As we approach the end of 2023, we welcome you to the last edition of the Weekly Rand Review for this year…

…and fair to say, it has been a challenging and eventful year for all of us with Rand exposures, marked by whipsaw fluctuations and a series of impactful global and domestic events that have kept the financial markets on their toes.

From geopolitical tensions and conflicts abroad to the unfolding drama on the domestic front, the Rand has navigated through a maze of uncertainties…

…but our local unit looks set to end the year on a positive note!

So, without further delay, let's delve into the final review of the year and explore the factors that shaped the Rand's performance one last time for 2023.

Key Moments (11-15 Dec 2023)

These were some of the major headlines over the last five days:

• Festive Cheer for Prices - - Headline consumer prices eased both locally and in the US in November, which provided market participants with renewed belief that interest rate hikes could be nearing an end as we head into the New Year.
• Early Xmas Gift for Production - - South Africa’s mining and manufacturing production exceeded expectations in October, providing a glimmer of hope that the local economy will avoid a technical recession at the end of Q4.

In a week of important inflation announcements both locally and abroad, the Rand got going at R19/$ at first light on Monday morning. However, with the major events only scheduled for midweek, the local unit found itself on the backfoot early, reaching the week’s high of R19.13/$ within the first two hours of trade. With little to sway sentiment in the first part of the week, the Rand traded mainly sideways, hovering above the R19 for a single greenback through Monday and Tuesday.

In October, annual mining production experienced a notable increase of 3.9%, surpassing expectations and marking its best annual rise in nearly two years. Over the three months leading to the end of October, mining output saw a 0.7% uplift!

The impressive recovery in October was led by the platinum group metals (PGMs) sector, which returned to the limelight with a robust 16.9% surge in production.

On the manufacturing front, the data for October was a slightly more mixed bag.

Manufacturing production recorded a notable 2.1% year-on-year increase in October, despite the crippling Transnet strike that occurred in the same month last year. However, on a monthly basis, manufacturing output experienced a marginal 0.2% dip, and over the three months ending in October, it declined by 0.7%.

Still, the industrial sectors of the economy showed a better-than-expected start to the final quarter of 2023 and gives hope that the economy will avoid a technical recession at the end of Q4. Midweek brought us the all-important local consumer inflation results, and with it came some Xmas cheer for the outlook of prices.

Starting at home…

As per Stats SA, the annual consumer inflation, as measured by the headline rate, eased to 5.5% in November, marking a decline from the 5.9% recorded in October.

And then abroad…

US CPI in November showed a year-on-year increase of 3.1%, slightly down from October's 3.2% and significantly lower than the peak of 9.1% observed in June 2022.

Concluding their last policy meeting of the year, central bankers decided to keep interest rates unchanged for the third consecutive time. In addition, the Federal Open Market Committee voted unanimously to keep the benchmark overnight borrowing rate within a targeted range of 5.25%-5.5%.

The big news, though, came during the press conference that followed, where Chair Jerome Powell stated that the Fed officials are likely finished with rate hikes.

Finally!

This marked a significant shift in the central bank's outlook, as just two weeks ago, Powell had deemed it "premature" to conclude that the Fed had completed rate hikes or to speculate about rate cuts.

However, this time around, the message conveyed was unequivocal: borrowing costs are sufficiently high to maintain control over inflation, and rate cuts are anticipated in 2024.

While no specific timeline was provided, the markets welcomed the news, almost as if they were interpreting it as a parting gift for 2023. Markets sprung into action on the more dovish tone set by the FOMC and Powell, which translated into big movements in the foreign exchange arena.

The Rand was ready to close up shop on Wednesday at R19.05/$, but following the Fed Chair’s conference, the local unit sprung to life and gobbled up as much as 40c to the greenback before markets closed for the evening…

…and continued to recover through Thursday as markets continued to digest the good news from the Fed.

Later in the day, we did get some negative news, though, as the South African Reserve Bank revealed its Quarterly Bulletin.

