Rand outlook: Local currency has weakened in the near term

27 August 2019

Global protectionism elevates risk concerns in financial markets

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The rand has weakened materially this month, to R15.50/USD, R17.19/EUR and R18.81/GBP fromR13.81/USD, R15.42/EUR and R17.15/GBP earlier in the quarter. Renewed fears of global recession initially saw a material sell-off of EM currencies, reinforced by market concerns over a perceived insufficiently dovish tone from the Fed following its July FOMC meeting.
 
The US economy is evincing strong economic growth, running at full employment, and leading to Fed caution on the monetary easing front. The FOMC was clear that the 25bp cut in interest rates at its July meeting did not necessarily indicate the start of a lengthy interest rate cut cycle, but more recently, commentary from Jackson Hole seems less opposed to additional easing.
 
Rand weakness ensued in August on the back of the Fed commentary after its July meeting, alongside worsening policy uncertainty in SA, delayed growth-enhancing reforms, fears of the need for an IMF bailout and the lack of resolution to the Eskom debt crisis.
 
Despite the IMF subsequently denying that SA needed financial rescue, the rand failed to strengthen, dragged down most recently by further trade developments at the past weekend. The domestic currency has been running towards the down side in August, as indicated by an earlier increase in the probability of the risks to the down side already in July, leading to a revision now of the H2.19 expected case currency forecasts.

Read the full report

 

PREVIOUS ECONOMIC UPDATES:

 
 
14 August 2019

 

Oil note: Fears of slower global growth lowers oil prices.

 

This is overshadowed by rand depreciation with a petrol price increase for September likely. Q4.19 could see the rand strengthen, if not before then.

Since its high point this year of US$74.5/bbl, which occurred in April, the Brent crude oil price has dropped by over 21%, leading to worries of a bear market for the commodity. However, the oil price high this year proved to be temporary, and for most of the period since this spike, the oil price has declined.
 
Indeed, the Brent crude oil price averages US$65/bbl to date this year, down from 2018’s US$71.8/bbl. We continue to expect the price will average US$65/bbl this year, with some upwards pressure from current levels, but with continued volatility also likely.
 
The rand to date averages R14.32/USD in Q3.19, essentially in line with our forecast (see “Rand Outlook”, 17th May 2019, see website address below) of R14.30/USD. However, August has seen risk aversion levels in global financial markets elevate notably, with the rand depreciating beyond R15.00/USD.
 
At the end of July the Federal Reserve Bank failed to deliver the extremely dovish tone markets anticipated, reducing expectations of multiple US interest rate cuts this year and sparking risk-off. These cuts were seen to be needed to stave off the risk of a future economic slowdown on the back of US-led trade protectionism. 
 
Thin liquidity conditions in August, as many market players in the northern hemisphere are away on summer vacation, exacerbated the sensitivity of the market reaction to the perceived Fed turnaround in tone, followed by heightened global trade tensions.
 
Q4.19 could see risk aversion subside (see “Rand note: elevated risk aversion in global markets causes marked rand sell-off in what is typically a risk off period for the domestic currency. The fourth quarter of the calendar year, in contrast, tends to see the rand recover”, 12th August 2019, website address below). 
 
With the rand oversold, some recovery in the domestic currency has already occurred, and further is expected in September as market players return. However, our Q3.19 forecast of R14.30/USD (average for the quarter), would be revised closer to R14.50/USD if the rand does not continue to correct this month.

Read the full report

You may also be interested in the following updates in August

  • Rand Note

    Rand stabilises as US economic symposium, Jackson Hole, approaches (19 Aug 2019)
  • Mining Update

    Based on June’s reading, mining production is expected to make a positive contribution to Q2.19 GDP (8 August 2019)
  • Rand Note

    Rand weakens as heightened global trade tensions add to the downside (06 August 2019)
  • Vehicle Sales Update

    Sales of new vehicles fell by 3.7% y/y in July, underpinned by a marked declined in the passenger car segment (1 August 2019)
  • PMI Update

    The increase in the manufacturing PMI to back above the neutral 50-mark may prove unsustainable in the coming months (1 August 2019)
  • Electricity Update

    Consumption figures continued to contract in June and remain constrained by weak domestic activity (1 Aug 2019)

You may also be interested in the following updates in August

Rand Note
Mining Update
Rand Note
Vehicle Sales Update
PMI Update
Electricity Update

