South Africa’s central bank says rising fuel and electricity prices posed a domestic risk to the inflation outlook and impact on its 2019 growth.

The apex bank governor, Lesetja Kganyago, gave the remarks on Wednesday after the latest fourth-quarter data showed an annualised growth of 0.8 per cent.

Besides, Kganyago said the impact of the volatile Rand currency and tightening global financial conditions were also being monitored for possible inflationary impacts.

The governor, however, maintained that he expected the economy to grow by 1.7 per cent this year and two per cent in 2020.

The South African government is forecast to be hit by a tax revenue shortfall of almost R43 billion for the tax year ending next month, Finance Minister Tito Mboweni indicated in his budget speech on Wednesday.
 
There were pronounced risks to the local economic outlook with the main risk of concern being power utility Eskom and its financial woes, the 2019 budget review report indicated.
 
The report indicated that government tax revenue for the 2019 fiscal year would come in at R43 billion under the target set at the 2018 budget speech.
 
“There are pronounced risks to the economic outlook. The main risk of concern is Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outlflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth,” the report said.
 
In the worst case scenario, National Treasury is forecasting negative 1% growth this year while its best-case scenario is just over 2% growth.
 
Mboweni cut the National Treasury’s forecast for economic growth for this year from 1.7% to 1.5% due to “fragile recovery in employment and investment, and a less supportive global trade environment”.
 
By 2021, the National Treasury’s best-case scenario is growth of 3% and its worst-case scenario is 1%.
 
“The economic and revenue outlook has deteriorated since the October 2018 medium-term budgetary policy statement and funding pressures from state-owned companies have increased,” the medium-term budgetary policy statement said.
 
“Several other state-owned companies are also in financial distress and have requested government support. As a result, the contingency reserve has been revised up by R6 billion in 2019/20 and any funding provided will be offset by the sale of non-core assets. Additional reforms to strengthen the governance, finances and operations of state-owned companies will be announced in the months ahead,” the 2019 budget review report said.
 
State companies that are looking for bailouts include the South African Broadcasting Corporation (SABC) and Denel.
 
“Several state-owned companies face negative cash flows and are financing operations from debt, which has become increasingly difficult to raise. This moves them perilously close to default unless they receive some form of recapitalisation.”
 
In another worrying sign, debt owed to municipalities is increasing. At the end of March, debt owed to municipalities is forecast to climb to almost R159 billion from almost R99 billion at the end of March 2015.
 
Of debts owed by municipalities that are more than 90 days in arrears, Eskom is the major creditor – it is owed R12.8 billion – followed by water boards with R6.4 billion.
 
“From July 2018 to June 2019 municipal financial year, 113 municipal councils adopted unfunded budgets, up from 83 the prior year.”
 
The government is expecting to issue $2 billion (about R28 billion) in debt by the end of the 2019 fiscal year.
 
Over the next three years, the government will raise an additional $8 billion (about R114 billion) in global capital markets.
 
“This year’s budget underlines the National Treasury’s continued commitment to these requirements in a difficult environment in which economic growth remains weak, public debt and debt-service costs have accelerated and governance and operational concerns are manifest across the public sector,” the review report said.
 
“Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls,” the report said.
 
“The deteriorating financial position of state-owned companies has put additional pressure on the public finances,” the report added.
 
“The government’s efforts to reform state-owned companies and the launch of the infrastructure fund are expected to increase growth and investment in the year ahead,” the 2019 budget review report said.
 
For the 2020 fiscal year, consolidated government expenditure is forecast to R1.83 trillion.

The South African government is forecast to be hit by a tax revenue shortfall of almost R43 billion for the tax year ending next month, Finance Minister Tito Mboweni indicated in his budget speech on Wednesday.

There were pronounced risks to the local economic outlook with the main risk of concern being power utility Eskom and its financial woes, the 2019 budget review report indicated.

The report indicated that government tax revenue for the 2019 fiscal year would come in at R43 billion under the target set at the 2018 budget speech.

“There are pronounced risks to the economic outlook. The main risk of concern is Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outlflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth,” the report said.

 
 

In the worst case scenario, National Treasury is forecasting negative 1% growth this year while its best-case scenario is just over 2% growth.

Mboweni cut the National Treasury’s forecast for economic growth for this year from 1.7% to 1.5% due to “fragile recovery in employment and investment, and a less supportive global trade environment”.

By 2021, the National Treasury’s best-case scenario is growth of 3% and its worst-case scenario is 1%.

