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Cape Town - While there is a risk of more radical and populist policies as the 2019 national elections approach, much depends on the identity of the next ANC leader, said Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
It said political uncertainty is likely to be at the forefront of business and household spending decisions as the ANC’s succession battle heats up ahead of the national elective conference in December.
"Cyril Ramaphosa’s candidacy is served well by President Zuma’s declining popularity, improving the outlook for future government policy."
South Africa economic review
• Growth in private sector credit extension (PSCE) increased from 5.0% year-on-year in December to 5.5% in January although off an extremely low base. The gain in PSCE is attributed exclusively to corporate lending growth, which increased from 8.9% to 10.1%, signaling an improvement in business confidence.
By contrast, household lending remained depressed with growth slowing from 0.7% to 0.6%. Moreover, overdraft lending growth increased from 7.0% to 9.6% potentially reflecting a pick-up in distressed borrowing.
Mortgage lending growth eased slightly from 3.1% to 3.0%. While household lending remains disappointing there are signs of a loosening in bank lending standards with the National Credit Regulator reporting an easing in the rejection rate on new credit applications.
• In its first output estimate for the 2016/2017 agricultural season, the Crop Estimate Committee confirmed the positive outlook for this year’s harvest. South Africa is projected to harvest 13.9 million tons of maize in 2017 a 78% increase on the previous year’s 7.77 million tons.
White maize production is expected to increase 144% and yellow maize by 28%. Harvests of soybeans, sunflower seeds and groundnuts are expected to increase by 44%, 23% and 399%. Improved output is attributed to a combination of increased plantings and higher crop yields. The bumper harvest should lead to a sharp decline in food price inflation and a broader deceleration in consumer price inflation.
• The Bureau of Economic Research manufacturing purchasing managers’ index (PMI) continued its steady ascent from 50.9 in January to 52.5 in February, above the expansionary 50-level for a second straight month. The PMI is at its highest since June 2016 supported by broad-based strength in the sub-indices.
The forward-looking new orders index increased sharply from 50.4 to 55.7 indicating a strengthening manufacturing environment in the months ahead. The future conditions index slipped slightly from 70.3 to 67.8 but nevertheless remained close to its six-year high. The PMI data is consistent with a rebound in GDP growth in 2017.
• Foreign investors were net seller of equities during the month of February to the tune of R5.34bn following net sales of R16.15bn in January, taking net sales for the year-to-date to R21.49bn.
Foreigners were more forgiving of the bond market, buying a net R3.81bn in February although not sufficient to cover the net sales of R6.51bn in January, resulting in net sales for the year-to-date of R2.7bn.
Despite continued net foreign selling of listed securities, the rand has strengthened since the start of the year against the US dollar, pound sterling and euro by 5.11%, 5.65% and 5.52%, respectively, indicating strong support from the country’s improving trade balance.
The week ahead
• GDP growth: Due on Tuesday 7th March. According to consensus forecast fourth quarter (Q4) GDP growth is expected to slow to 0.1% quarter-on-quarter annualised from 0.2% in Q3, due to persistent weakness in key manufacturing, mining and agricultural sectors. (See Bottom Line for further analysis).
• South African Chamber of Commerce and Industry (SACCI) business sentiment index: Due Wednesday 8th March. The SACCI index, which jumped from 93.8 in December to 97.7 in January, its highest since October 2015, is expected to maintain its elevated levels in February.
Business sentiment is benefiting from increased global trade and higher international commodity prices as well as improved prospects for agricultural production and the decline in inflation.
Technical analysis
• While the rand has broken below key resistance levels versus the dollar at R/$ 13.20 and 13.00 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 £/$1.25 level support level has been broken opening up a £/$1.18-1.22 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 firmly below the key support level of 9.0% confirming 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 $50 a barrel and having broken key resistance at $55 is targeting further gains to the next key level at $60. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5500 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1400 target level.
• 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
• GDP growth has been on a declining trend since 2011. Data released on Tuesday 7th March is expected to show GDP grew by just 0.4% in 2016 as a whole, its slowest since the 2009 recession.
In 2016, South Africa succumbed to the perfect storm. GDP growth was negatively affected by accelerating inflation, rising interest rates, declining consumer spending, slowing mining and manufacturing demand, the impact of political uncertainty on business confidence and one of the worst droughts in living memory.
• GDP growth will rebound in 2017 and 2018, potentially by more than currently projected. GDP growth of 2.0% is likely in 2017 as the negative conditions which beset the economy in 2016 begin to reverse.
READ: SA economy shrinks more than expected
• Forward-looking economic indicators, which measure expected conditions in 3-6 months’ time, are showing a strongly positive trend. The South African Reserve Bank (SARB) leading indicator increased from 95.6 in November to 96.3 in December its fifth straight monthly gain, taking the reading to its highest since the fourth quarter 2014.
The Bureau of Economic Research manufacturing purchasing managers’ index (PMI) increased from 50.9 in January to 52.5 in February, its strongest since June 2016 and above the expansionary 50-level for a second straight month. The South African Chamber of Commerce and Industry’s (SACCI) business sentiment index jumped from 93.8 in December to 97.7 in January, its highest since October 2015.
• A recovery in global economic growth is boosting South African export demand with firming international commodity prices and rising global trade promoting the manufacturing and mining sectors.
• Agricultural production will rebound strongly as weather patterns normalize. The US Department of Agriculture forecasts South Africa’s maize output will increase in 2017 by 65% year-on-year more than reversing the 27% decline in late 2015 and early 2016.
• Food price inflation is expected to reverse course in 2017, falling sharply in line with increased agricultural production, in turn bringing down consumer price inflation (CPI). CPI is expected to average 5.5% over 2017 well within the Reserve Bank’s 3-6% target range, which together with the stable rand will embolden the central bank to cut interest rates.
The benchmark repo rate is likely to be cut this year from 7.0% to 6.5%, boosting consumer and business confidence, household expenditure and investment spending.
• After a gloomy 2016 the consensus outlook for South Africa’s economy has become overly pessimistic. The economic rebound in 2017 is likely to take many by surprise fueled by a recovery in agriculture, manufacturing and mining, falling interest rates and increased business and household spending.
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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