Rand stabilises as US economic symposium, Jackson Hole, approaches (19 Aug 2019)

Based on June’s reading, mining production is expected to make a positive contribution to Q2.19 GDP (8 August 2019)

Rand weakens as heightened global trade tensions add to the downside (06 August 2019)

Sales of new vehicles fell by 3.7% y/y in July, underpinned by a marked declined in the passenger car segment (1 August 2019)

The increase in the manufacturing PMI to back above the neutral 50-mark may prove unsustainable in the coming months (1 August 2019)

Consumption figures continued to contract in June and remain constrained by weak domestic activity (1 Aug 2019)

 
12 August 2019
 

Rand outlook: Elevated risk aversion in global markets causes marked rand sell-off

 

The rand sell-off in what is typically a risk off period for the domestic currency. The fourth quarter of the calendar year tends, in contrast, to see the rand recover.

The rand has seen a further marked sell-off at the start of this week, depreciating to R15.46/USD, R17.28/EUR and R18.66/GBP from R13.98/USD, R15.77/EUR and R17.59/GBP a month ago. Risk aversion in global financial markets has elevated, leading to EM currency sell-off.

Financial market players’ concerns over global economic growth have sparked the latest sell-off (see “Rand note: Rand weakens as heightened global trade tensions add to the downside”, 6th August 2019, see website address below), a sell-off exacerbated by the inherent risk aversion of the northern hemisphere summer period.

Typically global financial markets experience a sell in May-and-go-away phenomenon, namely the northern hemisphere summer vacation effect which tends to result in an exodus from riskier assets as many market players take time off, and are mostly out of the markets away on holiday. 

The dovish FOMC tone in the first half of the year, and even most of July, countered most of the May-and-go-away phenomenon this year, as a series of US interest rate cuts were expected, and as such, were seen to provide protection against the weakness in global economic growth. 

However, at the end of July FOMC commentary did not deliver the very dovish tone that markets were expecting, and financial markets consequently reduced expectations of further US interest rate cuts this year, cuts that were seen to be needed to stave off market concerns over economic growth (see “FOMC note”, 1st August 2019).

July’s US interest rate cut itself was deemed insufficient in the face of the risks for economic activity emanating from the escalation in trade tensions, which, combined with weak data from other key areas such as the Eurozone and China, has also exacerbated the risk-off environment.

Market players are now particularly concerned that, in the absence of further US interest rate cuts this year, aggressive US-led trade protectionism will see US, and indeed global, economic growth slow markedly, typically negative for equities, and other perceived risky assets, such as EM assets.

Read the full report

 
01 August 2019
 

FOMC note: The US Federal Open Market Committee cuts by 25bp as expected

 

Rand fails to strengthen as national treasury announces an increase in bond issuance per week in SA to support Eskom bailout, Moody’s downgrade becomes more likely for South Africa.

The US Federal Open Market “Committee … (FOMC) … decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent” as expected at its July 2019 meeting. Two committee members voted against the cut, preferring that the fed funds target rate was left unchanged instead. 
 
Specifically, the FOMC worried that “although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.” 
 
The FOMC in particular highlighted global growth concerns in its decision to cut interest rates, stating “in light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate.” 
 
The rand had already priced in this 25bp US rate cut aleady in July (see “Bond note: rising expectations of a 25bp cut at the July FOMC meeting sees the rand drop through R14.00/USD, and the yield on the R186 through 8.00%, with the US yield curve maintaining inversion over the 10 year - 3 month period since May”, 11th July 2019, website address below). 
 
Severe financial deterioration of South Africa’s electricity utility, Eskom, has added to the pressure on SA’s government finances. SA’s Finance Ministry recently detailed a special appropriation bill for an additional R59bn for Eskom over two years, which will widen the budget deficit, with National Treasury announcing additional weekly bond issuance of around 27%. 
 
Moody’s immediately responded that SA’s “Government proposal to more than double support to Eskom is credit negative”. Moody’s is the last of the three key credit rating agencies to hold SA long-term debt on investment grade, Fitch also responded immediately, dropping SA rating outlook to negative, indicating that a credit rating downgrade is on the cards.