“The economic and revenue outlook has deteriorated since the October 2018 medium-term budgetary policy statement and funding pressures from state-owned companies have increased,” the medium-term budgetary policy statement said.

“Several other state-owned companies are also in financial distress and have requested government support. As a result, the contingency reserve has been revised up by R6 billion in 2019/20 and any funding provided will be offset by the sale of non-core assets. Additional reforms to strengthen the governance, finances and operations of state-owned companies will be announced in the months ahead,” the 2019 budget review report said.

State companies that are looking for bailouts include the South African Broadcasting Corporation (SABC) and Denel.

“Several state-owned companies face negative cash flows and are financing operations from debt, which has become increasingly difficult to raise. This moves them perilously close to default unless they receive some form of recapitalisation.”

In another worrying sign, debt owed to municipalities is increasing. At the end of March, debt owed to municipalities is forecast to climb to almost R159 billion from almost R99 billion at the end of March 2015.

Of debts owed by municipalities that are more than 90 days in arrears, Eskom is the major creditor – it is owed R12.8 billion – followed by water boards with R6.4 billion.

“From July 2018 to June 2019 municipal financial year, 113 municipal councils adopted unfunded budgets, up from 83 the prior year.”

The government is expecting to issue $2 billion (about R28 billion) in debt by the end of the 2019 fiscal year.

Over the next three years, the government will raise an additional $8 billion (about R114 billion) in global capital markets.

“This year’s budget underlines the National Treasury’s continued commitment to these requirements in a difficult environment in which economic growth remains weak, public debt and debt-service costs have accelerated and governance and operational concerns are manifest across the public sector,” the review report said.

“Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls,” the report said.

“The deteriorating financial position of state-owned companies has put additional pressure on the public finances,” the report added.

“The government’s efforts to reform state-owned companies and the launch of the infrastructure fund are expected to increase growth and investment in the year ahead,” the 2019 budget review report said.

For the 2020 fiscal year, consolidated government expenditure is forecast to R1.83 trillion.

In truth, the currency started from a very low base: the Nenegate crisis in 2015.
Its performance this year has not been stellar, but most experts expect it to remain below R15/$ in 2019.
Over the past three years, the rand has been the world's strongest major currency against the dollar.
 
The rand has strengthened by almost 6.3% against the dollar since mid-December 2015, according to data compiled by the independent analyst Johann Biermann. By comparison, the Mexican peso weakened by more than 16% and the Turkish lira lost an almighty 79% of its value. The UK pound fell almost 20% over the past three years as Brexit fears wreaked havoc.
 
Only the Russian rouble, which gained by 6% over this time,  the euro (+3%) and the yen (+6.2%) could keep up with the rand.
 
It is of course worth noting that three years ago the rand was in a very bad state amid the Nenegate crisis.
 
On December 9th 2015, former president Jacob Zuma fired then finance minister Nhlanhla Nene, replacing him with back-bencher Des van Rooyen. 
 
"After all is said and done, the rand has been one of the strongest currencies over the last three years - obviously benefiting from the low base created by Nenegate," Biermann said this week. "Still, not many would've predicted that the rand would outperform these majors in years to come."
 
Unfortunately, 2018 has been tough on the local currency: the rand has lost a painful 14.5% of its value against the dollar - on par with the rouble (-15%) and the Brazilian real (-17%). Even traditionally stable currencies - including the Australian dollar (-8%) and the euro (-6%) - took a hit.
 
The rand/dollar rate over the past five years. (So
The dollar/rand rate over the past five years. (Source: XE)
But most currency experts are not expecting the rand to take a massive hit in 2019.
 
The currency is expected to end 2019 between R12 to R15 a dollar, according to almost 70% of the 160 South African-based bankers, CEOs, CFOs, corporate treasurers as well as foreign exchange and hedge fund executives polled at the Bloomberg Foreign Exchange Summit last week. 
 
The rand will probably trade near R13.40 to the dollar by the end of next year, Standard Bank economist Elna Moolman said, according to a press report.
 
"The expectation is partly based on a dollar story, but also on the assumption that we will see political and policy improvements to support a stronger currency."  
 
Moolman said the next big local events that could influence the rand are the Budget in February, the response from Moody’s (the only agency that has not yet rated South Africa as "junk") and then the natonal elections, expected in May 2019.
 
If the US economy weakens and/or the equity markets fall apart, which means that the Fed won’t hike interest rates by as much as expected, the rand may benefit, according to Biermann.
 
