The rand has lost ground over the past week, with the US dollar elevated as global financial risk aversion rose on concerns AI tech stocks are in bubble territory, while the gold price has dropped sharply, with gold a key export for South Africa. The gold price has returned to US$4 016/oz, the same level in July this year and October last year. The drop in the gold price has come on the back of the jump in oil prices, to over US$114/bbl for brent crude and worries over higher interest rates.
ME tensions have risen again, with Iran intensifying strikes on oil tankers and a sharp drop in tanker traffic. The severity of the problem has seen the US consider lifting sanctions on Russian oil tankers, but not Russian oil. Crude oil crossing the Strait of Hormuz has fallen while tankers are making ship to ship transfers of oil. Oil flows in the Red Sea and Persian Gulf have moved higher however, exceeding flows pre the outbreak of the ME war, as would be expected.
Freight rates have risen to record highs for oil shipping, while the chance of a peace deal between Iran and the US is seen as remote, and oil stocks are very low with little near term chance of rebuilding inventories. The Northern Hemisphere winter is approaching, with oil used for heating. While the global El Nino weather phenomenon is expected to reduce the demand for oil for hearting, along with high prices, there is no absolute certainty in weather predictions.
High oil prices have also lifted concerns over US inflation, with South Africa bringing in cuts in the fuel price levy in November and again in December to aid motorists and bring down the cost of doing business, particularly as far as diesel prices go. The R3/litre reduction in the fuel levy for diesel and R1.50/litre for petrol from 4th November to 1st December will likely cancel out a petrol hike and similar for diesel, removing the impact fuel price hikes would have had on inflation and interest rates.
With the US expected to hike interest rates again this year and SA not expected to follow suit, the interest rate differential between South Africa and the US is expected to narrow, which has resulted on pressure on the rand to depreciate as well.
Fiscal progress supports SA’s credit upgrade prospects
After seeing some strength over the course of October until the MTBPS, the rand has since weakened as the rise in global financial market risk aversion has overshadowed the positive market sentiment towards SA’s MTBPS budget update. The rand however has not seen as great a depreciation as would typically occur in marked periods of global financial market risk-off, instead seeing lower volatility than in prior years, and even less volatility against the euro and pound.
Moody’s, which rates SA on BB, reportedly noted today that last week’s MTBPS was credit positive for South Africa, given fiscal consolidation despite monetary policy tightening while weaker nominal GDP had affected the fiscal ratios.
The credit rating agency, one of the key three, together with Fitch and S&P, expects debt to reach 84.9% of GDP in two years’ time from 86.8% of GDP last year, on a peaking in the country’s debt ratios to GDP. In addition, the agency notes the drop in the projected consolidated budget deficit ratios on the revenue overrun, but does highlight that South Africa has low debt affordability.
The agency positively sees risks to the upside for revenue collection, the driver of fiscal consolidation, on improved tax collections, and collections from the tax debt book up 11% y/y, year to date. In addition, the MTBPS projections show a rising consolidated primary surplus even with increased infrastructure spending planned which Moody’s evidences as a particularly notable commitment to fiscal consolidation. Elevated debt services costs are the biggest binding constraint on the state, and so on fiscal consolidation, with Moody’s adding that interest payments as a % of revenue are higher for South Africa than most of its rating peers.
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