Read the full report

You may also be interested in the following updates in July

  • Government Finance Update

    Weak economic activity slows growth in tax collections in June (31 July 2019)
  • PSCE Update

    Private sector credit extension moderated in June on slower corporate credit growth (29 July 2019)
  • PPI Update

    Producer price inflation eased to 5.8% y/y in June, underpinned primarily by a moderation in fuel price inflation (25 July 2019)
  • CPI Update

    Rate of CPI inflation remained unchanged at 4.5% y/y in June (24 July 2019)
  • Tourism Update

    Tourist numbers down 1.4% year-on-year, between January and May 2019. (22 July 2019)
  • Labour Update

    Unemployment climbs to 29.0% in Q2.19, against a backdrop of very weak growth (30 July 2019)
  • Trade Update

    Trade balance surplus widens to R4.42bn in June (31 July 2019)

You may also be interested in the following updates in July

Government Finance Update
PSCE Update
PPI Update
CPI Update
Tourism Update
Labour Update
Trade Update

Weak economic activity slows growth in tax collections in June (31 July 2019)

Private sector credit extension moderated in June on slower corporate credit growth (29 July 2019)

Producer price inflation eased to 5.8% y/y in June, underpinned primarily by a moderation in fuel price inflation (25 July 2019)

Rate of CPI inflation remained unchanged at 4.5% y/y in June (24 July 2019)

Tourist numbers down 1.4% year-on-year, between January and May 2019. (22 July 2019)

Unemployment climbs to 29.0% in Q2.19, against a backdrop of very weak growth (30 July 2019)

Trade balance surplus widens to R4.42bn in June (31 July 2019)

 
29 July 2019
 

Rand note: Rand runs back through R14.00/USD

 

South Africa is seen to move closer to becoming a sub-investment grade country, as rated by all three of the key credit rating agencies - the probability of the lite down case increases

After reaching R13.86/USD, R15.62/EUR and R17.40/GBP last week, the rand has run back above R14.00/USD, and closer to R16.00/EUR and R18.00/GBP, as Finance Minister Mboweni proposed further support for Eskom. Fears have arisen of further tax hikes in an environment where growth has dropped towards zero in a decade of rising direct and indirect taxation.

Two credit rating agencies indicated further credit rating downgrades could be on the cards for SA, with Moody’s specifically highlighting that “the Government proposal to more than double support to Eskom is credit negative” – Moody’s is the last of the three key credit rating agencies to hold SA long-term debt on investment grade. 

Prior to SA’s government comments on Eskom, the rand had convincingly strengthened past the R14.00/USD key resistance level on financial market expectations that the US will cut its interest rates this year by 50bp, with a 25bp cut expected to occur as early as this week.

However, the special appropriation bill from the Finance Ministry, detailing an additional R59bn for Eskom over two years, was met with a negative reaction from the rand as both Moody’s and Fitch signalled it increased the risk of further downgrades, with Moody’s specifying “(i)f passed, the additional support  … (to Eskom)… would be an additional drain on fiscal resources.” 

In particular, Moody’s worries that “South Africa's sluggish growth outlook limits its ability to absorb the extra cost of Eskom support”, and that “(n)o clear strategic turnaround plan agreeable to all stakeholders has emerged yet, fuelling risks for the government of having to provide additional support”.

We have revised our probability of the lite down case to 35% from 25% as the likelihood of SA receiving a credit rating downgrade from Moody’s is increasing, with the probability of the expected case falling to 45% from 50%, and that of the severe down case falling to 9% from 14% as the FOMC becomes increasingly dovish, and global growth risks reduce.

Read the full report

You may also be interested in the following updates in July

  • MPC update

    MPC update: The SARB unanimously opts to cut the repo rate by 25bp in July (19 July 2019)
  • Building Update

    Building plan approvals are down 8.9% y/y for the year to date (to May), with insufficient demand a major constraint (18 July 2019)
  • Retail Sales Update

    Retail trade sales grew by 2.2% y/y in May, buoyed by the general dealers' category (17 July 2019)
  • Manufacturing Update

    Production lifts by a modest 1.0% y/y in May, supported chiefly by a pick-up in the food and beverage division (11 July 2019)
  • Mining update

    Mining production fell by 1.5% y/y in May. Dragged down by marked declines in gold and diamond production (11 July 2019)
  • Government Finance update

    Budget deficit increases in the first two months of the 2019/20 fiscal year (8 July 2019)
  • Rand update

    Rand flirts with R14.00/USD, but piercing this resistance level will prove hard (3 July 2019)
  • Electricity Production Update

    Production and consumption figures contract in May and continue to be constrained by muted domestic activity (4 July 2019)
  • HCE outlook

