Global Market Wrap: South Africa in turbulent times

By Bianca Botes, Director at Citadel Global

Bianca Botes, Director at Citadel Global

Following President Cyril Ramaphosa’s State of The Nation Address (SONA), South African citizens, analysts and investors all looked to the national budget to provide guidance and clarity on numerous challenges impacting the local economy. Wednesday’s budget speech by Finance Minister, Enoch Godongwana, offered some answers, especially around Eskom and South Africa’s electricity crisis, but now the country was greylisted by the Financial Action Task Force today.

A rather grey outlook

When considering the recent SONA address, Wednesday’s budget, and today’s greylisting, one cannot help but feel a bit gloomy about South Africa’s economic outlook.

While balanced and offering some solid solutions to some of the country’s most pressing issues, the budget served, yet again, to highlight the difficulties faced by the local economy.

Some key themes that emerged were:

  • The country’s energy crisis. This week saw Eskom shed 7000MW from the grid, which is roughly 50% of its total generating capacity, leaving citizens and business to deal with over 10 hours of loadshedding a day.
  • High levels of unemployment, exacerbated by the country’s larger structural economic constraints, is putting additional pressure onto the already stretched fiscus.
  • Low economic growth, with the projected growth for 2023 being revised down to 0.9%.
  • Ballooning government debt which will reach 73.6% of GDP. Debt servicing costs will rise to R366 billion – or R1 billion a day – which is approximately 18% of total government revenue.

The constrained fiscus, and the dire position of Eskom along with most of the country’s state-owned enterprises (SOEs) are not the only issue being faced by the local economy. During Wednesday’s budget address, Finance Minister, Enoch Godongwana, noted that South Africans should prepare for the possibility of a greylisting. This decision was announced today. The greylisting will see South Africa placed in the “time out corner for bad behaviour”, due to its lack of compliance in the global fight against money laundering and corruption.

To add fuel to the fire, exiting Eskom CEO, Andre de Ruyter has accused the ruling party of playing an active role in the corruption witnessed across all areas of service delivery and within the SOE’s, with a particular focus on Eskom. In a controversial and explosive interview with Annika Larsen on news channel ENCA, de Ruyter implicated top, although unnamed, political figures in the estimated R1 billion theft from Eskom, per month.

These new allegations of gross corruption against the ruling party, leaves South Africa in a precarious position, one that might not be easy to solve. One thing, however, has become apparent. If we want to stimulate growth, we will need to put an end to large scale corruption that is undermining state institutions.

Data in a nutshell

The People’s Bank of China kept its key lending rates steady for the sixth consecutive month at the February fixing on Monday, in line with expectations. The one-year loan prime rate, which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%, while the five-year rate, a reference for mortgages, was maintained at 4.3%. The Central Bank held its medium-term policy rate at 2.75% last week, while adding more cash into the financial system to meet a rebound in loan demand after the country eased its strict COVID-19 measures.

The S&P Global Eurozone Composite PMI increased to 52.3 in February, up from 50.3 in the previous month and well above market consensus of 50.6, a preliminary estimate showed. The latest reading indicated the strongest expansion of business activity since May 2022, as service sector growth accelerated to an eight-month high. Manufacturing production levels rose for the first time since last May, helped by improved supply chains. Within the euro area, both France and Germany returned to growth for the first time since October and June 2022 respectively.

Business confidence hit a one-year high due to reduced concerns over the possibility of a deep recession as energy supply improves and prices fall. There are also signs that the region is reaching peak inflation. The consumer price inflation (CPI) in the euro area was revised slightly higher to 8.6% year-on-year in January, up from a preliminary estimate of 8.5% and well above the European Central Bank’s (ECB’s) target of 2%. The rate, however, eased to its lowest level since May 2022, due to a slowdown in energy inflation.

Meanwhile, the UK S&P Global/CIPS Composite PMI rose to 53.0 in February, up sharply from 48.5 in January, returning to growth for the first time since July 2022 and well above market expectations of 49. The latest reading signalled the fastest rate of private sector output expansion in eight months. Both the manufacturing and service sectors achieved a return to growth, with the latter posting the faster rate of expansion.

The US S&P Global Composite PMI also rose to climb 50.2 in February, up sharply from 46.8 in the previous month beating market expectations of 47.5, a preliminary estimate showed. The latest reading also marked the highest in eight months. Meanwhile, the rate of US job creation accelerated at its fastest pace since September, while backlogs of work contracted by the lowest rate in five months.

The composite leading business cycle indicator in South Africa fell by 2.1% from a month earlier in December 2022, following a downwardly revised 0.08% gain in November, as decreases were seen in nine of the 10 available component time series. The largest negative contributors were a drop in the number of residential building plans approved and a deceleration in the six-month smoothed growth rate of job advertisement space.

Stocks mixed as markets digest hawkish fed

Stock futures contracts tied to the blue-chip Dow Jones rose 0.2% on Thursday, and those linked to the S&P 500 and Nasdaq were up 0.4% and 1% respectively, following sharp losses in overnight trade. Investors welcomed upbeat earnings results while reassessing the outlook for monetary policy. Nvidia jumped more than 9% in premarket trading after the chipmaker reported better-than-expected revenue and better net income than expected.

