Greetings, and welcome to the Weekly Rand Review.

It was a shorter week for Saffers but one that saw the South African Rand taking some steps backward.

One of the primary factors contributing to the local unit’s struggles was the prevailing global sentiment that favoured safer assets...

And who would blame the global view on an asset like the Rand right now, as everyone is tightening up on their risk profile. While the ANC flounders in managing the country's finances, it doesn't exactly inspire confidence to the world.

The week witnessed more concerns about local fiscal risks and budget deficits, casting an even larger shadow on the Rand's outlook.

A thin week of data results - but here’s everything you need to know:

Key Moments (25-29 September 2023)

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

• Producer Prices Up - As per Stats SA, annual inflation for producer prices experienced a notable jump from 2.7% in July 2023 to 4.3% in August 2023.
• Oil Price Concerns - Concerns are growing among global monetary authorities as soaring oil prices threaten the worldwide inflation trajectory and overall monetary policy outlook.

After a two green arrows in a row, the Rand got last week started about level on its previous close in the mid R18.70s.

With Saffers celebrating Heritage Day, many local market participants were still enjoying the long weekend, and the local unit was relatively untroubled over the course of the day.

However, the market waits for no one.

US Treasury yields reached 16-year highs on Monday evening, and the effects hit almost as soon as investors returned to duty on Tuesday morning.

The increased US yields heightened the attractiveness of the greenback, propelling the dollar index to 106.2, its highest level since late November 2022. So while the Dollar had reached a fresh 10-month high against a basket of major currencies on Tuesday, the Rand lost over a percent against the greenback and was back above R19/$ by the end of the day.

On the local front, concerns around SA’s precarious financial situation were also creating a sour taste in the mouths of market participants which prompted the National Treasury to attempt to calm tensions and advocate for composure.

Finance Minister Enoch Godongwana indicated in the week that the nation should await the Mid-Term Budget Policy Statement scheduled for presentation on 1 November 2023 to learn about the government's plans to address the situation...

...in the interim, he assured that the government and National Treasury are fully aware of the financial crisis and have plans in place to address the challenges.

Specifically, he mentioned that the expanding budget gap, while suboptimal, was within the realm of expectations and had been considered in Treasury's downside projections during the February budget.

Phew! That’s a relief?!

...not!

Unfortunately accurately predicting losses doesn't really help change the situation.

The country is on track to reach a budget deficit of nearly R300 billion by the end of the financial year. This is propelled by lower tax collections and significantly higher-than-expected government spending, primarily due to the 7.5% increase granted to public sector workers.

Yet, despite these challenges, it seems that the full gravity of this reality has not entirely come home to government officials. Without any justifiable reason, they still continue to advocate for additional spending as the country's budget deficit widens.

In addition, dangerous narratives are circulating...

...such as promoting the idea that increased government spending will miraculously lead to more social spending and growth.

However, this ignores the flip side, which is that it could easily lead to insolvency. The consequences of a state tipping into insolvency are dire, as witnessed in various global instances such as Argentina, Greece, and Zimbabwe…

…not to mention that it involves significant disruptions to public services, extensive public sector workforce reductions, and a collapse in the value of government debt.

Plus, insolvency naturally triggers a crisis in the private sector, as it is a major lender to the government. As government finances become less stable, investors are compelled to account for the risk of potential government default. This, in turn, affects the entire economy, as a collapsed state invariably leads to a major recession. Fair to say, the argument advocated by some government officials, suggesting that increased government spending will spur growth, is frankly ridiculous…

…considering the substantial government spending over the past decade should have yielded record growth. Right?

I guess it depends what the government funds have actually been spent on!

The true state of the budget will be revealed in the November meeting - but at this moment, it looks like it will be a pretty bleak picture.

On Wednesday, the dollar continued to stomp on emerging currencies and the Rand was no exception and broke past R19.20/$ by the evening trading session. Later in the day, SARB's quarterly bulletin for Q2 2023 revealed a 0.1% quarter-on-quarter decline in real personal disposable income, following a 0.3% decrease in Q1.

Clearly, the combination of tight household finances and subdued economic prospects has dampened consumer confidence, leading to cautious spending behavior…

…and consequently, consumer spending contracted by 0.3% in Q2, reflecting financial pressures that compelled households to resort to credit for essential expenses. Nominal household debt outpaced disposable income growth, causing the debt-to-income ratio to rise from 62.3% to 62.5%.

While the SARB's anti-inflation efforts have yielded some results, with both headline and core inflation lower than anticipated over the last three months, the central bank has adjusted its economic growth forecast for 2023 from 0.4% to 0.7%.

SARB also revised down its headline and core inflation predictions for the year, from 6.0% to 5.9% and from 5.2% to 4.9%, respectively.

However, despite improvements in inflation figures, these developments are likely insufficient to shift rate expectations towards anticipated early cuts anytime soon, with major risks still hovering just overhead.

Chief among these risks is oil!

After commencing the month at elevated levels, global oil prices surged to nearly $97 per barrel in the middle of August, notably up from $75 and $85 in preceding months.

Although the current trading value of around $95 per barrel is a slight improvement from the previous week, it still represents a relatively high position. The primary driver behind the current surge in oil prices stems from artificial supply constraints implemented by oil-producing nations, particularly OPEC.

Additionally, Russia's ban on the sale of all types of diesel fuel to all countries has exacerbated the situation.

The potential for Russia to weaponize the oil industry (again) is no doubt a concerning factor with significant repercussions for global inflation trajectories and the outlook for central banks' monetary policies…

…and the repercussions of rising oil prices are not confined to consumers facing higher pump prices; they extend to businesses and industries, contributing to indirect inflationary pressure.

Additionally, Eskom faces challenges as it heavily relies on diesel-powered generators to maintain its electricity supply.

What all of this suggests is that rate cuts are likely to be a story of 2024, at best.

The Rand opened Thursday at R19.18/$ ahead of local PPI results.

Stats SA revealed that annual producer price inflation jumped from 2.7% in July 2023 to 4.3% in August 2023 and increased by 1% on a monthly basis. As PPI reflects inflation from the producer's standpoint, an unfavorable inflation figure implies potential pain for South African consumers at the point of sale.

Stats SA identified the primary contributors to the headline PPI annual inflation rate to be Metals, food products/ beverages, and paper and printed products. As Thursday evening approached, the dollar began to weaken and emerging markets gobbled up gains, including the Rand which pulled back below R19/$ before trade results on Friday.

And then we were looking at the end of the week...

The Rand gained overnight and opened Friday’s trade in the mid-R18.70s.

In August, South Africa reported a trade surplus of 13.28 billion rand ($703.87 million), according to figures from the revenue service later in the day. However, this had no impact on the local unit’s performance as the Rand slowly slipped backward to end the week in the mid-R18.80s.

End result - a week in the red.

The Week Ahead (2-6 October 2023)

Here's what we'll be eyeing up over the next five days:

• SA: ABSA Manufacturing PMI (Sep), S&P Global PMI
• EU/UK: EU Retail Sales YoY (Aug)
• US: ISM Manufacturing and Services PMI (Sep), Balance of Trade (Aug, Non Farm Payrolls (Sep)

And just like that, Q3 is done and dusted and we are on the home stretch of 2023...

Crazy!

The Rand losses last week were really just dollar gains, but the local unit is still under major pressure due to forces locally and abroad.

Next week is another thin but important one, and our forecasting model is showing a few interesting moves over the next five days.

If you’d like to receive our up-to-date predictions, simply click the link below or drop us a message if you have any questions.

Safe trading!

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To your success~

James Paynter

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