    Domestic demand remains muted, underpinned by a highly constrained consumer (3 July 2019)
  • Vehicle Sales update

    Passenger car sales contracts by 3.2% y/y in June as consumers remain financially constrained (1 July 2019)
  • PMI update

    PMI signals that the manufacturing sector remained in contraction in Q2.19 (1 July 2019)

You may also be interested in the following updates in July

MPC update
Building Update
Retail Sales Update
Manufacturing Update
Mining update
Government Finance update
Rand update
Electricity Production Update
HCE outlook
Vehicle Sales update
PMI update

MPC update: The SARB unanimously opts to cut the repo rate by 25bp in July (19 July 2019)

Building plan approvals are down 8.9% y/y for the year to date (to May), with insufficient demand a major constraint (18 July 2019)

Retail trade sales grew by 2.2% y/y in May, buoyed by the general dealers' category (17 July 2019)

Production lifts by a modest 1.0% y/y in May, supported chiefly by a pick-up in the food and beverage division (11 July 2019)

Mining production fell by 1.5% y/y in May. Dragged down by marked declines in gold and diamond production (11 July 2019)

Budget deficit increases in the first two months of the 2019/20 fiscal year (8 July 2019)

Rand flirts with R14.00/USD, but piercing this resistance level will prove hard (3 July 2019)

Production and consumption figures contract in May and continue to be constrained by muted domestic activity (4 July 2019)

Domestic demand remains muted, underpinned by a highly constrained consumer (3 July 2019)

Passenger car sales contracts by 3.2% y/y in June as consumers remain financially constrained (1 July 2019)

PMI signals that the manufacturing sector remained in contraction in Q2.19 (1 July 2019)

 
5 June 2019
 

Rand note: Confusing messages out of the ANC on Reserve Bank independence

 

Rand's nascent recovery stalls, as the ANC apparently moots printing money 

 
After managing to strengthen to R14.40/USD, R16.22/EUR and R18.24/GBP earlier yesterday in a winning streak from 29th May, the domestic currency then lost all of these gains, reaching R14.83/USD, R16.70/EUR and R18.83/GBP on an announced change in the ANC stance to one of potential interference in the Reserve Bank’s independence. 
 
Specifically, the Secretary General of the ANC announced that “the ANC NEC Lekgotla agreed to expand the mandate of the South African Reserve Bank beyond price stability to include growth and employment, It also directed the ANC Government to consider constituting a task team to explore quantity easing measures to address intergovernmental debts to make funds available for developmental purposes“ sic. 
 
The announced move to printing money - “quantity” (quantitative) easing - was met with a negative market reaction as fears of hyperinflation and a Zimbabwe/Venezuela style economic collapse came to mind. While the Finance Minister, Mr Mboweni, scrabbled to deny these statements on the SARB, the rand has failed to recover substantially. 
 
Mr Mboweni was seen to immediately react with a twitter statement of “Government sets the mandate for the SARB. There is no quantitative easing thing here. The primary mandate of the SA Reserve Bank is to protect the value of the currency in the interest of balanced economic growth and development”. 
 
Others in the ANC are reported to have also disagreed with the party’s Secretary General, with Enoch Godongwana said to have stated “(t)he statement that suggests that the ANC is intending to set up a committee to investigate the need or otherwise for quantitative easing is inaccurate.” 
 
Mr Godongwana is reported to have added “(i)n this regard the finance minister and the Governor of the Sarb will continue to assess our economic performance and coordinate macroeconomic policy in the interest of balance and sustainable economic growth. The matter is therefore closed”. 
 
The announcement, and counter announcements on the SARB’s independence, come at a poor time for the rand, which typically sees material risk from the second quarter of each year to the end of the third quarter, with the advent of the sell-in-May-and-go-away season for emerging market portfolio assets, as global markets risk concerns are amplified.