“Also, sentiment towards emerging markets has been very negative in 2018. If it starts to turn, the rand will get a boost."
 
But there are risks – chief among them, Eskom’s R100 billion debt burden.
 
“If government took over the debt, our credit rating will be further downgraded – which will be negative for the rand.”
 
Ratings agencies have also been clear that further slippage in terms of property rights could prompt downgrades, Biermann said. 
 
 
Source: Bloomberg news 
JOHANNESBURG - The rand rose for a fourth straight session on Friday to end the week nearly 3% firmer, benefiting from political chaos in Britain and a revival of risk appetite linked to a thawing of United States (US)-Sino trade tensions.
 
Stocks ended slightly lower, with British American Tobacco taking the most off the benchmark index after the United States announced sweeping restrictions on flavoured tobacco products.
 
At 1530 GMT, the rand was 1.09% firmer at 14.0300.
 
Most of the gains were posted after the dollar wobbled as two Federal Reserve officials cautioned in separate television interviews about slowing global economic growth, raising doubts about the number of future US rate increases.
 
The rally followed Thursday’s strong gains, particularly against the pound, as Prime Minister Theresa May battled to salvage a draft Brexit deal.
 
Growing bets that the South African Reserve Bank (Sarb) may raise rates at its policy meeting on Thursday supported the already attractive carry yield offered by the rand.
 
It outpaced most other emerging currencies against the dollar on the day.
 
In a Reuters poll taken this week, 16 of 26 economists said the SARB would keep its repo rate at 6.50% while the rest forecast a 25 basis-point hike.
 
Bonds also rose, with the yield on the benchmark 2026 paper down 4.5 basis points at 9.115%.
 
On the bourse, the benchmark Top-40 index was down 0.17% at 45,851 and the broader All-share index lost 0.1% to 52,095.
 
BAT slumped 6% to R495.67, tracking falls in its London-listed shares. On Thursday the US Food and Drug Administration announced restrictions on flavoured tobacco products, including electronic cigarettes, in an effort to prevent a new generation of nicotine addicts.
 
Investment house Reinet Investment was also under pressure, falling 6.7% to R215.58 after the company reported a drop in net asset value, a key profitability measure for investment companies.
 
 
Source: The Routers
The rand has seen strong gains in recent days – rallying from R15.04/$ to R14.22 in a week.
 
Here are some of the main reasons for its current run:
 
1. Delay in the Moody’s announcement
There was apprehension ahead of the credit rating agency’s latest decision on South Africa’s sovereign debt rating, which was expected last Friday.
 
Moody’s is the only credit rating agency that has kept South Africa at investment rating. But the agency decided not to announce its decision, which is now only expected after the medium-term budget next week.
 
If SA lost its investment rate grade from Moody’s, it would have cost the country its place in the most important group of government bonds. The Citigroup’s World Government Bond Index contains only bonds that are investment grade. 
 
All the massive investment funds that track the index would have been forced to sell their South African government bonds. It has previously been estimated that foreigners would have to sell South African bonds worth R200 billion. This would have lowered the value of our bonds, and make it much more expensive for government to borrow money to keep the country afloat.
 
2. Donald Trump’s attacks on the Fed
The dollar has been taking strain amid the US president’s repeated attacks on his country’s central bank. Trump does not like the fact that the US Federal Reserve is hiking interest rates.
 
 "I think the Fed is making a mistake. It's so tight. I think the Fed has gone crazy," Trump told reporters last week. 
 
Higher interest rates make a currency more attractive: investors in that currency earn a higher rate of return.
 
3. Weaker US inflation
A central bank will hike interest rates to protect an economy from inflation. But the latest US inflation numbers, released last week, show that September inflation is now only 2.3% - from 2.7% in August and 2.9% in July
 
 “I think the Fed will continue on its gradual interest rate hiking path. But for now there seems to be less risk of a sharper-than-expected Fed interest rate hiking cycle,” Arthur Kamp, economist at Sanlam Investments, told Business Insider SA.
 
4. The Mboweni effect
Kamp believes the biggest reason for the rand strength is the appointment of Tito Mboweni as minister of finance.
 
“In policymaking, good track records are important. Of course, Mboweni does not have a track record yet in fiscal policy, but he has a good track record in monetary policy.
 
“Inflation targeting was first implemented (successfully) during his tenure as Reserve Bank governor. From this perspective the Treasury’s support of the current inflation targeting regime and the Reserve Bank’s mandate is likely to continue.
 
“That’s important because in a time of currency volatility the central bank is the anchor for inflation expectations and the currency.
 