US-listed Alibaba shares rallied 6% after the company posted quarterly results that surprised investors on the upside. On the policy front, minutes from the last FOMC meeting showed that a large majority of policymakers agreed to slow down the pace of rate increases, delivering a smaller 25 basis point hike in February. However, policymakers warned that the tightening cycle is not yet over as inflation risks remain tilted to the upside.

London equities extended losses for a third consecutive session on Thursday, with the FTSE 100 Index bottoming around 7 900 points, dragged down by healthcare and financial stocks. Investors remained cautious after the release of the FOMC minutes. In specific stock moves, paper giant, Mondi, fell roughly 6% to be among the top losers. On the positive side, aerospace and defence company, Rolls-Royce, jumped almost 20% after profit growth beat expectations, as the post-pandemic recovery in international travel continues.

European stocks turned to green on Thursday, recovering from two straight sessions of losses, with the benchmark STOXX 600 up 0.3%, after upbeat corporate reports lifted tech stocks. Retail shares also gained on the day. The German DAX advanced by 0.4%. Investors, however, remain cautious on the back of the release of Wednesday’s FOMC minutes.

Japan’s Nikkei 225 Index dropped 1.34% to close at 27 104 while the broader TOPIX Index tumbled 1.11% to 1 975 on Wednesday, extending losses from the previous session and tracking sharp losses on Wall Street overnight, as investors fretted about the prospect that the US Federal Reserve will continue hiking rates to tame inflation. Investors also digested data showing the sentiment of Japanese manufacturers remained gloomy in February. A slowing global economy is stalling the country’s recovery following the pandemic slump.

The JSE FTSE All Share Index was slightly higher around 78 577 on Thursday, after two straight sessions of losses, broadly supported by financial, industrial and tech stocks. Investors digested the South African government’s plan to take on more than half of Eskom’s debt over the next three years, viewing it as a path back to sustainability for the troubled state utility, while remaining cautious ahead of the upcoming greylisting decision.

Higher-rates-for-longer narrative weighs on gold price

West Texas Intermediate Crude futures rallied almost 2% on Thursday, to trade above $75/barrel, after two days of losses on the back of lingering concerns around tight global supplies. Russia announced its plans to cut oil exports from its western ports by up to 25% in March, exceeding its announced output curbs of 500 000 barrels per day. In addition, market participants expect China’s oil imports to hit record highs in 2023 amid rising demand for transportation fuel and as new refineries come online. Fears of a global recession, however, is limiting any significant upward momentum.

Gold remained below the $1 830/ounce mark on Thursday, to hover near its weakest levels in eight weeks on the back of Wednesday’s FOMC meeting minutes. The minutes followed last week’s announcements of stronger-than-expected US inflation, jobs, and retail-sales data that also support the case for further monetary tightening.

Copper futures rose above $4.15/pound, approaching the seven-month high of $4.27/pound traded at on 26 January, tracking the increase in other base metals amid persistent supply concerns and strong demand expectations. Investors continued to monitor the extent of improved Chinese demand after the country’s economic reopening, as new home sales grew for a third straight week in 16 major cities. Industrial demand is also expected to pick up as the Chinese government is set to announce further stimulus measures at its National People’s Congress in March.

Meanwhile, platinum futures extended losses to change hands below $940/ounce, their lowest level in over three months, weighed down by subdued demand and expectations of reduced economic activity in the US and Europe. China eased its buying of platinum at the beginning of the year following strong buying in the fourth quarter of 2022, to support a pick-up in industrial and automotive manufacturing activities. Investors also remain concerned that prolonged higher interest rates, especially in the US, will hurt global economic activity and the demand for platinum.

Dollar index sets sights on six-week highs

The US Dollar Index remained upbeat to trade near 104.5 on Thursday, hovering near its strongest levels in seven weeks as minutes from the FOMC meeting – which indicated that further rate hikes are on the cards, even though it is at a slower pace than earlier tightening – bolstered the greenback.

The euro depreciated towards $1.06, its weakest level since 5 January, as investors turned to the dollar amid a hawkish Fed. Meanwhile, today’s Core Personal Consumption Expenditure (PCE) Price Index could offer further clues on the ECB’s tightening cycle path. The ECB is likely to continue raising interest rates after better-than-expected data showed eurozone output growth accelerated in February to a nine-month high, assisted by improved supply chains and stronger demand. The Central Bank hiked interest rates by 50 basis points at its February meeting, to their highest levels since late 2008, flagging one more increase of the same magnitude next month and reaffirming its commitment to battle inflation.

The British pound broke through the $1.21 level, recovering from a six-week low of $1.19, hit on 17 February, as investors monitored stronger-than-expected PMI data and softer-than-expected inflation. Flash figures showed output for private sector business rebounded after six months of contraction, with both the manufacturing and service sectors achieving a return to growth, encouraging resilience in the economy. On the monetary policy front, United Kingdom policymakers raised interest rates to 4% this month, a tenth consecutive hike, and are expected to raise rates just twice more, to peak at 4.5% by June, with a chance that they may stop earlier, at 4.25%.

The South African rand appreciated slightly toward R18.10/$ after Wednesday’s budget speech given the government’s plan to support Eskom. The rand will take further direction from the anticipated greylisting decision later today, as well as ongoing global monetary tightening expectations.

The rand is trading at R18.23/$, R19.32/€ and R21.91/£.

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