Read the full report

You may also be interested in the following updates in June

  • Trade update

    Trade balance registers a surplus in May of R1.74bn (28 June 2019)
  • PSCE update

    Private sector credit extension rates remain relatively contained amid weak economic activity and low confidence levels (28 June 2019)
  • SARB Quarterly Bulletin update

    The SARB’s Quarterly Bulletin provides some further insight into the state of the household sector in Q1.19 (27 June 2019)
  • Employment update

    Non-farm employment adds a modest 22,000 positions in Q1.19 (25 June 2019)
  • Business cycle note

    Economic growth outlook weakens for 2019, but leading indicator shows some improvement could be on horizon for 2020 (25 June 2019)
  • Tourism update

    Ramaphosa reiterates his intention to double international tourist arrivals by 2030, in the latest SONA (24 June 2019)
  • Building update

    Building plans passed fell in April by 2.5% y/y, albeit at a slower pace than in March, as building confidence picked up modestly in Q2.19 (20 June 2019)
  • CPI update

    Inflation remains around the midpoint of the target, which could persist until July as large petrol, diesel price cuts build (19 June 2019)

You may also be interested in the following updates in June

Trade update
PSCE update
SARB Quarterly Bulletin update
Employment update
Business cycle note
Tourism update
Building update
CPI update

Trade balance registers a surplus in May of R1.74bn (28 June 2019)

Private sector credit extension rates remain relatively contained amid weak economic activity and low confidence levels (28 June 2019)

The SARB’s Quarterly Bulletin provides some further insight into the state of the household sector in Q1.19 (27 June 2019)

Non-farm employment adds a modest 22,000 positions in Q1.19 (25 June 2019)

Economic growth outlook weakens for 2019, but leading indicator shows some improvement could be on horizon for 2020 (25 June 2019)

Ramaphosa reiterates his intention to double international tourist arrivals by 2030, in the latest SONA (24 June 2019)

Building plans passed fell in April by 2.5% y/y, albeit at a slower pace than in March, as building confidence picked up modestly in Q2.19 (20 June 2019)

Inflation remains around the midpoint of the target, which could persist until July as large petrol, diesel price cuts build (19 June 2019)

 
20 June 2019
 

FOMC note

 

Increasingly dovish tilt of the FOMC leaves door open for US interest rate cuts; rand strengthens to R14.23/USD, R16.06/EUR and R18.07/GBP as the focus turns to 31st July FOMC meeting.

While the Fed decided “to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent” as expected at its June 2019 FOMC meeting, the committee’s tone was decidedly more dovish than at its May meeting. With the statement released after SA market hours last night, the rand strengthened this morning to R14.23/USD, R16.06/EUR and R18.07/GBP in response.
 
Specifically, the FOMC worried that while “the Committee continues to view sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.”
 
Additionally, the word patient (seen to imply a pause in the rate hike cycle) was removed, with the FOMC stating instead “in light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2 percent objective.”
 
The next FOMC meeting is on 30th to 31st July, followed by 17th to 18th September, 29th to 30th October and 10th to 11th December this year. Markets have factored in around a 66% chance of a 25bp cut in the fed funds rate in July, and the implied probabilities of further cuts could rise as markets digest the Fed’s comments. One member of the committee voted for a cut.

Read the full report

 
13 June 2019
 

Mining update

 

Mining production contracted by 1.5% y/y in April, dragged down primarily by gold and iron-ore

The contraction in mining production deepened slightly in April to 1.5% y/y, this following March’s 0.7% y/y (revised) decline. However, it was markedly less severe than February 2019’s reading, which saw production levels plunge by 8.1% y/y.
 
The performance of the gold sector continued to plague overall mining industry production, underpinned in part by a five-month strike at the gold operations of Sibanye-Stillwater, which ended mid-April. SA gold mines are typically old and deep and continue to struggle with dwindling grades and productivity. The gold sector constitutes a marked 16.0% of the mining basket and fell by 19.5% y/y in April, in turn detracting 2.7% from the headline number.

Read the full report

You may also be interested in the following updates in June

  • Business confidence update

    Remains at levels reached during 2009’s global recession on persistent weak demand in the economy (13 June 2019)
  • Retail sales update

    Retail trade sales lift by 2.4% y/y in April, buoyed largely by the textiles segment (12 June 2019)
  • Manufacturing update

    Production climbed 4.6% y/y in April, markedly ahead of market estimates (11 June 2019)
  • Current account update

    Current account deficit widens in Q1.19 on a narrowing of the trade surplus (6 June 2019)
  • GDP update

    GDP contracted by 3.2% qqsaa in Q1.19, weighed down predominantly by the manufacturing and mining sectors (4 June 2019)

You may also be interested in the following updates in June

Business confidence update
Retail sales update
Manufacturing update
Current account update
GDP update

Remains at levels reached during 2009’s global recession on persistent weak demand in the economy (13 June 2019)

