Incorporating Currency Compass, a monthly analysis of the real and nominal value of the rand
February proved to be a welcome improvement from the slow start to the new year, which was hampered by a return to stricter lockdown regulations. The ban on liquor sales and the closure of beaches came at the worst time for holidaymakers and a tourism industry that remains in the doldrums.
Fortunately, most of these restrictions were lifted on February 1, mainly due to a steady decline in the number of new Covid-19 infections and evidence of adequate capacity for trauma cases in most hospitals. from the country. It is therefore not surprising that Pres. Ramaphosa announced a return to Alert Level 1 on February 28. This means that most of the remaining restrictions on economic activity have been removed.
By the end of February, the 7-day average of new Covid-19 cases had fallen by more than 75% from the previous month to its lowest level since the 2
October last year. After some hiccups with the coronavirus vaccination process, we started vaccinating health care workers. South Africa has one of the highest coronavirus recovery rates in the world at almost 95%. February was also South Africa’s national budget month, with Finance Minister Tito Mboweni in a much more jovial mood than four months earlier when the country was still reeling from the worst quarterly decline in output. economics of modern history. A faster and more pronounced recovery in most key economic sectors in the second half of 2020 predictably swelled the coffers of SA Revenue Services to such an extent that the National Treasury suddenly had much more leeway with finance. including the bold step of lowering the Corporate Tax Rate. With the wealth tax rumor now shelved and growing hope that a third wave of Covid-19 infections can be averted, the economy should be able to kick into high gear or two within months. coming.
Higher income eases fiscal pressure
Compared to last year’s mini-budget, the 2021/22 budget came with great relief and clear signs that the budgetary pressures caused by the Covid-19 pandemic will ease in the medium term. To a large extent, the overly conservative revenue estimates presented last year in the country’s annual October State of Fiscal Affairs update were based on dismal Q2 GDP figures. Fortunately, however, a rapid and pronounced economic recovery occurred during the 3rd quarter of 2020, which included a trade balance that was rapidly preparing for what turned out to be the largest surplus in history. Higher economic growth has translated into a huge windfall of revenue, meaning the National Treasury’s lending needs have been reduced by almost R100 billion – clearly the most important feature of the February budget and which was initially well received by the capital markets.
Nevertheless, concerns about the extent of the country’s public debt persist. Although the latter is now over 90% of GDP, the National Treasury has presented a viable plan to stabilize the debt and start reducing it over the next three years.
One reason for the prospect of a more stable fiscal position is the ongoing restructuring of state-owned enterprises (SoEs), with fiscal support from
The National Treasury is expected to virtually disappear by 2024.
Here are some other budget highlights:
• The government’s intentions to contain the public sector wage bill have been clarified, with a reduction of more than R144 billion over the period of the medium-term expenditure framework (MTEF)
• Personal income tax relief was provided to low-income earners, albeit marginal, and the corporate tax rate was lowered from 28% to 27%
• A sharp shift in focus towards economic development spending, with the latter registering the second highest non-interest percentage increase from the 2021 budget
An exceptional holiday season for retail sales
Despite the reintroduction of stricter lockdown regulations at the end of December, the retail sector ended the year on a high note, with sales of R124 billion. Although this represents an all-time high in nominal terms, it was slightly lower than the comparable 2019 figure in real terms.
The scale of the pandemic-induced crisis is well illustrated by the halving of retail sales from March to April 2020. The recovery, however, was fast and furious, with retail sales in December being 170% higher to those of April. Even Moody’s analysts, renowned for their pessimistic views on South Africa, have changed their view of the country’s retail sector from negative to stable.
Examination of the latest retail sales data released by Statistics SA reveals a profound shift in consumer preferences between the 3rd and 4th quarters of 2020, the categories of food and specialty beverages and clothing and textile outperforming other retailers by a considerable margin.
Inflation at multi-year low
In 2020, inflation, as measured by the consumer price index (CPI), fell to its lowest level in 14 years, at 3.3%. CPI low and stable trend
continued into the new year, with the January CPI registering a level of 3.2%.
In January, food prices rose at a faster rate than the headline inflation rate, consistent with the continued rise in global commodity prices. Education and insurance were the only two other consumer spending groups that recorded higher rates of increase than the CPI.
Low inflation has improved the outlook for a credit-led impulse for the ongoing economic recovery in 2021. With aggregate demand in the economy still below normal, the CPI is expected to remain near the bottom of the target range Reserve Bank inflation rate. 3% to 6%.
Huge new investment from Ford
Ford Motor Company has announced its largest-ever investment in South Africa, expanding its manufacturing operations to Silverton (Pretoria),
as well as a new chassis line in Tshwane Automotive’s Special Economic Zone (SEZ), valued at R15.8 billion.
The announcement was made at a press conference attended by Pres. Cyril Ramaphosa and the Minister for Trade, Industry and Competition, Ebrahim Patel.
The recent creation of this SEZ played a key role in Ford’s decision to embark on such an ambitious investment.
One of the intentions of the upgrade is to expand production of Ford Ranger pickup trucks (widely referred to as bakkies) from 168,000 units per year to 200,000 units. Ford South Africa is one of four global locations producing the Ranger and the company intends to export them to more than 100 countries in Europe, the rest of Africa and Mexico. In addition to the 1,200 new jobs that will be created at Ford SA, approximately 10,000 new job opportunities will be created within the supplier network.
Note on the real value of the rand: The real effective exchange rate (REER) of the rand is based on the average trade-weighted exchange rate against the country’s top 20 trading partners, adjusted for inflation differentials. It is calculated as an index, with 2010 equal to 100. Coincidentally, the REER was also valued at 100 at the start date of the period under review (1987).
During the month of February, capital market news was dominated by the sharp rise in the US 10-year bond yield. Towards the end of the month, the yield had risen to 1.54%, but fell 8 basis points to end the month at 1.46%.
While this yield still pales in comparison to some of the long-term yields offered by emerging markets, it still represents an increase over the yield at the end of the year.
December by nearly 60%.
A consensus exists among currency analysts on the support that rising US Treasury yields have provided for the US currency. It remains to be seen, however, whether the latest uptrend in the dollar will be sustainable, due to uncertainty over the impact of US pressure. Joe Biden’s new economic stimulus package and the potential positive impact on emerging market currencies from the resumption of the commodity price cycle.
On February 27, the United States House of Representatives approved $1.9 trillion in tax relief for unemployed Americans and people struggling to cope.
the effects of the pandemic.
According to Jeffrey Halley, senior market analyst at Oanda, a further recovery in private consumer spending in the United States could see the strength of the American dollar accelerate more broadly, but the greenback retreated somewhat after the announcement of the provisional approval of the recovery plan. Most Asian currencies remain resolute, thanks in part to China’s policy of keeping the yuan firm.
The rand performed quite well against the US dollar in February and gained almost 5% through the middle of the month. However, most of that gain was wiped out in the last week of February, a spell that also hit most other emerging market currencies.
Much of the market analysis on the probable future trend of the rand is currently centered on a level between R14.50 and R15.00 per US dollar. With South Africa’s 2021/2022 budget well received by capital markets and the further easing of lockdown regulations from March 1, the rand may soon reach a stronger resistance level.
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