January 11, 2021
Market News 11 January 2021
What we know
The New Year got underway with the rand trading around the 14.6000 level, and trading to a best level of 14.5100. However, this scenario was short-lived as a number of factors weighed on the rand: offshore names apparently exited long risk positions initiated early in December, and this, combined with political turmoil in the US, concerns over the apparent lack of a meaningful vaccine plan in SA and a lack of liquidity, saw the Rand trade rapidly weaker to reach a high of 15.4850 last week. Since then, the ZAR has managed a very modest recovery. We open this morning with the local unit currently trading at 15.45. The EURZAR is trading at 18.84 and the GBPZAR is currently trading at 20.86.
The news flow for 2021 has so far been abysmal. Vaccine hope is slowly slinking away and as virus numbers rise in a number of areas throughout South Africa, it’s becoming clearer that we’re not quite at the ‘beginning of the end’ that so many had hoped for last year. The virus getting out of control or the vaccines being rendered moot by mutated variants of the virus do present significant risk, obviously, and from a currency perspective the move weaker cannot be surprising, given we were trading at levels seen prior to the virus first arriving on our shores back in March 2020.
With renewed lockdown measures, the return of load shedding, mounting debt and shattered confidence, the outlook for 2021, with a few exceptions, is still not very encouraging.
Here are five key factors to look out for this year that will have an impact on the economy and the Rand – plan accordingly!
1. The Pandemic
Covid-19 has usurped Eskom’s role as the chief risk to the economy. Eskom would have had to implode to pull off a 51% gross domestic product (GDP) collapse on its own. The renewed lockdown measures imposed late in December have shut down about 20% of the economy already. If these get renewed or if more stringent regulations are brought back, the throttling of the economy could herald a Q1 contraction. Although the measures are well-intended, with the saving of lives their ultimate goal, they will add to the growing ranks of the unemployed. A proper vaccine rollout is the potential game-changer. The government’s aim is to vaccinate more than 40 million people this year but many critics do not believe this is plausible. Yet it is affordable. Several Wits academics, in a piece published this week, estimated the costs for a proper rollout at between R8,6-billion and R16-billion – a small price to pay considering the lives and livelihoods that will be saved. And Thursday’s announcement that SA will receive one million doses this month from India is a promising start.
2. Commodity prices
South Africa is deeply exposed to commodity prices on two fronts: oil, which is imported, and metals and minerals, which are crucial exports. Prices for the stuff that South Africa pulls out of the ground fared much better last year. Gold rose 25% in dollar terms and vaulted to record highs above $2,000 an ounce at one point, boosted by its status as a safe haven in times of uncertainty or global political turbulence. There will be uncertainty and turbulence galore in 2021 – behold the events in Washington last week – so the gold price should remain elevated.
3. The SARB and interest Rates
The economy’s stuttering start to 2021 could give room for an additional cut of 25 basis points when the Monetary Policy Committee meets later this month. Inflation remains well-contained. The latest CPI reading for November was 3.2%, near the bottom of the SARB’s mandated 3% to 6% target range, and there is little in the way of price or demand pressures. Governor Lesetja Kganyago is a steady hand at the helm, and the SARB is hardly going to crank up the presses to print money. The bank did embark on a bond-buying programme last year in the secondary market, in a bid to stabilise and inject liquidity into financial markets. This mission was largely accomplished, but it is not clear if the SARB will take similar action this year.
4. The Debt monster
South Africa has been basking in the glow of risk-on sentiment, the benefits of which are most evident in the local bond and currency markets. However, much like holidaymakers who allow festive cheer to tempt them into spending freely on credit, South Africa’s bill is eventually coming due, forcing government to return to reality and face its fiscal demons. So far, foreign investor support for the local bond market together with the IMF’s loan have kept the country from feeling the worst effects of the pandemic’s devastation. But the holiday will eventually end in 2021, and government will need to tighten its belt significantly at the end of the three-year fiscal framework – especially as its first IMF loan repayment will come due. And if economic growth does not meet its tepid expectations this year, the debt-to-GDP ratio will rise even faster, while anticipated revenues will fall short.
Load shedding is back, even if the 2021 variant is (initially) nocturnal, taking place, as it has, during the unproductive night hours. Eskom under CEO André de Ruyter has laid out a “reliability maintenance programme” and he has put underperforming managers and staff on notice to shape up or ship out. The separation of Eskom into three separate units – generation, transmission and distribution – appears to be forging ahead.
Still, if there is one SOE where things can go wrong with major consequences, it’s Eskom. Broken conveyor belts are at least understandable, but after the debacles of “wet coal” and “stage six load shedding”, what next? Will the coal get too dry and ignite? Will load shedding stages reach double digits? And speaking of digits, Eskom’s debt is close to the half a trillion Rand mark – that’s a dozen digits.
What others say
BusinessTech – Meetings to decide on lockdown restrictions for South Africa: Ramaphosa
Cooperative Governance Minister Nkosazana Dlamini-Zuma and Police Minister Bheki Cele have recommended the country move to virus alert level 4 for 30 days, two people familiar with the matter said. They asked not to be identified as no decision has been taken.Other officials concerned about the impact harsher restrictions might have on the economy called for the relaxation of measures including the ban on alcohol sales and the closing of the nation’s beaches, the people said.
Bloomberg – South Africa’s Rand suffers from deepening virus crisis
“The main explanation is related to worries regarding the mutation of the virus and risks for serious lockdowns in the country,” said Hans Gustafson, a Stockholm-based emerging-market strategist at Swedbank AB. “The external environment is very positive for the rand with the dollar trending lower and precious metals zooming. If those conditions disappear, the rand is very vulnerable.”
NYTimes – Trump’s Capitol Offense
Donald Trump’s inhumanity, his sick torrent of lies and incitement, came to its inevitable, shameful end on Wednesday, when a mob smeared blood, excrement, hate and death all over the Capitol. At least Trump put my conservative siblings and me on the same page for once. We agreed — seeing the mob crash in; seeing lawmakers fearing for their lives, crouching and hiding and making calls to plead for the cavalry to come from any of the myriad federal and local police forces here, as Confederate flags waved — that this was a heart-breaking disgrace. It would have enraged my father.
Moneyweb – Record rise in government debt will hit emerging markets harder: Fitch
Both the increase and debt levels are at a record high, Fitch’s head of sovereign ratings, James McCormack, wrote in a report, adding that the last $10 trillion tranche took seven years to build. And while the government debt-to-GDP measure – often used as a rough measure for debt sustainability – stood at around 60% of GDP for both developing and developed markets, this masked a divergence in interest rates for the two groups, McCormack said.
What we think
It’s not often that the markets welcome a government with total control that promises to spend money in mouth-watering quantities. Yet, last week, the markets welcomed warmly the US Democrats winning effective control of the Senate, giving them the Presidency and both Houses of Congress. What’s more, equity markets opened at a record high after Joe Biden was confirmed as the next US President even though, just hours earlier, there had been riots at the Capitol.
This suggests strongly that the upbeat market mood will continue into the coming week, and in the FX markets that means more money flowing out of the safe-haven US Dollar into currencies seen as riskier such as the Rand.
For sure, there will likely be bumps along the road but over the course of a week when almost nothing is on the South African economic calendar except Business Confidence figure, it’s the USD side of the USD/ZAR equation that will determine the currency’s direction.
Our range for the week is USD 15.15 – 15.75.
Have a great week!