapped South Africa with downgrades in April. These downgrades from Fitch and Standard & Poor’s came as a consequence of Zuma firing the well-respected Finance Minister Pravin Gordhan – during a time when the USDZAR traded at its lowest point in the year at 12.42636 – and reflect the overall disparaging sentiment in South Africa. The three key sectors of interest to forex traders and investors – economics, finance and politics – have been badly wounded.

On the other hand, some financial experts still view the South African economy optimistically, saying that a country which relies so heavily on commodities should not have its economy assessed by exchange rates alone. For example, when the rand experienced bouts of weakness between 2011 and 2015, a slump in commodity prices and a commotion in the workforce that reduced productivity contributed significantly to its weakness. When Zuma made good on his promise to sack Gordhan, the rand dipped significantly and investors showed a lack of confidence in the ZAR. But, the drop-off was short lived as the rand quickly recovered alongside government bonds.

As it stands now, South Africa is part of the same parcel as the UK and the US; a country that’s shrouded in political uncertainty. However, currency markets appear to be showing signs of optimism when it comes to the ZAR as it has shown how quickly it can recover after a political shakeup. As such, there are justified hopes that this commodities-focused economy will be able to weather this most recent internal storm.

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.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

Chris Lee

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