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Lisette IJssel de Schepper
The theme of the week was still Donald Trump’s pending return to the White House. Speculation about what his policies could mean for the (global) economy and inflation and what this, in turn, would imply for interest rates and exchange rates kept markets busy. The dollar stayed strong, with the rand feeling the pressure and weakening past R18/$. With growing concerns about the health of the Eurozone economy, calls for the dollar to reach parity with the euro also returned. Local data releases were mixed, with reasonably strong labour data for Q3 despite high-frequency data (including this week’s manufacturing production for September) suggesting that economic activity remained weak during the quarter. While manufacturing was weaker than expected, mining production recorded another significant monthly gain to end the quarter 1% up from Q2.
During the week, Trump made several announcements for key cabinet positions. Unpacking each decision falls outside the scope of the Weekly (and my expertise), but it seems to be MAGA-strong. Elon Musk will play an important role in the newly established Department of Government Efficiency (DOGE) – although some political analysts wonder how long the ‘bromance’ between Trump and Musk will last. Trump and his team will have significant power to make changes as his party also won the majority in the House of Representatives, completing the ‘Republican Trifecta’.
The concern that Trump’s policies could be inflationary drove US Treasury yields higher once more. Positive for global inflation dynamics was that Brent crude lost almost 4% w-o-w, with Trump’s plans to ramp up US oil production possibly contributing to lower prices over time. While US stock markets rallied last week, higher yields contributed to US equities pulling back this week. European stock markets also struggled this week. After the effective collapse of the German coalition government last week, it was confirmed that elections should take place in late February. All this weighed on the euro and helped lift the dollar, with the dollar index (against a basket of currencies) climbing to a six-month high and the greenback reaching a one-year high against the euro.
The rand, which tends to be volatile in its reaction to global market dynamics, depreciated by over 5% against the US dollar relative to last Thursday. The rand also lost ground against the euro and pound. It remains to be seen where the rand will settle and whether the recent strengthening trend will return. Positive for SA was that the government marketed its first Eurobonds following the May elections, offering 12- and 30-year dollar securities. The first SA dollar bond sale since 2022 attracted strong demand and was 2.5 times oversubscribed. Indeed, the ‘normal’ SA 10-year government bond yield bucked the global trend and edged down last week.
Later today, S&P Global Ratings is scheduled to provide an update on SA’s sovereign credit rating. The rating agency is unlikely to upwardly adjust its assessment, but it may change its stable outlook to positive. While some puzzle pieces are falling into place for SA’s growth prospects that may contribute to upward revisions in the next couple of years, there still are some heavy pieces that need swift and determined action to be moved into place before such a scenario can play out.
The RMB/BER Business Confidence Index (BCI), which will be out on Wednesday, will be closely watched. The BCI is the only true business sentiment measure in SA. It will provide an essential update on how sentiment developed through Q4, with no load-shedding and local political stability likely to be positive.
On Wednesday, we will also see the October consumer price inflation (CPI) print from Stats SA. We foresee a further slowdown, with the annual increase in headline CPI expected to move close to 3% in October from 3.8% in September. This is largely on the back of a double-digit decline in the petrol price component of CPI. Even for November (when we saw an increase in the fuel price at the start of the month), petrol is expected to be a significant drag as prices were so much higher this time last year. This is why we see a sub-4% CPI for the remainder of the year. Core CPI, which excludes fuel and food, should remain steady at around 4.1% y-o-y in October. Stats SA will also publish September internal trade data next week.
The SA Reserve Bank (SARB) should welcome the slowdown in CPI during its monetary policy meeting on Thursday, but it will not be the reason for the forward-looking central bank to reduce the repo rate. However, the expectation that CPI should settle around 4.5% over the medium term should prompt another 25bps cut in the policy rate. While there is still lots of uncertainty around the actual impact on the (global) economy of a Trump presidency, the concern that his policies could be inflationary and/or lead to a sustained stronger dollar (i.e. weaker rand) means that a 50bps cut is unlikely. That said, it is also unlikely to sway the SARB from cutting at all. Over time, a more hawkish Fed may leave global interest rates (incl. SA’s) higher than expected a month or two ago, but for now, there is sufficient reason for the SARB to cut next week.
On the international front, Fridays’ flash November PMI figures are probably the most keenly awaited data releases.
It was a busy week for SA structural reform progress, with five developments standing out: (1) a new tariff proposal from Eskom; (2) the temporary resolution of a stand-off between the City of Johannesburg and Eskom; (3) an update from the IPP office on the progress of bid windows; (4) the release by National Treasury of an updated carbon tax discussion document; and (5) mixed progress on logistics reform.
Eskom has made a proposal to NERSA for a new tariff regime. The impact tool for large customers is here and for small customers, it is here. That said, none of Eskom’s previous tariff submissions have been approved (with the exception of the Homeflex tariff for grid connection and energy export for solar PV), so it is unclear if the proposals will become the new approach.
From a reform perspective, the most important proposal is to charge different prices for each point of supply—this will help achieve better transmission tariffs, which will, in turn, support independent transmission providers.
The unbundled tariffs will enable Eskom to recover NERSA-approved costs and returns by aligning prices and tariff rates with the actual costs incurred. According to NERSA, the application is a crucial step towards fully unbundled tariffs, which will have separate charges for electricity capacity usage and network services.
Eskom’s proposals include:
In June 2024, the Johannesburg High Court ordered the City of Johannesburg (CoJ) and its utility, City Power, to pay Eskom R1.073 billion for unpaid electricity bills. The CoJ appealed this decision, arguing that Eskom owed it R3.4 billion due to alleged overbilling.
