Zuma’s power has been steadily eroded - OAM

Cape Town - President Jacob Zuma’s power has been steadily eroded since the axing of Nhlanhla Nene as Finance Minister, according to Overberg Asset Management.

It said in its weekly review there have since been several high profile setbacks to his authority. These include the Constitutional Court’s Nkandla judgement, the ANC’s weak municipal election performance, and last month the findings of the Public Protector’s State Capture report.

The past week has shown further evidence of Zuma’s falling support with the ANC’s National Executive Committee (NEC) debating the fitness of Zuma to hold office. 

South Africa economic review

• The South African Reserve Bank (SARB) decided unanimously to maintain its benchmark repo interest rate unchanged at 7.0%. The SARB forecast consumer price inflation (CPI) to peak in the final quarter at 6.6% slightly below its previous forecast of 6.7%, and maintains that CPI will fall back within its 3-6% target range in the second quarter 2017.

Its GDP growth forecasts remained unchanged at 0.4% in 2016, 1.2% in 2017 and 1.6% in 2018. SARB Governor Lesetja Kganyago cautioned that although the interest rate hiking cycle is close to the end, risks to inflation remain and any deterioration could prompt a review of the rate outlook.

• Producer price inflation (PPI) increased in October by a higher than expected 0.9% month-on-month. On a year-on-year basis PPI remained unchanged from September’s level at 6.6% above the 6.1% consensus forecast. The main culprit was food price inflation, which increased 1.1% on the month and 11.4% on the year.

Meat prices increased a substantial 3.1% on the month. PPI is likely to ease in coming months due to the base effect of high year-ago comparative levels. While improved rains and higher maize crops should reduce food price inflation meat prices are likely to accelerate as farmers rebuild their livestock herds.

• Consumer price inflation (CPI) accelerated from 6.1% year-on-year in September to 6.4% in October slightly above the 6.3% consensus forecast. Fuel prices increased 3.7% month-on-month adding 0.2 percentage points to the headline CPI reading.

Food price inflation also picked-up from 11.3% to 11.7%. Core CPI, excluding food and energy prices, unexpectedly increased from 5.6% to 5.7% although on a 3-month-on-3-month annualised basis it reduced from 5.1% to 4.9% its first sub-5% reading since late 2015.

• The unemployment rate increased from 26.6% in the second quarter (Q2) to a record high 27.1% in Q3 despite a rise in the number of employed. A total 288 000 jobs were created during the quarter but the work force increased by 527,000. More encouragingly, the expanded definition of unemployment, which includes discouraged job seekers, edged lower from 36.4% to 36.3%.

The highest number of jobs were created in the construction, finance, trade, agriculture and transport sectors, at 104 000, 103 000, 61 000, 56 000 and 53 000, respectively. The mining and manufacturing sectors continued to shed jobs. The level of jobs growth is unlikely to increase for the foreseeable future due to the weight of political and regulatory uncertainty on business confidence.

• In its review Fitch rating agency revised its outlook for South Africa’s long-term foreign currency credit rating from “stable” to “negative” but kept its rating unchanged at BBB-, one notch above sub-investment grade. The changed outlook is attributed to increased political risk, which is likely to remain at least until the ANC’s elective conference in December 2017.

Political uncertainty is expected to undermine business confidence and investment. Fitch also expressed concern, following demands for state funding of university fees, that “social pressures could lead to further spending needs.” On the bright side Fitch noted that the Treasury had stuck to its expenditure ceilings, introduced in 2012.

• Like Fitch, Moody’s credit rating agency unexpectedly kept South Africa’s long-term foreign currency rating unchanged. Moody’s rating is at Baa2, two notches above sub-investment grade.

However, Moody’s maintained its negative outlook citing risks to structural reforms, political uncertainty, weak business confidence and poor export demand. Moody’s cautioned that a rating downgrade may ensue if much needed structural reforms are not implemented. Structural reforms are required to lift the economy’s potential economic growth rate.

The week ahead

• Private sector credit extension: Due Tuesday 29th November. According to consensus forecast growth in private sector credit extension is expected to slow from 7.2% year-on-year in September to 6.8% in October, attributed to continued weakness in household credit demand.

• BER Business Confidence Index: Due Tuesday 29th November. The business confidence index measured 42.0 in the third quarter (Q3) and unlikely to show much reprieve in Q4. While export activity has picked-up domestic demand remains depressed.

• Trade balance: Due Wednesday 30th November. According to consensus forecast the trade balance is expected to revert to a deficit of -R9.0bn in October reversing the +R6.7bn surplus registered in September. Imports typically rise in October due to restocking ahead of the festive season.

• Barclays manufacturing purchasing managers’ index: Due Thursday 1st December. The purchasing managers’ index (PMI) was at 45.9 in October below the key 50-level demarcating expansion from contraction. The November PMI is expected to remain below 50 due to continued weakness in domestic demand.

• Standard & Poor’s (S&P) Global Ratings: Due Friday 2nd December. Standard & Poor’s (S&P) Global Ratings will release its South African foreign currency credit rating review.

The S&P credit rating is currently just one notch above non-investment grade with a “negative outlook”. This suggests the next move will be a downgrade to “junk status”. However, both Moody’s and Fitch rating agencies kept their ratings unchanged in their reviews last week suggesting some reprieve from S&P.

Technical analysis

• While the rand has broken below key resistance levels versus the dollar at R/$ 14.20 and 13.80 the strengthening trend is not confirmed by momentum indicators, signalling that the currency is overbought.

• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.

• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The key £/$1.30 level support level has ben broken opening up a £/$1.20-1.24 target.

• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.

• The US 10-year Treasury yield has broken back above the key support level of 2.0% endangering the multi-year bull trend in US bonds.

• The benchmark R186 SA Gilt yield is now testing the key support level of 9.0% endangering the mini-bull market in bonds which has been in place since the start of the year.

• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.  

• The Brent crude price is well supported at $40 a barrel but unlikely to break above strong resistance at $50. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5 000 per ton.

• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.

• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 900 in turn opening a downside target of 45 000.

 A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.

The bottom line

• Subtle shifts are also signaling Zuma’s demise. Minister in the Presidency Jeff Radebe last month suggested that the full weight of the Cabinet was in support of Finance Minister Pravin Gordhan. A vote of support for Gordhan is seen as a proxy vote against Zuma. Furthermore, the Department of Energy announced that it will delay its nuclear programme, a clear contradiction to Zuma’s stated objective.

The Congress of South African Trade Unions (COSATU) ended its three-day central executive meeting last week by announcing that it wants Deputy President Cyril Ramaphosa to succeed Zuma at the ANC’s electoral conference in December 2017. While falling short of demanding that Zuma step down COSATU nonetheless backed former Public Protector Thuli Madonsela’s call for a judicial enquiry into State Capture allegations.

• Although the rand appears to be celebrating the latest erosion of Zuma’s power base, with the currency gaining over the weekend from R/$14.16 to 13.82, from R/£17.64 to 17.14 and from R/€15.02 to 14.62, other key factors are also contributing to the rand’s strength.

• According to studies by the IMF the most potent determinants of the rand’s trajectory are the level of risk appetite in global financial markets and the direction of commodity prices. With the Commodity Research Bureau Metals Index rising by over 10% during November and the S&P 500 index gaining almost 4% over the same period, it is no wonder the rand has rallied.

• Meanwhile, the positive outcome from last week’s credit rating reviews by Fitch and Moody’s has raised the likelihood that South Africa will narrowly avoid a downgrade from Standard & Poor’s when it concludes its findings on Friday.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer:

Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.

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