Retail trade sales lift by 2.4% y/y in April, buoyed largely by the textiles segment (12 June 2019)

Production climbed 4.6% y/y in April, markedly ahead of market estimates (11 June 2019)

Current account deficit widens in Q1.19 on a narrowing of the trade surplus (6 June 2019)

GDP contracted by 3.2% qqsaa in Q1.19, weighed down predominantly by the manufacturing and mining sectors (4 June 2019)

 
31 May 2019
 

Money Supply and PSCE Update: growth in credit extension in April

 

Growth driven by deeper access of corporates to general loans and advances in a tough environment

 
Domestic private sector credit extension (PSCE) rose to 8.0% y/y in April, from 6.0% y/y in March, largely driven by the growth of the category general loans and advances on the corporate side. Tough conditions persist in 2019 on fragile economic activity, with some corporates resorting to borrowings to fund operating costs.

Private sector credit extension to corporates (which accounts for 56% of total credit extended to the private sector) came out 9.5% higher in April y/y, bringing the total figure to R2.1tr.

Business confidence remains depressed, with corporates reported overdraft usage rising to 18.4% y/y in April, from 5.7% y/y in April 2018, while growth in general loans lifted to 8.5% y/y, the largest component of credit extended to corporates, from around 3% y/y on average over the past twelve months.

Consumer confidence is relatively modest, and so is real disposable income growth with modest consumer price inflation this year. 

On the household side, reported consumers credit card usage rose to 9.7% y/y in April, on a steady upwards trend since 2016. Vehicle finance extended to consumers is reported to have also seen a lift in growth, at 8.2% y/y, over the period, while growth in mortgage advances has been stable around 4.0% y/y over the period (4.0% y/y April 2019).

Read the full report

 
29 May 2019
 

Sell-in-May-and-go-away strikes financial markets again, on bearish global  growth concerns on the intensification of the US-Sino trade disputes, with EM currencies weakness tilting the rand towards the downside

 

 
The rand has weakened materially to R14.89/USD, R16.62/EUR and R18.85/GBP, from R14.16/USD, R15.91/EUR and R18.41/GBP after SA’s elections, as risk aversion in global financial markets has risen from mid-May on growing concerns around the outlook for world economic growth following the exacerbation of trade tensions between the US and China.  

The rand typically sees material risk from the second quarter of each year, with the advent of the sell-in-May-and-go-away season for emerging market portfolio assets, as risk concerns are amplified. Last year, markets adjusted to the realization that US interest rates were likely to take a hawkish path, this year concerns centre around a full-blown trade war occurring.
 
With the bulk of global markets’ wealth held in the Northern hemisphere, markets tend to become risk averse during the Northern Hemisphere’s summer vacation period, with investors switching to perceived less risky investments (typically selling EM portfolio assets), and often returning to ‘higher yielding/high risk’ markets in September/October. 
 
Last year, South Africa saw –R166.3bn of foreign sales net of purchases of SA bonds and equities, from May to end 2018. The rand saw a weakening trend develop from mid-May in 2018 as the domestic currency weakened from R12.18/USD, R14.57/EUR and R16.54/GBP to R15.70/USD, R18.12/EUR and R20.13/GBP by September 2018.
 
This year, global markets have come under the influence of worsening US Sino trade tensions, raising significant concerns recently of weaker world economic growth, which has negatively impacted sentiment in global financial markets, with fears of a marked slowdown in global growth, if not an actual recession on a full blown trade war. 
 
Initially the US was not expected to escalate trade tensions with China to the extent of an outright trade war. Investec’s down case encapsulates such an outcome on the international side – allowing for a substantial slowdown in global growth, with risk of a financial crisis as financial markets crash and emerging markets see huge sell–off of EM assets as risk aversion elevates. 
 
With US 2019 ‘municipal’ elections upcoming in November ahead of the 2020 Presidential elections, trade tension could persist, and worsen, as the Trump administration seeks to gain leverage on this politically. This time around however, China is taking a firmer stand in the face of escalating US protectionism, which has seen concerns over global growth rise. 
 
However, should equities markets and economic performance come under sustained pressure on the back of the US-led rhetoric and tariff escalation, the pursuit of US-led protectionism may begin to ease, given the negative impact it could have at the polls. China’s reaction is key too, with the world’s second largest economy becoming tougher in its stance recently.
 
