JOHANNESBURG South Africa's rand weakened to a record low on Friday, slumping more than 3 percent in the wake of this week's sacking of the finance minister, while banks led stocks lower.
President Jacob Zuma sacked Nhlanhla Nene late on Wednesday in favor of a relatively unknown lawmaker, David van Rooyen, unnerving investors in an ailing economy whose investment grade status is already at risk.
The sacking of Nene, a veteran civil servant in the ministry who was keen to rein in government spending in Africa's most industrialized economy, has also sparked a sell-off in bank stocks, which have dropped nearly 20 percent since Thursday.
"Government will not abandon the fiscal path that we have chosen in the last few years," Zuma said in a statement. "Maintaining a prudent fiscal position remains one of government’s top priorities."
Zuma said Nene was removed from his role as finance minister under short notice so that he could be nominated as the head of the African Regional Centre of the New Development Bank/BRICS Bank, to be based in Johannesburg.
"It's a lame reason. They are fishing for an excuse. They are trying to find a position that is senior enough for Nene to give a valid reason for why he was sacked," Dawie Roodt, the chief economist at financial services firm Efficient Group said. "I've got very little doubt that markets will be skeptical too."
In a separate statement, Zuma denied local media reports that a wider cabinet reshuffle was in the offing, in what analysts saw as an attempt to calm jittery markets.
Many economists have questioned van Rooyen's ability to steady an economy hammered by falling prices for commodity exports that range from coal to gold.
"Markets don't like uncertainty," Cratos Capital equity analyst Greg Davies. "You have taken a minister that had a lot of credibility with the market ... and put someone in his place that doesn't seem to have any sort of experience like the previous minister."
By 1700 GMT the rand had recovered slightly, trading 1.98 percent lower to the dollar at 15.78150 ZAR=D3, from the psychologically crucial 16.00 level it hit earlier in the day.
The central bank told Reuters it would hold its monetary policy committee meeting in January as scheduled. It raised the benchmark lending rate for the second time in 2015 last month to 6.25 percent.
Analysts had speculated that the bank may call an earlier meeting to increase interest rates to protect the rand.
Yields on local and dollar-denominated debt soared as the likelihood of a downgrade to junk spooked investors. Demand levels in local bond auctions were weak on the day, reflecting the subdued interest in local debt.
On the bourse, the banking index .JBANK dropped more than 10 percent in early deals before recouping some of the losses to close 5.8 percent lower as worries grew that pressure on South Africa's sovereign credit ratings would hit profits and drive up bad debts among the nation's banks.
Barclays Africa (BGAJ.J) plummeted as much as 12 percent, ending 3 percent lower at 127,84 rand, while FirstRand (FSRJ.J) lost 8.3 percent to 35.57 rand and Standard Bank (SBKJ.J) fell 4.2 percent to 101.39 rand.
The blue-chip JSE Top-40 index .JTOPI dropped 1.24 percent to 43,701 points, while the broader All-share index was off 1.56 percent at 48,219 points.
"This country would be far better off without this man as our president, and I say that with a great deal of sadness," former health minister and anti-apartheid activist Barbara Hogan told Talk Radio 702, referring to Zuma.
Credit ratings agency Fitch, which downgraded South Africa last Friday to just one notch above "junk" status, said Nene's firing "raised more negative than positive questions".
Downgrades jack up South Africa's borrowing costs and flow through to the banking system.
The yield on the benchmark government bond due in 2026 ZAR186= has added nearly 200 basis points, or 2 percent, in the last two days to levels last seen during the 2009 recession.
Overseas investors also shunned local dollar-denominated debt, with the average yield premium to hold South African debt compared to U.S. Treasuries surging to 6-1/2 year highs.
(Writing by James Macharia and Tiisetso Motsoeneng; Editing by Ruth Pitchford)