Tag: economy

Rand weakens in volatile trade

The rand was slightly weaker against the dollar on Tuesday afternoon, in volatile trade.

The local currency weakened to R13.71 to the dollar in earlier sessions, but improved to R13.58 in intraday trade.

Local political uncertainty and a ratings review by ratings agency Moody’s were the main risks the rand was facing.

In April‚ Fitch Ratings and S&P Global Ratings downgraded SA’s debt to “junk” status after President Jacob Zuma fired Pravin Gordhan as the finance minister in a Cabinet reshuffle.

Moody’s was expected to visit SA in May, before announcing its country rating in the weeks thereafter.

At 3.33pm‚ the rand was at R13.6367 to the dollar from Monday’s R13.6135‚ at R14.8489 to the euro from R14.8805 and at R17.6230 to pound from R17.6191.

The euro was at $1.0889 from $1.0931.

By Reitumetse Pitso for www.businesslive.co.za

SA extends trade surplus

South Africa recorded an R11,4-billion trade surplus in March, continuing the trend of strong net inflows into SA.
The rand closed weaker on Friday despite the surplus, as fears mounted of a US Government shutdown.

As expected, US lawmakers reached a $1-trillion budget deal, which will keep the economy ticking until September.

The agreement should give the rand breathing room for strength today. It’s a busy 4-day week, with the US Fed statement and local manufacturing data out tomorrow and US job numbers the highlight out on Friday.

After then finance minister Nhlanhla Nene was axed in December 2015, the rand weakened dramatically. This time around, however, despite the even worse news of Pravin Gordhan’s axing and SA’s downgrade to junk status, the rand has proved remarkably resilient.
How do we square this? Are the markets getting so used to bad news coming out of SA that they have stopped reacting to it? Or is there some other factor at play?
Before President Jacob Zuma’s cabinet reshuffle on March 30 the rand was trading at R12.40/$. In the following two weeks it weakened by roughly R1.50 against the dollar. But at the time of writing, it had reversed almost one-third of its losses, firming by 50c to trade at R13.40/$.

What is evident is that the local news flow — dominated by mass protests against Zuma and a growing clamour for his resignation — certainly doesn’t justify the biggest rand rally in six months.
“Total rand losses of a mere R1 seem remarkably limited given all that has happened,” says Rand Merchant Bank (RMB) currency strategist John Cairns.
Dollar weakness and better Chinese trade data appear to have triggered the latest rand gains, but far more interesting is the currency’s longer-term outlook.
Surprisingly, given how much SA’s prospects have darkened, Cairns has not downgraded his rand forecast of R13/$ for the year end. Of course, the situation remains in flux and RMB could still change its rand forecast. But for now, Cairns says there are two positive factors RMB believes might offset the negatives.
First is the significant narrowing of SA’s current account deficit. This has been caused mainly by slowing imports due to falling domestic demand and firmer exports following the recovery in commodity prices.
RMB expects the deficit to average 2.8% this year compared with an average of 3.3% in 2016 and 4.4% in 2015. This will take significant pressure off the rand.
Second, a more positive growth outlook in advanced economies has contributed to a more favourable environment for emerging markets and commodity currencies as a whole. As a result, foreign capital inflows into SA’s bond market have held up remarkably well.
The favourable external backdrop helps to explain why the market reaction to SA’s recent downgrades has been more benign than experienced by other countries when they lost their investment-grade status.
“We continue to feel that the external backdrop is restricting far bigger losses on our local markets,” says Cairns, “It seems a rising tide lifts even half-submerged boats.”
Efficient Group chief economist Dawie Roodt is also sticking to his year-end rand forecast of R13/$.
Both Roodt and Cairns are assuming that Zuma will stay on as president this year and that there will be no further dramatic political negatives or further downgrades to SA’s local currency rating.