Trade policy has proved volatile, but increasingly protectionist under Trump. However, this does not necessarily mean that markets are set for a lengthy bear period, as positive developments on the trade front in negotiations with China could be met with a rally. A sustained bear market caused by Trump led protectionism is unlikely to be good for his re-election. 
 
This year is still not expected to see as extreme a sell-off period as last year. However, much will depend on the extent of retaliation to US protectionism from China and other countries, as to whether an actual trade war, and prolonged severe risk-off market reaction, is achieved. Currently the rand is tilting towards, but not, in the down case, partly on these fears.

Read the full report

 
29 May 2019
 

Consumer Confidence Update: Confidence sees a mild uptick in Q2.19, but was surveyed before 8th May 2019 Election

 

 
The FNB/BER consumer confidence index (CCI) rose in Q2.19, to +5 from +2 in Q1.19. It was likely influenced by expectations of an ANC majority win in the 2019 elections, but was not influenced by the election outcome itself, as the survey for the Q2.19 results occurred before the election (between the 21st March and 18th April), as reported by BER. 

The Q3.19 CCI reading may reflect more optimism than the Q2.19 one, given SA’s election took place on 8th May, outside of the time period of the survey for Q2.19 CCI. However, the Q3.19 CCI reading will likely fail to achieve the huge jump to +26 (from -8) recorded in Q1.18, with Cyril Ramaphosa becoming President of the ANC, then of SA.

Furthermore, the 2019 election aside, with a contraction in GDP likely in Q1.19, (see “Industrial production note: GDP is likely to contract in the first quarter of this year”, 28th May 2019, website address below), Q3.19’s consumer confidence could be at risk from this source. The second half of 2018 saw consumer confidence wane, to +7 from +24 in H1.18, influenced by the recession recorded in the first half of 2018.

The long-run average (since 1994) of the Consumer Confidence Index (CCI) is +2, with today’s released reading of +5 above that.

 
28 May 2019
 

Industrial production note: GDP is likely to contract in the first quarter

 

Industrial production already falling by -10% qqssa in Q1.19, while longer term, regulatory blockages can contribute to deindustrialisation in SA

 
Industrial production’s components, comprising of manufacturing, mining and electricity production, fall into the primary or secondary sectors. As a consequence, they impact the tertiary sector, having a meaningful influence on GDP growth. Overall industrial production itself accounts for 22% of GDP in SA, and in Q1.19 fell by 10% qqsaa. 

With Q1.19 also seeing a drop in retail sales, of -2.9% qqsaa, GDP could contract at the start of this year (qqsaa), which is unhelpful for job creation in SA. The agricultural sector has a small weighting, and is expected to return a modest, positive outcome in Q1.19 on some good crop performance, but the construction sector has largely been in decline for two years.   

Manufacturing production fell by -9.1% qqsaa, mining production by -12.7% qqsaa and electricity production by -10.0% qqsaa in Q1.19, partly on the back of load shedding and seasonal effects. However, it would be a mistake to ascribe the deindustrialisation trend in SA over the past ten years merely to insufficient electricity supply. A number of other factors have been at play. 

Declining investor sentiment, depressed business confidence, and weak confidence in the manufacturing industry (a significant proportion of GDP) are all reflective of the moderation in SA’s competitiveness, which has dropped substantially, to sixty seventh, from thirty ninth in 2007/08 (the World Economic Forum’s Global Competitiveness Survey). 

South Africa has seen its unemployment rate rise in the past ten years, from below 22% (see graph directly below, inverted axis for unemployment), to closer to 28%, driven lower in part by the drop in manufacturing as a % of GDP (deindustrialisation), with the industry seen to be afflicted to some degree by some regulatory blockages.

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21 May 2019
 

Consumer price inflation rate around the midpoint of the inflation target

 

CPI rate does not foretell interest rate cuts as higher inflation is likely, and SA’s credit rating risk is still material 

 
CPI inflation has moderated in South Africa reaching the midpoint of the 3-6% inflation target range in March at 4.5% y/y, after a relatively modest year in 2018 of 4.7% y/y. This is compared to the historical average of 5.5% over the period 2011 to 2017. 

Indeed, CPI inflation experienced a downward trajectory from 2016, largely led by falling food price inflation, if not deflation. The drop in price pressures to below 5.0% y/y generally also had some subduing effect on inflation expectations.   

Lower inflation expectations support lower inflation itself, as salary and wage demands moderate, leading to less upwards price pressure. Salary and wage increases have dropped from around 7.0% y/y in the 2010 to 2015 period, to closer to 6.0% y/y in 2016-2017, as expectations of future inflation also moderated. 