South Africa experienced a decrease in foreign direct investment inflows, recording R26 billion in the third quarter of 2023, down from R53.8 billion in the second quarter. Additionally, portfolio investments exhibited a larger outflow of R41.9 billion in the third quarter, compared to outflows of R4.6 billion in the second quarter of 2023.

The central bank attributed this to a public entity redeeming a $1 billion international bond, which the World Bank approved as a loan to South Africa to address the ongoing power crisis. Nevertheless, those results did not deter investors and after starting the day at R18.61/$, the local unit strengthened to around the R18.30/$ mark heading into the long weekend.

Before we close out, let’s take a moment to reflect on the good, the bad and the ugly of the year past.

The Good

Despite a challenging year marked by record load shedding, there has been notable progress in addressing the electricity crisis. The National Energy Regulator of South Africa (Nersa) received registrations for 4.1GW of new generation, attracting approximately R111 billion in investments.

This additional capacity is gradually becoming operational, and around 4GW of small-scale generation has been added, benefiting from solar tax incentives and the declining cost of solar technology.

The brightest light though is that despite a slight contraction in GDP figures for Q3 2023, the economy has demonstrated resilience, recording yearly GDP growth.

The Bad

Logistical crises have emerged as a significant challenge and have been impacting South Africa's ports with a substantial backlog, limiting material exports. Issues such as theft, vandalism, and poor maintenance have all contributed to the issue, affecting economic growth by leading to reduced sales and production of commodities and goods.

Hopefully, the National Logistics Crisis Committee can draw some lessons from the minor successes in the electricity sector to encourage greater private sector participation in logistics (without selling our country to acquire them, of course).

The Ugly

The health sector still faces challenges, compounded by the passage of the National Health Insurance Bill by the National Council of Provinces. Many health industry professionals deem the Bill unworkable and believe it will not be implemented. The uncertainty surrounding its implementation has led to delays in investments, ultimately creating a negative impact.

In addition, despite improvements in headline CPI, South Africa's interest rates may remain higher for an extended period due to increased government borrowing. In November 2023, the central bank maintained its main lending rate at 8.25%, emphasising the need to keep rates higher domestically amid heightened government borrowing and an increased risk premium. The National Treasury has escalated borrowing to around R14 billion per week since August, further supporting the case for sustained higher interest rates.

On Friday, with no major events on the calendar, the local unit continued to rake in the gains as investor appetite grew for riskier assets. After opening at R18.34/$, the local unit strengthened one last time late in the day before settling to close out the week around R18.30 for a single greenback.

What a way to end!

A huge green arrow for the local unit as we head into the last lap of 2023 - and a welcome one for importers and consumers..

The Week Ahead (18-22 December 2023)

While the Rand Review may be signing off for the year, the markets never sleep and here are the key events to keep an eye on this week.

• SA: Leading Business Cycle Indicator MoM (Oct)
• EU/UK:Inflation Rate YoY (Nov)
• US: CB Consumer Confidence (Dec), GDP Growth Rate QoQ (Q3)

And just like that, another year passed, and new lessons were learned.

What a ride 2023 has been!

Yet, in the midst of all the challenges, we found solace in the steady guidance of our forecasting model, a beacon in the stormy seas of market fluctuations. It has been our trusted companion, helping us sift through the noise, make sense of the complexities, and anticipate the Rand's dance with the markets.

We owe much of our unscathed journey this year to this steadfast companion.

As the year draws to a close, we want to express our heartfelt gratitude to you, our readers, for joining us on this thrilling ride. Your trust and engagement have fueled our commitment to delivering insightful analysis and a touch of wit and humour along the way.

As we head into the holiday season, may you have a good rest and enjoy the company of those your care about…

… and may you find some time for respite and reflection, knowing that you've weathered the storm alongside us.

We look forward to welcoming you back in 2024, where we'll once again embark on the exciting journey of unravelling the mysteries of the Rand and the ever-evolving global markets.

Until then, though, stay safe, and let's do it all again next year!

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To your success~

James Paynter

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