Zuma's 'night of the long knives' rattles investors, puts South Africa's credit rating at risk

President Jacob Zuma's dismissal of the finance minister and eight other cabinet members has sent the South African rand to a two-year low, raising concerns over the country’s fiscal path and its investment-grade credit rating.

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In a major cabinet reshuffle, President Zuma has replaced Finance Minister Pravin Gordhan with home affairs head Malusi Gigaba, according to a statement. Also, African National Congress lawmaker Sfiso Buthelezi will replace Mcebisi Jonas as Deputy Finance Minister.

Some other changes in the cabinet affected the positions in the ministries of energy, police, and tourism.

The rand has fallen 1.3 percent against the US dollar, to its lowest in seven weeks, and looks to be heading for further decline. The rand has been falling for five days in a row and is currently trading at 13.38 per dollar.

Benchmark 10-year government bonds had their worst day in seven months, tumbling and sending the yield soaring by 42 basis points to 8.93 percent.

Some experts are saying the falling rand, and government bond prices are indicative of the good reputation of the former finance minister among investors. Gordhan's policymaking ensured stability in South Africa was a rebuttal of the country’s rating being lowered to junk status. His pledge to cut spending and state debt inspired investor trust.

“Market reaction to the cabinet reshuffle and what looks to have been a clean sweep of the Treasury top team is going to be a significant negative. Given past volatility in the rand when a cabinet reshuffle was even suggested, the expectation is that the impact may be more pronounced now,” said Razia Khan, chief Africa economist at British multinational bank Standard Chartered.

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The South African rand was one of the top three emerging market currencies last year and in early 2017, enjoying a 12.6 percent surge against the greenback in 2016 outpaced only by Brazil’s real and Russia’s ruble.

“The annoying, frustrating thing from the South Africa perspective is that you don’t want political worries now because things are trending up, things are picking up. South Africa is pretty much in the penalty box for investors now,” said Moz Afzal, global chief investment officer of Swiss investment manager EFG Asset Management.