A more moderate inflation environment also tends to engender lower inflation expectations, as the increase in the cost of living proves lower than in previous periods, often causing consumers to expect similar going forward, entrenching expectations. 

Indeed, nominal salary and wage increases dropped to only 4.2% y/y over 2018, on the back of the lowering of inflation expectations over the past few years. While we forecast CPI inflation will average 4.8% y/y in 2019, from 2020 consumer inflation is likely to rise to return to 5.5% y/y as moderating effects wear out. 

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17 May 2019
 

Rand Outlook, MPC Preview: likelihood of extreme down case falls post-election

 

SA’s May 2019 election outcome has provided material support for the rand, at a time when other emerging market currencies faltered, as the risk of trade tensions between the US and China developing into a trade war rose with the back of tariff, and retaliatory tariff, increases.

 
In SA rising support for the ANC, which is increasingly expected as a political party to follow a more market friendly approach to the management of the economy, is also seen to have reduced the likelihood of further marked deterioration of government finances compared to the previous regime of the Zuma Presidency. 

This, in turn, is expected to provide some stabilisation in the perceived creditworthiness of SA government debt, and as such, reduce the likelihood of the extreme down case, which is one of partial debt default. A proven track record of substantially better management of state resources, would underpin further rand strength, allowing the currency an increased chance of approaching its PPP (purchasing power parity or effective) valuation. 

While Ramaphoria was short lived in round one, and markets are more wary this time, South Africa’s severe structural problems likely prevent another bout of rand Ramaphoria, at least until some of the structural weaknesses of the economy have been resolved. 

Turning to monetary policy, South Africa’s MPC is likely to keep the repo rate unchanged at its meeting next week, with the neutral tone in US monetary policy indicative of stable US interest rates for the majority of this year, and so likely for SA as well. Globally monetary policy has generally seen a switch from hawkish to neutral, if not dovish, tones, which has seen some alleviation of tight monetary conditions. 

With South Africa’s CPI inflation rate likely to rise back to 5.5% y/y next year (the upper end of the 3-6% inflation target range), the SARB is not expected to cut its interest rates this year. In the MPC’s inflation targeting process, the focus is on inflation in twelve to eighteen months’ time.

The small relief rally in the rand post elections would likely have been greater were it not tempered by an escalation in US China trade tensions at the time. The rand will likely remain beholden to the volatility caused by global trade tensions this year.

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8 April 2019
 

Rand note: R14.00/USD proves key resistance level

 

The rand is underpinned by moderating US-Sino trade tensions, improved risk appetite as global growth fears lessen and lower longer-term US interest rates.

 
With financial markets improving materially in Q1.19 the rand has strengthened alongside the reduction in risk aversion. 
 
Higher metal prices this year have assisted commodity currencies stronger in general, with dire warnings at the end of 2018/ start of 2019 on the outlook for global growth subsequently fading slightly, reducing uncertainty somewhat and bolstering markets in the first quarter. 
 
In particular, early this year, the World Bank cautioned of “darkening skies” as “downside risks have become more acute. Financial market pressures and trade tensions could escalate, denting global activity”. The IMF added “risks to global growth tilt to the downside.” 
 
Additionally, both the IMF and World Bank identified tightening financial conditions as a cause for concern. The IMF added, “a range of triggers … could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt.” 
 
The IMF also highlighted that “(a)n escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook.” Concerns over a sharp global slowdown in economic growth, with commentators even highlighting the risks of recession and a global financial crisis, saw risk aversion rise materially last year. 
 
This year, improvements in US-Chinese trade relations eased some of the previous marked concerns, and so pressure on markets, as has the market switch to expecting lower US interest rates on an increasingly neutral FOMC tone. Metal prices have lifted somewhat, but not to last year’s highs, while a number of economies see weaker conditions. 
 
While the global economic performance has not weakened by as much as some warned of (growth has slowed not stalled), particularly in terms of the worries over recession and a global financial crisis, the bearish mood has not waned entirely for metals’ markets, and global growth is still a concern. 
 
The focus remains on global growth, with the IMF recently seeing “the global economy at a delicate moment with a hoped-for rebound in growth later this year” and “does not forecast a recession in its updated economic outlook”, “even though the current situation is precarious and vulnerable to policy mistakes.” 

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