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President Ramaphosa has been working tirelessly at stimulating South Africa’s economy. Business confidence is gradually turning. Over the past two months Ramaphosa has announced a stimulus package aimed at infrastructure spending and chaired a presidential jobs summit pledging to create an additional 275 000 jobs a year, according to Overberg Asset Management (OAM).
Last weekend he chaired a three-day investment conference attended by 1 300 local and foreign business leaders.
The investment conference came just two days after finance minister Tito Mboweni presented his first Medium Term Budget Policy Statement (MTBPS).
The mood at the investment conference was positive, reminiscent of the halcyon days under Thabo Mbeki’s presidency when South Africa’s economy was growing at over 5% per annum, said OAM in its weekly economic and market overview.
"The last time the economy grew by over 5%, Thabo Mbeki, Trevor Manuel and Tito Mboweni (the three TMs) headed the Presidency, the Treasury and the Reserve Ban. Encouragingly, Tito Mboweni and Trevor Manuel are back, as finance minister and investment envoy. The four presidential investment envoys have been tasked with attracting local and foreign investment."
The analysts at OAM also believe that the medium term budget was positive in key respects, such as focusing on growing the economy rather than maintaining fiscal targets, especially after a recession. "It will be better for South Africa’s economy and tax collection in the long-run."
South Africa economic review
• In his maiden Medium-Term Budget Policy Statement (MTBPS), Finance Minister Tito Mboweni, citing weak economic performance, raised the projected fiscal deficit for 2018/19 to 4.0% of GDP up from the 3.6% projection given in the February Budget. The projected fiscal deficit for 2019/20 was raised from 3.6% to 4.2%.
The budget projections surprised financial markets, which had expected more aggressive fiscal consolidation. Nonetheless Mboweni ensured there was no increase in budgeted expenditure. He reprioritised around R50bn worth of expenditure, allocating R32.4bn to fund the stimulus package and infrastructure spending, R14.7bn to upgrade informal settlements and R9.2bn to SAA, SA Express and the Post Office.
Encouragingly, Mboweni refused to fund the unbudgeted R30bn increase in public sector wages, announcing that this amount would have to be absorbed by departments’ existing budget allocations. With the MTBPS appearing to favour economic growth over fiscal consolidation, Moody’s credit rating agency issued a negative assessment of the mid-term budget: "The government’s revised budget policy statement projects larger fiscal deficits and higher government debt, amid slower growth, a weaker rand and higher interest rates than expected in February, a credit negative." (See Bottom Line for further analysis).
• The South African Reserve Bank (SARB) composite leading business cycle indicator, a barometer of expected economic and business conditions 6-9 months ahead, fell in July from 106.3 to 105.4 its lowest level since the start of the year. The decline was broad-based across the ten component measures, with seven falling and only three showing an improvement on the month.
Positive contributions came from an acceleration in real M1 money supply growth, an increase in the number of residential building plans passed and the composite leading business cycle indicator for South Africa’s major trading partners. The largest detractors were a fall in job advertisements, and a reduction in the average number of hours worked in the manufacturing sector. The declining trend in the composite leading business cycle indicator signals a slow start for the economy in the first half of 2019.
• Consumer price inflation (CPI) remained unchanged in September at 4.9% year-on-year, down from July’s level of 5.1%. While food inflation picked-up from 3.5% to 3.9% on the year, transport inflation eased slightly from 9.5% to 8.7% in the absence of any further fuel price increases during the month. Expectations for a decline in global oil prices and a stabilisation in the rand indicate a further easing in transport inflation over coming months.
Core CPI, which excludes energy and food prices due to their volatility, remained unchanged from August’s level of 4.2% but below the July level of 4.3%. July is likely to have marked the peak in consumer inflation, which suggests the South African Reserve Bank will refrain from hiking interest rates for the foreseeable future, especially given the economy’s recessionary performance.
• Producer price inflation (PPI) moderated in September from 6.3% year-on-year to 6.2% although marked the third straight month that it has been above the key 6% level. In the year-to-date PPI has averaged 5.2% compared with 4.8% over the same period last year. However, PPI is likely to have passed its peak, with expectations of a stabilisation in the rand and falling global oil prices over coming months likely to bring down energy inflation.
At the PPI level, petrol and diesel inflation fell sharply in September from 25.3% to 18.8% and from 27.7% to 22.8%, respectively with further declines expected over the next 6-12 months helped by a high comparative base effect. A moderation in PPI bodes well for pipeline pressures at the consumer inflation level.
• Growth in private sector credit extension (PSCE) slowed in September from 6.7% to 6.3% year-on-year. While growth in credit to companies slowed from 6.4% to 5.3% this was due mainly to a high comparative base effect. On a month-on-month basis, credit extension to companies increased by a solid 0.9%.
