South African rand slides on fears for central bank independence

South Africa’s rand fell and sovereign bond yields jumped after the country’s anti-corruption watchdog advised president Jacob Zuma to shift the focus of the central bank’s mandate away from targeting inflation.

The public protector’s office said on Monday that the South African Reserve Bank should promote “balanced and sustainable economic growth” rather than target inflation. That left the rand down 1.9 per cent at one point, before it recovered to trade 0.9 per cent lower at R12.94. Government bonds also fell, forcing a sharp rise in the yields of 10-year local currency bonds.

Busisiwe Mkhwebane, the public protector, made the call in a report looking at alleged corruption in an apartheid-era bailout of banks known as the Ciex scandal.

As well as promoting growth under its current mandate, the SARB should also protect the “socio-economic wellbeing” of citizens and advance “meaningful socio economic transformation,” or increasing black ownership of the post-apartheid economy, Ms Mkhwebane said.

The call will be seen as a threat to an institution that has so far avoided sharpened political attacks by allies of Mr Zuma on banks and the Treasury for allegedly serving “white monopoly capital” over the majority black population.

The possibility of amending the central bank mandate could be an attempt by the ruling African National Congress to find a shortcut to boost sluggish GDP growth, said Piotr Matys, an emerging markets currency analyst at Rabobank.

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“Finding consensus to implement structural reforms is proving difficult and instead the ANC may opt to gain political control over the central bank,” Mr Matys said. “Unless prominent ANC officials quickly reassured the market that they have no intentions to approve any proposals that could potentially undermine SARB’s independence, the rand could fall significantly in the coming days.”

The ANC is unlikely to muster the two-thirds majority in parliament to change the constitution over the SARB’s role. Such a move would also be likely to face serious challenge in South Africa’s constitutional court.

But worries about the SARB’s independence persist, fuelled by Mr Zuma in late March firing finance minister Pravin Gordhan, a critic of corruption and much respected by markets.

In recent pronouncements, SARB governor Lesetja Kganyago has warned about the risk political instability poses to inflation, which is running at 5.3 per cent. The central bank is targeting an inflation range of 3 to 6 per cent.

Despite setbacks such as Mr Gordhan’s sacking, rating agency downgrades and the return of recession, the rand has gained 8.7 per cent this year. Mr Zuma is in the final year of his final term of office, and investors hope new leadership will deliver reform.

Ms Mkhwebane’s appointment by Mr Zuma last year sparked concerns over the public protector’s independence. Her predecessor, Thuli Madonsela, implicated the president in a report last year on so-called state capture, or alleged looting of key institutions by cronies. The scandal has split the ruling ANC as Mr Zuma tries to control his succession as party leader later this year.

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Ms Mkhwebane said on Monday that she would challenge Mr Zuma’s bid to have the report’s release judicially reviewed.