Load Shedding and Rand Sliding

What we know

 

The Rand suffered its worst week in quite some time, as we fell between 3% – 4% against the USD, EUR and GBP.

The most obvious local driver was the drama around Eskom, both in terms of the current round of load shedding, as well as the increasingly bleak prospects facing the power generator. The very stark reality of the situation was felt around the country, with businesses everywhere facing significant disruptions. This, combined with Moody’s comments regarding SONA and our GDP outlook, placed the ZAR firmly on the back-foot.

It is important to note that, while it may certainly feel like this is all “about us and our problems”, at least a part of the Rand’s losses has been due to most emerging currencies selling off following their recent rally. It is the additional losses, around 2% over the past five days, that could therefore be considered more country-specific.

Also important to note is the impact the recent news-flow has had on general sentiment towards the Rand. From a mood of positivity and, in our opinion, complacency, the market is now very jittery, with the result that any negative headlines or data releases are unlikely to be simply “shrugged off” as they have been of late. To this end we saw shocking retail sales figures and poor mining production add to the selling pressure.

In the background, the USD continues to push and pull markets with it. Having sold off sharply leading into and following the recent Fed interest-rate statement, the green-back made a somewhat unexpected comeback by gaining in 8 out of the 10 trading sessions in February. As we frequently remind clients, the fortunes of the ZAR will always be substantially impacted by this external driver.

What others say

 

13 February 2019

MoneyWeb – Can Things Still Get Worse On The JSE

“2018 being the first year in a decade that the FTSE/JSE All Share Index (Alsi) ended in negative territory. This weakness was also very widespread, with more than 60% of the companies in the index being down for the 12 months to the end of December.”

“This is only the third time in the last 20 years that there has been such broad market negativity. The first was in 1998 following the Asian crisis, and the second was the global financial crisis of 2008.”

“In 1999, the JSE recorded its highest annual return of the last 40 years at 61.4%. In 2009 the market bounced 32.1%.”

RMB Global Markets

“Unlike its EM compatriots, the Rand is not revelling in renewed risk appetite, weighed down by domestic constraints. Rolling electricity blackouts and less than favourable economic data have left investors uneasy about the prospects for the local currency, with 3-month USD/ZAR implied volatility surging above its 50-week moving average of 16.42.

This isn’t to say that offshore investors have lost interest in SA assets, with foreigners continuing to purchase local benchmark bonds this week, albeit at a slower pace, but flows are likely to be thin ahead of next week’s budget announcement as markets await guidance on state funding.

Moody’s did very little to help the market’s disposition… the ratings agency released a review of the electricity industry in South Africa yesterday. As the country was gripped by stage 4 load shedding, the narrative was never going to be positive.

The message is similar to that expressed last week – there is little choice but to provide support for Eskom.”

14 February 2019

Reuters – US-China Trade Talks Move To Higher Level As Deadline Looms

“US tariffs on $200 billion worth of imports from China are scheduled to rise to 25% from 10% if the two sides do not reach a deal by March 1.”

“…Trump was considering pushing back the deadline by 60 days to give negotiators more time after the Chinese side requested a 90-day extension.”

MoneyWeb – Eskom In Danger Of Collapse Without Bailout South Africa Says

“Eskom is laden with more than $30 billion of debt and is battling a shortage of capacity that threatens to derail government plans to lift the sluggish economy.

President Cyril Ramaphosa said last week that the government would support Eskom’s balance sheet but said details would be announced in a budget speech by the finance minister on February 20.

The department of public enterprises, which oversees Eskom, said in a presentation to parliament that Eskom was technically insolvent and would “cease to exist” at the current trajectory by April, unless it gets a bailout.”

Fin24 – Moody’s Likely To Downgrade SA If Government Takes On Eskom Debt – PWC

“The audit and advisory firm told a media briefing on Wednesday that revenue collection in November and December 2018 “became significantly worse” and “chances are quite high” that Moody’s will cut SA’s rating to junk.”

15 February 2019

Fin24 – Banks Urge Ramaphosa To Put Politics Aside In Fixing State Firms

“A lobby group representing South African banks urged President Cyril Ramaphosa to prioritise the country’s wider interests rather than securing votes for the ANC if he is to boost confidence in the economy before May elections.”

“It’s crazy in this day and age we still can’t say privatisation, but some sort of private-equity stake has got to be there,” said Banking Association of South Africa Managing Director Cas Coovadia.

“That brings in money, it reduces the state’s burden, brings in more accountability, expertise.”

Nedbank CIB Market Commentary

“Any slowdown in global growth and demand would hamper demand for SA minerals in 2019. Trade activity has already slowed, and any further decline in global export activity will also hamper sales of SA minerals.

Prospects for the mining industry looks bleak in the face of lower demand, and rising cost pressures. While growth is likely to rise of a low base, there are still material downside risks in 2019 that may only be mitigated by structural reform or a turnaround in global growth.”

What we think

Two weeks ago we wrote that “…we have been fairly bullish on the ZAR outlook in recent months. Although we do remain concerned about the local risks that lie in wait over the next few months, from a trading and technical perspective the Rand has felt resilient in the face of any selling pressure….In the near-term however, we would expect the 13.00 – 13.20 range to be the most likely best case and reiterate that at current levels, given the known risk events (not to mention the unknowns), externalising at least a portion of one’s funds would be prudent, when considered from a risk-management point of view.”

It turns out that the best case had already been reached and we saw once again how some things just don’t change!

Yes, the Rand had been resilient. No, we weren’t bearish regarding its prospects. And maybe we could see further gains. However, we had a number of events on the horizon which could upset the proverbial apple-cart and, as we have seen time and time and time again, a nasty unexpected surprise may have been just around the corner (we would argue that the “unexpected” surprise – the flurry of negativity around Eskom – was unexpected only in its timing).

So here we sit: the Rand is down 7% in February, with most of the gains for the year wiped out. It’s hard to predict where the Rand may head in the short-term and when the negative momentum will abate, for now, we can only take some encouragement from resistance levels at both 14.20 and 14.40.

Given that the Budget Speech (with a huge focus on growth, jobs and Eskom) will take place next Wednesday, Nersa’s tariff decision is to be made on 15 March and Moody’s sovereign review is scheduled for 29 March, it would take an extremely brave (or clairvoyant) person to make bullish forecasts at this point.

The Eskom debacle may very well turn into a full-blown disaster and at this moment we simply don’t know how much of this is priced in.

As such our range for the week ahead is 13.80 -14.40.

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Have a great weekend!