Last week, Eskom threatened to reduce the load to the CoJ until payment was received. While the appeal was pending, both parties engaged in discussions to address their financial disputes. These talks led to a temporary resolution, allowing the CoJ to continue receiving electricity from Eskom without immediate payment of the disputed amount. This arrangement aimed to ensure uninterrupted power supply to Johannesburg residents while the legal process continued.
On Wednesday 13 November, the IPP office and the Department of Mineral Resources and Energy presented an update on the progress of bid windows. A replay is available here and the session detail are here. The office highlighted that 141 bidders, totalling an amount of 13.4GW of preferred bidders, had been finalised. According to the office, the total new energy online is on track for 8.3GW. Geographically, there are a large number of projects in the Northern Cape (56), but the grid remains the constraint.
The 5 000MW Bid Submission for REIPPPP BW7 was concluded on 15 August 2024 and is currently under evaluation. The preferred Bidder will be announced by mid-November.
The IPP office noted that there is currently no grid capacity in the Cape regions, and grid constraints continue to limit project development in these regions, where most shovel-ready projects are located. About 14 000 km of transmission is required.
There was very little guidance on whether the IPP office would also assume responsibility for independent transmission operators.
National Treasury (NT) released an update on the carbon tax paper. Key updates include:
There was mixed news on logistics reforms. Iron ore and coal volumes rose 4%, on the back of a rise of coal volumes of 6% (cumulatively by week 44, relative to last year). However, Transnet National Ports Authority requested the Ports Regulator of SA to raise average tariffs by 7.9% during the 2025/26 financial year. It wants tariffs hiked by 18.61% in 2026/27 and 2.52% in 2027/28. Transnet has also revised its throughput to the TNPA. It previously projected that its ports would handle 4.9 million TEUs in 2024/25, which has now been downgraded to 4.4 million TEUs and indicated that capacity will probably remain static at around 4.8 million TEUs until 2028/29. This suggests that it is internally working on no significant capacity increase for the next five years.
Tshidiso Mofokeng
Following three consecutive quarters of upticks, the official unemployment rate receded by 1.4%pts to 32.1% in Q3, according to Stats SA. Meanwhile, the expanded unemployment rate (which includes discouraged job seekers) fell by 0.7%pts to 41.9% in Q3. Job growth was surprisingly strong and driven by gains in community and social services, construction as well as trade. In contrast, the finance industry shed jobs. The latest jobs recovery is encouraging and could reflect some first green shoots of the modestly improving economic environment. Although, to be clear, stronger real economic growth is required on a sustained basis to make a dent in SA’s unemployment problem.
Source: Stats SA
In other local news, annual manufacturing production declined by 0.8% in September, similar to August. The motor vehicles, parts and accessories category (down 18.7% y-o-y, shaving off 1.7%pts) weighed the most on manufacturing production. Meanwhile, petrol, chemical products, rubber and plastic products (+3.1%, contributing 0.6%pts) recorded the largest gains. Seasonally adjusted (sa) manufacturing production was flat in September following a 0.7% m-o-m decrease previously. The manufacturing industry continues to face challenges such as high production costs coupled with weak domestic and global demand. Nonetheless, the high-frequency data suggests that manufacturing will eke out modest growth once the Q3 GDP figures are published.
Finally, annual mining production rose sharply by 4.7% in September, following a 0.3% gain in August. The largest contributors were PGMs (up 6.7%, adding 2.1%pts) as well as iron ore (13.5%, 1.3%pts). Contrastingly, coal and gold were the only categories which dragged on production. On a monthly basis (sa), mining production grew by a solid 3.8% in September after a 3.3% rise previously. Owing to a strong bounce in mining production for September, this means that the mining industry should contribute positively to quarterly GDP growth in Q3.
Momvelo Moima
The latest US consumer inflation print revealed a slowing in disinflation progress in October. Aligning with market expectations, headline inflation accelerated to 2.6%. y-o-y, up from 2.4% y-o-y in September. This marks the first inflation increase in seven months, despite a further decline in gasoline costs and a more benign increase in food prices. Excluding food and energy prices, core inflation remained at 3.3% y-o-y in October. Worryingly, this marked the third straight monthly reading of a 0.3% rise in core CPI, primarily driven by sticky shelter inflation. At the same time, producer price inflation (PPI) rose by 2.4% y-o-y in October, up from a 1.9% rise in the prior month. On a monthly basis, PPI increased by 0.2% in October, reflecting a rise in the price of services (+0.3% m-o-m).
Indeed, markets have priced in an 80% probability of the US Fed cutting by another 25bps at their next meeting in December. However, a lack of additional disinflation over the past few months (particularly in consumer prices) suggests that the US Fed could proceed with easing monetary policy at a slower pace in the near term.
The ZEW indicator of economic sentiment for Germany fell from 13.1 in October to 7.4 in November, performing worse than markets had expected. Additionally, the current conditions index also deteriorated, declining by 4.5 points to -91.4 points. Uncertainties around tariffs given Donald Trump’s election victory and the collapse of the German government coalition weighed on overall sentiment in the month.
Hanjo Odendaal
We recently launched the beta version of the BER Data Playground. To showcase the data freely available on the Playground, we will regularly publish a chart in the Weekly. Today we focus on the data from the Association for Savings and Investment South Africa (ASISA).
With a rate cut widely anticipated for the SARB MPC meeting in September, Equity and Multi-Asset funds increased their financial sector exposure by 14.9% and 13.8%, respectively. This sectoral exposure has risen steadily since Q1 2024, as among other drivers, these funds likely anticipated the onset of a rate-cutting cycle by the middle of 2024. Financial sector holdings now represent 30.7% of total domestic equity in Equity funds and 25.1% in Multi-Asset funds, amounting to a combined R280 billion by 2024Q3. The stacked holdings chart above illustrates these movements from 2014 to the present.
Editor: Lisette IJssel de Schepper
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 15 Nov 2024