Like Cairns, Roodt made this forecast many months before Zuma reshuffled his cabinet and caused many to wonder if SA’s democratic project had permanently run aground. So the fact that he hasn’t lowered his forecast also bears scrutiny.
Roodt has a remarkably successful track record in correctly predicting the rand, having won the 2016 Sake24 economist of the year award for the accuracy of his forecasting against that of more than 30 other economists.
His forecast that the currency would average R13/$ in the final quarter of 2015 was the closest to the actual figure of R13.09/$.
Roodt looks set to be closest to the pin again this year, with a forecast of R14/$ for the final quarter of 2016 compared with the actual figure of R13.91/$.
In January 2016, when he made this forecast, the rand rose to a new record high of almost R18/$ during intraday trading as the markets battled to digest the axing of Nene.
“Everyone said I was crazy,” chuckles Roodt. “Some said the rand would be R20/$ by the year end.”
He bases his rand forecasts on the observation that on a 35-year view (1980-2015), the rand has on average been roughly 50% undervalued against the US dollar on a purchasing power parity (PPP) basis (see graph).
The easiest way to understand the theory of PPP is to use The Economist’s Big Mac index. It was invented as a light-hearted tool to make it easier to compare the misalignment of exchange rates between countries. It was never intended as a precise gauge, explains the magazine, but rather a fun way of explaining PPP.
In January 2017, the price of a Big Mac burger in the US was $5.06. In SA it was R26.32. At the prevailing exchange rate of R13.95/$ at the time, a Big Mac in SA cost only $1.89.
So according to the “raw” Big Mac index, the rand was undervalued by almost 63% against the US dollar on a PPP basis.
This made the rand the fourth most undervalued currency against the US dollar among 44 countries surveyed, after Malaysia (64.6% undervalued), the Ukraine (-69.5%) and Egypt (-71.1%)
Roodt bases his study of PPP not just on the Big Mac, but on a more representative basket of goods published as a series by Oxford Economics, one of the world’s largest data providers.
By this yardstick, the rand at R13/$ would be 54% undervalued, making Roodt fairly confident the currency will move back towards this level over time.
“I’m pretty sure the rand will come back. It always does, very strongly, but it never resets to purchasing power parity. It is always about 50% undervalued on average. So if it stays at R14/$, and inflation remains where it is now, then this would be an exception,” says Roodt.
Roodt, in fact, considers the rand at R14/$ to be a “screaming buy”, given that SA’s 10-year bond yield is highly attractive at 9% and that SA’s bond market is exceptionally liquid and well-integrated, so investors can get out quickly.
“Where can you get such an attractive yield with an undervalued currency at the same time?” he asks.
This explains foreign investors’ continued appetite for SA bonds, despite the highly uncertain political environment.
Based on Roodt’s PPP estimates, the rand has fared remarkably well during the current crisis compared with previous episodes.
In nominal terms, the rand dropped by just 12% in the first two weeks after Gordhan’s axing before pulling back sharply. In PPP terms the rand at its recent worst of R13.95/$ was just 56% weaker than parity.
By comparison, in 1985 after then president PW Botha’s famous “Rubicon” speech, in which he failed to announce the dismantling of apartheid, the rand nose-dived by 66% in nominal terms. It was the sharpest nominal decline in the history of the currency.
At its worst, the rand was 72% undervalued against the dollar but it recovered shortly thereafter, mostly because inflation accelerated.
During the 2002 rand crisis, contagion from the Asian financial crisis caused the rand to collapse by 47% in nominal terms. It reached an undervaluation low of 73% but again bounced back quickly, mostly because of a nominal exchange-rate correction, helped by some inflation.
The rand suffered another huge blow when Nene was axed. At its worst level of R18/$ it was 69% weaker than parity. The reasons for the rand’s fall were mostly political but, unlike now, unfavourable international forces were also at play.
At the time, fears were growing that China was heading for a hard landing. The deteriorating growth prospects of emerging markets, particularly for commodity-producing countries such as SA, caused persistent capital outflows from these markets.
Had the same global conditions been in place now, there is little doubt that the fallout from Gordhan’s axing and SA’s downgrade to junk would have been far more severe. This doesn’t mean the political and economic implications aren’t deeply worrying — only that Zuma’s timing was excellent.

By Claire Bisseker for www.businessday.co.za

Motorists one of junk’s first victims

A fuel price increase will be the first major expense to hit South Africans as a result of a weaker rand‚ the Automobile Association of SA (AA) has warned.

The AA’s mid-month data forecasts that petrol will rise 55c a litre in May‚ while diesel will cost about 30c a litre more. Illuminating paraffin will cost an estimated 41c a litre extra.

