Welcome to another Weekly Rand Review with the latest developments shaping the South African Rand's performance.

A busy week in the world of currency movements, with the headline act for the Rand being the local inflation results that were set to take centre stage midweek.

Local and international monetary authorities were also scheduled to announce their decision on interest rates, which would unveil potential implications for borrowing costs and investments.

Adding to the intrigue of the week's events, speculation regarding significant changes in South Africa's taxation policies surfaced in the week…

…and if there is any validity to these reports, it could have profound effects on disposable income and spending power for Saffers.

Let's get started.

Key Moments (18-22 September 2023)

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

• Local Inflation -In August, South Africa experienced a slight uptick in inflation, bringing an end to a run of four consecutive months of declining inflation rates.
• Interest Rates - A spate of interest rate decisions were eagerly awaited from various corners of the globe, including Europe, the United States, and locally.

After a small green arrow last time out, the Rand got going at R18.95/$ on Monday morning.

But, in what could be a tough week, the local unit was on the back foot early due mainly to concerns about the impact of rising oil prices on the overall inflation outlook…

…and the subsequent knock-on effect on interest rates.

Global Brent crude oil prices approached $95 (approximately R1,805) per barrel in the week, their highest point in over a decade, due to anticipations of an expanding market supply deficit in the fourth quarter.

This shortage is attributed to prolonged supply reductions by Saudi Arabia and Russia, alongside optimistic prospects for increased demand in China.

As always, most of this is just speculation...

...as is the case with almost all trade in global markets!

The Rand broke back above R19/$ before lunch and traded sideways for most of Tuesday as well, with investors biding their time until later in the week. Before we get to the raft of interest rate decisions in the week, a particularly alarming report in the week suggested that Saffers could be in for a big change in taxation that could have a huge impact on their disposable incomes.

In last week’s episode of the Rand review, we discussed SA’s fiscal deficit, which now sits at R145 billion, and the concerns that it creates about the outlook of the government’s finances…

…well, a report from trade union Solidarity last week explained that the National Treasury are considering a possible hike in VAT by 2%.

The potential value-added tax (VAT) increase is just one of several proposals presented by the Treasury during high-level meetings with government officials this month. These discussions aim to identify strategies for augmenting revenue to address the nation's growing social spending requirements amidst an expanding budget deficit.

Worryingly, in the initial four months of the 2023/24 fiscal year, the budget deficit already reached a substantial R191.1 billion, equivalent to 67.4% of the projected consolidated budget deficit for the entire fiscal year.

Safe to say, South Africa's budget is grappling with challenges on multiple fronts.

On one hand, revenues are declining, primarily driven by a sharp drop in corporate tax collections during the early months of 2023/24, which is impacting overall tax income from income and profits…

…additionally, subdued growth in VAT receipts are constraining revenue from the sale of goods and services.

On the other hand, expenditures are surging, exacerbated by the public sector wage settlement exceeding budgeted figures, significantly elevating total government spending…

…while concurrently, higher debt service costs are further intensifying fiscal pressures.

But this is nothing new.

Finance Minister Enoch Godongwana has long cautioned about the consequences and trade-offs that would be required if the government did not adhere to the budget outlined in February.

The report also suggests that an increase in VAT could potentially generate an additional revenue of R24.5 billion to R49.4 billion, depending on the percentage of the increase eventually decided upon. In the context of this year's National Budget, it's important to note that the payment of the R350 grant carries an annual cost of R44 billion (which has been cited as one of the main reasons for the proposed increase).

Based on this comparison, raising VAT to 17% could conceivably cover the expenses associated with the grant. The government has been advocating for this grant as a novel form of basic income to support approximately 8.5 million individuals in the country…

…as it turns government plans to fund this is based on stomping on taxpayers even further!

Yet, the government continues to believe that it can continue to burn funds (that it doesn’t have) to pursue ambitious, socialist projects like the National Health Insurance (NHI) and various other impractical initiatives...

Indeed, rather than reigning in spending, transferring a greater share of its responsibilities to the private sector and prioritizing immediate economic growth…

…intimidating taxpayers with the prospect of more taxes seems to make more sense to the local powers that be.

Now let’s take a look at a separate report in the week relating to government spending.

According to the National Treasury's report last week, national departments have accumulated more than R18.5 billion in unauthorized expenditures since 2005, necessitating either budget reductions or charging these expenses against the National Revenue Fund for recovery.

Treasury outlined the unauthorized spending that has occurred across 13 government departments and entities over the years, with five entities still undergoing scrutiny.

Although the most significant overspending was linked to the pandemic and the state of emergency…

…South African government departments have still exceeded their budgets by nearly R2.1 billion during that period. Notably, the Department of Transport holds the highest record of overspending, amounting to R1.34 billion between 2013 and 2016.

This overspending was a direct result of the department's engagement of a service provider for the development, operation, and maintenance of the eNaTIS system. Even HSBC noted that the Rand is anticipated to depreciate against the dollar due to a deteriorating fiscal situation and an expanding current account deficit.

Not a promising outlook!

Anyway, back to the Rand.

On Wednesday, the local unit opened at R18.93/$ ahead of the crucial inflation results.