Growth in credit extension to households increased from 4.8% to 5.1% on the year although growth in mortgage advances remained unchanged at a subdued 4.4%. Credit extension is likely to pick-up in the fourth quarter as the economy rebounds off its low base, helped by steady interest rates and a gradual improvement in business and consumer confidence. At the company level, credit extension growth should respond favourably to the recent signing of renewable energy deals.
The week ahead
• Third quarter unemployment report: South Africa's unemployment rate increased by 0.3% to 27.5% at the end of third quarter of 2018, Stats SA announced on Tuesday.
According to the Quarterly Labour Force Survey for the third quarter, there are 16.4 million employed people and 6.2 million unemployed people between the ages of 15 and 64 years in South Africa.
• Trade balance: The trade balance is expected to have posted a surplus of R3.9bn in September, according to consensus forecast, building on August’s solid R8.8bn positive balance.
• Absa/BER manufacturing purchasing managers’ index: Amid weak domestic demand and continued policy uncertainty, the Absa/BER manufacturing purchasing managers’ index, a forward-looking indicator, is likely to have remained well below the neutral 50-level for October.
• Vehicle sales: New vehicle sales are likely to have remained flat in October on a year-on-year basis with weak domestic demand compensated by heavy discounting and other sales incentives.
Technical analysis
• The spike in the rand/dollar rate to R15.50/$ in the first week of September may mark the peak in the currency’s recent decline.
• The rally in the US dollar index has reached its medium-term goal suggesting a correction from current levels. The dollar remains below a major 30-year resistance line suggesting the bull run in the dollar may be over.
• The British pound has broken back below key resistance at £1.35/$ suggesting a trading range of £1.30/$ to £1.35/$. The £1.28/$ level is expected to provide strong resistance.
• 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 above resistance at 3.0% and 3.20%, paving the way for a new 3.20-3.30% trading range. However, any further move highly is likely to meet stiff resistance, especially at the key 3.50% level.
• The benchmark R186 2025 SA Gilt yield has spiked higher to 9.30% but is expected to meet stiff resistance at this level, limiting any further likely upside. The R186 may retrace a portion of its upward move taking the yield back to the 8.80% level and thereafter 8.60%.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken above key resistance at $80 per barrel, opening-up the $100 level, which just two months ago seemed far-fetched. However, any spike higher to the $100 level is likely to be short-lived, a blip rather than the start of a sustainable trend higher. The outlook for base metals prices is less certain after the copper price retreated sharply from the key $7 000 per ton level. A decisive break below $6 000 per ton would herald a bear market in copper and base metals’ prices.
• Gold has developed an inverse "head and shoulders" pattern, which indicates a price recovery and a test of the $1 400 target level.
• Despite the consolidation since the start of the year the break in the JSE All Share index above the key resistance level of 60 000 in December signals the early stages of a new bull market.
Bottom line
• President Ramaphosa has been working tirelessly at stimulating South Africa’s economy. Business confidence is gradually turning. Over the past two months Ramaphosa has announced a stimulus package aimed at infrastructure spending and chaired a presidential jobs summit pledging to create an additional 275 000 jobs a year. Last weekend he chaired a three-day investment conference attended by 1300 local and foreign business leaders.
• The mood at the investment conference was positive, reminiscent of the halcyon days under Thabo Mbeki’s presidency when South Africa’s economy was growing at over 5% per annum.
• The last time the economy grew by over 5%, Thabo Mbeki, Trevor Manuel and Tito Mboweni (the three TMs) headed the Presidency, the Treasury and the Reserve Bank. Encouragingly, Tito Mboweni and Trevor Manuel are back, as finance minister and investment envoy. The four presidential investment envoys have been tasked with attracting local and foreign investment.
Ramaphosa said at the investment conference: “We did so knowing no meaningful growth and job creation would be done without a massive surge in investment in our economy.”
• The investment conference came just two days after finance minister Tito Mboweni presented his first Medium Term Budget Policy Statement (MTBPS). Citing weaker than expected GDP growth, Mboweni raised the Treasury’s budget deficit and borrowing requirement forecasts, in the process surprising financial markets, which had expected more aggressive fiscal consolidation.
Despite some fiscal slippage, the rand and bond yields barely reacted to the mid-term budget, signalling market confidence that Moody’s would maintain South Africa’s investment grade sovereign credit rating.
• The MTBPS was positive in key respects. It’s focus on growing the economy rather than maintaining fiscal targets, especially after a recession, will be better for South Africa’s economy and tax collection in the long-run.
The re-prioritisation of expenditure towards infrastructure spending will help economic growth. Several references to partnering with the private sector will boost business confidence and private sector investment spending. His refusal to fund wage increases indicates a growing willingness to confront the public-sector unions head-on. His use of the military to help tackle the Vaal water issue confirms a much-needed sense of urgency.
• With gradual incremental steps, events over the past week have once again boosted Ramaphosa’s authority within the deeply fractured ANC. As his authority strengthens, so too will his ability to push through less popular but necessary structural reforms. These reforms will be essential for economic growth to lift sustainably above 5%.
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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