The fuel-hike predictions are based on unaudited mid-month fuel price data released by the Central Energy Fund.

“The loss of confidence by investors and the sovereign ratings downgrades by ratings agencies Fitch and S&P‚ have led to the rand slipping against the US dollar‚ down from around R12.35 at the beginning of the month to its current position of around R13.40‚” said the AA’s Layton Beard.

The AA said the rand’s weakness largely contributed to the expected fuel price increase‚ with hikes in international petroleum prices accounting for the balance.

“However, there is no certainty that the impact of the downgrades has been fully priced into the economy. The picture for May could be substantially different‚” Beard said.

By Suthentira Govender for www.businesslive.co.za

First Standard & Poor, now Fitch have rated the South African economy “junk” with huge ramifications for South African citizens, with the poorest of the poor being the worst affected, economists agree.
Manie van Schalkwyk, executive director, of the South African Fraud Prevention unit said there would be much less money going around, a severe lack of international investment and potential job losses.

Continue reading

While it is well documented that junk status has a number of dire consequences for both South Africa, and its people, more important is to consider how long the country can expect to be stuck with a junk rating say Lullu Krugel and Christie Viljoen, economists at KPMG.

On Monday, ratings agency S&P Global lowered South Africa’s sovereign debt to below investment grade, with Fitch and Moody’s likely to follow.

Hours after S&P announced that it would be downgrading South Africa to junk status, Moody’s confirmed that it would also be placing the country on review for downgrade, though the group has now delayed its report for at least 30 days as it assesses the country.

Economists have warned that the downgrade to junk is likely to trigger a recession as its effects spread to the wider economy.

“The downgrade greatly complicates the prospects for South Africa being able to stage an economic recovery. Without a growth recovery, employment growth and revenue collection will stagnate and may even decline,” said CEO of the South African Institute of Race Relations, Frans Cronje.

Research by KPMG into the sovereign ratings assigned by the three largest rating agencies – S&P, Fitch Ratings and Moody’s Investors Service – over the past three decades indicates that 15 countries have seen their investment-grade ratings revoked but were then able – over time – to regain this status.

These countries include Colombia, Croatia, Hungary, Iceland, India (twice), Indonesia, Ireland, Korea Republic, Latvia, Romania, Slovakia, Slovenia, Thailand, Turkey and Uruguay.

Of these countries, Krugel and Viljoen noted that the rating downgrades were broadly grouped into four categories:

Economic deterioration (Colombia, Hungary, India, Latvia and Romania);
Unsustainable macroeconomic imbalances (India, Slovakia and Slovenia);
A domestic currency, financial or banking crisis (Croatia, Iceland, Ireland, Thailand, Turkey and Uruguay); and
A currency, financial or banking crisis resulting directly from neighbouring or regional influences (Indonesia and the Korea Republic).
“These countries’ diverse experiences show that it takes, on average, seven years to again graduate to the investment-grade club.”

The economists said that countries like Croatia, Iceland, Ireland, Korea Republic, Latvia and Slovenia were able to do so in three years or less. At the opposite end of the spectrum, and depending on which rating agency was involved, there were instances where it took Colombia, India, Indonesia, Turkey and Uruguay more than a decade.

Strategies used to return to investment-grade

In addition to an analysis of why countries had historically been downgraded to junk, Krugel and Viljoen also released a report detailing how these countries typically managed to return to an investment-grade rating.

“Strategies and narratives on countries that recovered their investment-grade ratings are broadly grouped into six categories,” noted the duo.

These include:

Fiscal consolidation and/or austerity (Hungary, Ireland, Latvia, Romania and Slovenia);
Significant economic and political reforms (Colombia, India, Indonesia, Turkey and Uruguay);
Declining external and fiscal vulnerabilities (India and Thailand);
Debt restructuring and economic policy reform (Korea Republic);
Privatisation of the sovereign’s holdings in private/semi-state companies (Croatia); and
Active intervention by a newly elected government (Iceland and Slovakia).

South Africa
South Africa is most closely associated with the countries experiencing economic deterioration and, possibly, those having unsustainable macroeconomic imbalances, said Krugel and Viljoen.