In August, South Africa witnessed a slight uptick in inflation, breaking a streak of four consecutive months of decline. According to Stats SA, the annual consumer inflation rate increased from 4.7% in July to 4.8% in August.

Despite ongoing reductions in food and non-alcoholic beverages (NAB) inflation, these declines were insufficient to offset the impact of rising fuel prices and municipal tariff hikes.

The monthly shift in the consumer price index also moderated, dropping from 0.9% in July to 0.3% in August, according to the report. Annual food inflation decreased from 9.9% in July to 8.0% in August, with all food and NAB categories, except fruit, reporting lower annual rates. Stats SA's surveys of municipal rates in July and August also revealed noteworthy increases.

In 2023, electricity tariffs surged by 15.3%, a substantial increase compared to the 7.9% rise in 2022, while water costs increased by 9.6% in 2023, following an 8.1% rise the previous year. Property rates also saw an 8.4% increase, up from a 4.3% rise in 2022.

Furthermore, fuel prices experienced a 2.2% rise between July and August, contributing to the shift from a -16.8% annual rate in July to -11.7% in August.

Later that day, the focus shifted to the US, where the Federal Reserve opted to keep interest rates unchanged.

Simultaneously, the central bank hinted that it anticipates one more rate hike before the year's end and fewer reductions in the following year compared to previous indications. According to the projections released by the central bank at the conclusion of its two-day meeting, this prospective final increase, if realized, would mark the conclusion of this rate-hiking cycle.

If the Fed proceeds with this step, it would signify a total of twelve rate hikes since the commencement of its policy tightening efforts in March 2022. Consumer inflation in the US has significantly decreased from its peak of 9.1% in June 2022 to a current rate of 3.7%...

…however, it still remains well above the Federal Reserve's target of 2%, and the Fed's policymakers have emphasized that they are far from declaring victory over the most severe inflationary period witnessed in the past four decades.

The latest decision by the Fed has maintained its benchmark rate at approximately 5.4%, a result of the 11 rate hikes initiated since March 2022. Furthermore, there are indications that the labor market's strength has waned somewhat, which serves as a check on inflation.

The pace of hiring has slowed down, and the number of unfilled job openings experienced a significant decline in June and July, and there has been an increase in the number of Americans actively seeking employment. Not to mention, in the coming month, millions of Americans will need to resume their student loan payments as the pandemic-related pause comes to an end…

… and this shift towards loan repayments could potentially weaken consumer spending, which is a primary driver of the economy.

Emerging currencies received a boost (albeit a brief one) following the announcement from the Fed, and the Rand improved to the mid-R18.60s but slowly gave back the gains overnight.

On Thursday, SARB followed the Fed's lead and opted to maintain the current interest rates in its recent decision. While two members of the SARB's Monetary Policy Committee (MPC) advocated for a 25 basis point rate increase, three members voted in favor of keeping rates unchanged.

Consequently, the repo rate remains at 8.25%, with the prime lending rate at 11.75%.

Despite a notable decline in headline inflation in recent months, SARB Governor Lesetja Kganyago highlighted that risks persist in the future economic outlook.

The reaction to the decision taken by the MPC was muted, and the Rand was unaffected, back in the mid-R18.80s heading into Friday.

Before we continue, let's take a look at some of the other notable stories of the week:

• In August, the annual inflation rate in the Eurozone stood at 5.2%. Official data from Eurostat revealed a decrease from 5.3% in July this year and a significant drop from 9.1% in August 2022. Similarly, the European Union reported an inflation rate of 5.9%, down from 6.1% in July this year and a substantial decline from 10.1% in August 2022.
• In the United Kingdom, there was a 6.7% increase in prices in the year leading up to August, as reported by the Office for National Statistics. This marked a slight decrease from the 6.8% seen in the year ending in July and a significant drop from the peak of 11.1% recorded in October 2022. Although this inflation rate remains well above the Bank of England's 2% target, the Bank of England opted to keep interest rates steady, breaking a streak of 14 consecutive rate hikes. This decision was not unanimous, as five out of the nine members of the committee voted for the pause.
• In the ongoing Ukraine-Russia feud, there is a new player as one of Ukraine's allies has had enough - Poland announcing that they will no longer supply Kyiv with weapons. This seems to be closely interlinked with the current agricultural export issues with Ukraine's grain, as well as the upcoming Polish elections, where the ruling party is looking to secure votes from the farmers.

On Friday, the Rand found support mainly due to a weaker dollar, dropping from R18.90/$ at the start of the day to the mid-R18.70s by the afternoon and held on as we headed into the weekend.

Two green arrows in a row!

The Week Ahead (25-29 September 2023)

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

• SAPPI YoY (Aug), Balance of Trade (Aug)
• EU/UK GDP Growth Rate YoY Final (Q2)
• US CB Consumer Confidence (Sep), PCE Price Index YoY (Aug)

Next week is a shorter one locally as Saffers celebrate Heritage Day but there’s still plenty of events later in the week to keep us engaged.

If you followed our predictions last week, well done, as our forecasting models were right on the money (yet again).

Simply click the link below to receive full access to all our predictions or drop us a message if you have any questions.

See you soon!

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To your success~

James Paynter

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