“If the bank does what is needed (unfortunately that sometimes implies interest rate hikes) to keep inflation expectations anchored at a low level then there is a good chance the currency will settle – over time,” Kamp said.
 
5. The rand was oversold
Sanisha Packirisamy, an economist at Momentum Investments, believes the rand was unfairly sold off over recent weeks, as the market lumped South Africa with Turkey and Argentina. South Africa is in healthier shape than these countries, she believes.
 
“SA’s current account deficit is smaller than that of Turkey (...) and it has a credible and independent central bank.
 
“Assets in Brazil and SA (and more recently in countries which have done significant amounts of structural reform, including Indonesia, India and the Philippines) have been sold given the depth and liquidity of their markets.
 
“As such, these countries acted as proxies for the countries which experienced economic mismanagement in the last while and were unfairly sold off,” says Packirisamy.
 
When markets are worried about emerging markets, the rand gets hit first because it is a very liquid currency.
 
This means that traders know they can get in and out of the rand very quickly as there are massive amounts being traded in the rand every day. In fact, the rand is the 20th most traded currency in the world – it attracts much more action than the currency of Poland, with an economy 60% bigger than the South African GDP.
 
6. More hope for emerging markets
For a long time, emerging market currencies have been shunned amid concerns about Turkey and Argentina.
 
But a new Bloomberg survey among more than twenty fund managers shows there are more professional investors who are bullish about the prospect of emerging markets, than those who are negative:
 
Forecast for the rand:
Analysts polled by Bloomberg at the end of last month, expected the rand to end the year somewhat weaker than at current levels. The median forecast for the rand versus the dollar by year-end is R14.75.
 
Paul Makube, senior agricultural economist at FNB Agri-Business, thinks that the medium-term budget statement, which will be released on 24 October, will provide some direction for the rand.
 
 
Source: Bloomberg news
The rand has been on a seesaw over the past 24 hours hitting above R15 to the US dollar.
 
Currently the rand is at High R14.60 Low R14. 57 to the greenback.
 
The rand has been under pressure for the past few weeks with ratings agencies Moody’s and Fitch citing continued political uncertainty.
 
Rising US interest rates have also had a profound effect on the rand which has plunged to levels last seen in 2016.
 
The local currency has also been volatile this week with economists concerned about the medium-term budget speech later this month.
 
All eyes will be on former Reserve Bank governor and now Finance Minister Tito Mboweni with rating agencies calling for more stability and transparency at the highest level.
 
 
Source: News24

South Africa’s economy faces major challenges and government needs to win back the confidence of businesses and investors by tackling policy uncertainty and corruption, central bank governor Lesetja Kganyago said on Thursday.

Kganyago said in a speech at an investor conference in New York that weak business confidence had shaved an estimated one percentage point off South Africa’s economic growth last year. He said that the central bank would like to see inflation expectations anchored at around 4.5 percent, compared with 5.1 percent now. The volatile rand currency is the biggest risk to inflation forecasts, Kganyago said.

“Inflation today in South Africa is within the target. The highest it should be in terms of our forecast is 5.2 percent,” he said in a subsequent interview with Reuters. “That gives us room within the inflation target band...Inflation could rise but would remain within our inflation target,” Kganyago said.

The Governor of the South African Reserve Bank deflected questions on where he thought interest rates would move, saying there is no target.

The central bank kept its benchmark repo rate at 6.75 percent on Sept. 21, defying expectations at the time of a cut based upon easing inflation pressures and a sluggish recovery from a recession in the first half of the year.

“Everybody talks about are you close to neutral or off neutral? When the world over, nobody knows what neutral is because the world as we know it is different from the world we knew before the global financial crisis. Everybody is trying to find neutral,” he said.

The central banker, in his position since 2014, said that inflation would remain in the 3 to 6 percent target zone for the next two years.

“We are currently at 4.8 percent and the outlook is that inflation will average 5 percent this year. But we still expect to reach the bottom of 4.6 percent in the first quarter of next year. Over the policy horizon of 2018 and 2019, the highest inflation will be is 5.2 percent for the year,” he said.

With inflation remaining subdued, Kganyago also highlighted the improvements in the narrowing current account deficit. He said indications are that for the third quarter it should remain, at worst in the 2 percent area.

”And at best could actual decline as low as 1 percent.

 

(REUTERS)

  1. Opinions and Analysis

Calender

« May 2019 »
Mon Tue Wed Thu Fri Sat Sun
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31