“On the issue of how South Africa will be able to return to its former investment-grade rating, the key element in a recovery process is that admission that a problem exists and that work is needed to rectify this,” Krugel and Viljoen said.

However the economists noted that following the downgrade announcement by S&P, the National Treasury appeared far from concerned with the development

“The commitment to fiscal consolidation was reiterated, coupled with a rebuttal that South Africa is committed to a predictable and consistent policy framework and that open debate on policy matters should not be a cause for concern.”

Thanks to Zuma, we’re junk

Last week’s shock cabinet reshuffle has tipped SA over the edge of the investment-grade cliff, with ratings agency S&P Global Ratings downgrading SA’s foreign currency rating to subinvestment grade, or “junk” status, on Monday evening, sending markets into a tailspin.

What does junk mean to the average South African?


Further downgrade imminent
Moody’s also put SA on review for a downgrade late on Monday, which suggests that a downgrade from the agency is imminent.
The ratings agency, whose next ratings review had been due only in June, departed from its schedule to do the downgrade, saying the executive changes initiated by President Jacob Zuma had put at risk the country’s fiscal and growth outcomes, increasing the risk of policy shifts that could be negative for economic growth and fiscal discipline.

S&P also put a negative outlook on the new BB+ rating, suggesting a further downgrade could be on the cards if it sees deterioration in SA’s economic or fiscal performance.

The rand lost almost 3% within half an hour of S&P’s announcement.
Source: www.businesslive.co.za

Zuma breaks the rand – again

The rand was weaker on Tuesday afternoon as it emerged that President Jacob Zuma had told senior leaders of the South African Communist Party (SACP) that he planned to fire Finance Minister Pravin Gordhan.

When the market learnt on Monday that Zuma had recalled Gordhan and his deputy, Mcebisi Jonas, from an investor trip to the UK and US, the rand nosedived from 20-month highs it scaled last week.

The president is reported to have told senior leaders of the South African Communist Party that he plans to dismiss the finance minister.

After hitting a fresh 20-month best level of R12.31 against the dollar in Monday’s opening trade‚ the rand plunged more than 3%, or 52c, to an intraday worst level of R12.8295/$ in the afternoon.

The rand also weakened against global majors and went from being the best-performing emerging-market currency to one of the worst-performing currencies.

Rand Merchant Bank (RMB) analyst John Cairns said further runs on the rand were possible but Monday’s rand losses were nothing compared with what happened in the worst-case Cabinet reshuffle scenario when former finance minister Nhlanhla Nene was replaced in 2015. At that time, the rand shed 150c immediately and 250c within a month.

Cairns said the best rand scenario for the day was for the rand to stabilise above R12.50/$ within a 30-cent range, the worst case scenario would be a Cabinet reshuffle.

At 11.30am the rand was at R12.9766 to the dollar from a previous close of R12.7616. It was at R14.0954 to the euro from R13.8647 and at R16.3203 to the pound from R16.0221.

The euro was at $1.0859 from $1.0864.

By Reitumetse Pitso for www.businessday.co.za

Economy is shutting out qualified people

South Africans are obtaining qualifications at a faster rate than the country’s economy is growing, according to South African Qualifications Authority data.

The proportion of South Africans getting qualifications has risen consistently by 4% year on year, but growth stagnated to 0.3% in 2016.

This means that there is a surplus of qualified people who cannot be absorbed into the mainstream economy.

The qualifications authority is able to assess trends and report on significant aspects of the education and training system by using the National Learners Records Database, an electronic record-keeping system.

The qualifications authority’s data analysis shows that higher education qualifications almost tripled between 1995 and 2014 from 70,020 to 202,653. The most popular fields of study were business, commerce and management studies, which constituted 29% of qualifications obtained in that period.

Education, training and development, and health sciences and social services qualifications were also popular. Women also showed improvements in the number of qualifications they achieved.

Nursing qualifications saw the biggest increase at 252%, having gone from 6,834 in 1995 to 24,028 in 2013. The South African Nursing Council estimated that, out of a population of more than 54-million people, SA had nursing manpower of 278,617 registered nurses.

Qualifications authority CEO Joe Samuels said: “It [data] shows us clearly what the areas of successful implementation are, but also points to areas that need our collective attention.”

By Michelle Gumede for www.businesslive.co.za

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