News in South Africa 14th February:
1. Rand crashes through R18/$:
The rand is trading on the wrong side of R18/$ for the first time in more than three months, as expectations grow that US interest rates may still climb much higher.
On Monday morning, the local currency declined to R18.06/$, after trading around R17.50 just a week ago. It started the year below R16.70.
Strong US employment data, released last week, fuelled fears that the US Fed may move to cool inflation with even higher rates.
AFP reported that the employment reading led a number of Federal Reserve officials to insist that there was still plenty of work to do before they were happy they had prices under control.
“These comments were particularly noteworthy given that they explicitly pushed back against the narrative of rate cuts by year end, which markets had started to assume would be coming fairly soon,” said Michael Hewson at CMC Markets.
Markets are now nervously awaiting the US inflation data for January, which will be released on Tuesday.
“An upside surprise can move through risk assets like a wrecking ball after a slowdown in recent inflation readings has sparked a fresh bout of optimism among investors for a potential ‘soft landing’,” SPI Asset Management’s Stephen Innes said.
Some economists are now predicting that rates could move to six percent from the current 4.50% to 4.75%, AFP reported.
2. Reserve Bank warns against changes:
Economists from the Bureau for Economic Research (BER) have laid out three scenarios for the South African Reserve Bank should its independence continue to come under attack from politicians.
The SARB has come into the crosshairs of political figures over the last few years, with senior figures in the ruling African National Congress (ANC) suggesting that changes to the central bank’s mandate are under consideration.
The party wants the central bank’s mandate to be changed to include employment targets. The Reserve Bank has hit back at this proposal time and time again, saying that employment is a feature of economic growth, which is a structural issue that sits with the national government.
Changes to the SARB’s mandate have been brought up by senior ANC politicians, along with repeated talk of nationalising the central bank. Each time it is raised, markets react negatively, forcing National Treasury and, more often than not, the presidency to come out and do damage control.
According to the BER, there is a mainstream consensus that inflation targeting is the ideal mandate for a central bank. Introducing things like a “dual mandate” is a red herring, it said because a sustainable, low-inflation environment already builds in a sustainable employment environment. Price stability is always the priority.
Whether or not the ANC is serious about changing the Reserve Bank’s mandate, or simply using it as a tool for internal politicking, however, the BER said the “thinly veiled attacks” on the central bank carry significant risks.
The economists outline three main risk scenarios that could follow:
Scenario 1 – No mandate change, but attacks continue
In this scenario, while no mandate change ever happens, persistent attacks on the SARB potentially unnerve investors, requiring a more hawkish policy stance from the central bank in order to shore up its independence from political influence and the credibility of its commitment to price stability.
Scenario 2 -Mandate change with little effect
In this scenario, the central bank’s mandate is changed. This then requires the SARB to explain how the change affects its monetary policy framework and public communication in order to comply with an amended Constitution.
“Under the most benign approach, the SARB would reassert its independence and argue – as the US Fed does – that a sustainable level of employment is also a non-inflationary level of employment,” the BER said.
Even if such a change in the wording of the SARB’s mandate does not materially affect the implementation of monetary policy in the long run, it may require a period of tighter policy to reinforce the central bank’s independence and credibility.
“In our view, the current leadership of the SARB would pursue this approach. However, it does then render future government appointments to the Monetary Policy Committee (MPC) even more critical, as interpretations of the revised mandate would be heavily scrutinised by market participants,” the BER said.
Scenario 3 – The nightmare scenario
In this scenario, the SARB’s mandate is changed after a series of “pro-growth” appointments to the leadership of the bank and its Monetary Policy Committee.
According to the BER, this would amount to a dismantling of the SARB’s hard-won credibility and independence, which could seriously undermine price and general macroeconomic stability.
“Unlikely as this scenario is at this point in time, it could conceivably form part of a broader political realignment in South Africa, particularly through coalition arrangements between a declining ANC and radical political parties currently in opposition,” it said.
The BER said that none of these scenarios even need to be considered if the President, the minister of finance and other key cabinet members and senior ANC figures act decisively to shut down the proposal to change the bank’s mandate.
3. Asset manager launches solar fund:
South Africa’s ongoing energy crisis has weakened the South African rand and forced the declaration of a state of disaster. An alternative asset manager is touting a new fund that it says will help alleviate that crisis and make investors a healthy return.
Grovest’s Twelve B Green Energy Fund will ultimately seek to deploy as much as R1 billion annually, Chief Executive Officer Jeff Miller said in an interview, while noting its current pipeline is about a tenth of that.
It will use the funds to invest in solar panels, inverters, and batteries in residential complexes, commercial buildings, and industrial buildings.
The fund will also allow investors to benefit from a tax deduction — as high as 100% — for having qualifying assets used for electricity generation from renewable sources, as stipulated under Section 12B of the Income Tax Act.
“There’s an energy crisis and there’s a tax benefit and there’s attractive cash return after fees and taxes,” Miller said, predicting an investor return of as much as 15% net of taxes and fees.
“We are very bullish on it and because it is a moderate-risk fund we are very comfortable that we will be able to deliver returns to investors.”
The venture comes as the country suffers through its 13th consecutive month of power cuts, which the South African Reserve Bank estimates are costing the economy as much as R899 million per day.
4. Retail pricing battle nears:
If it has not arrived yet, a fierce pricing battle brought on by South Africa’s unending electricity supply crisis is brewing among grocery retailers.
South Africa’s largest retailers are spending millions daily to keep their stores running. They face mounting pressure to recover the additional, and at times unexpected, costs related to growing diesel bills and the ramping up of energy equipment – all of which is escalating the cost of doing business.
In its latest trading update, retailer Pick n Pay lamented confronting a “permanent new reality” and said it spent nearly R350 million in the 10 months to 25 December 2022 on diesel, to keep its stores operational during load shedding.
Similarly, its closest rival and Africa’s largest retailer Shoprite, said it had to cough up an additional R560 million for diesel to operate generators across its South African stores for the six months ended 1 January 2023.
“The costs will be passed on to the consumer … probably not initially, it’s a slow process. But you [can] bet your bottom dollar … they [retailers] will quietly and slowly raise their margins so that within a year from today, it will be embedded in extra margin and higher prices,” Vianello tells Moneyweb.
Retailers have already reacted to the pressures, with Pick n Pay reporting 10% internal inflation, while Shoprite said its price inflation measures 9.4%. Upmarket retailer Woolworths in its trading statement for the 26 weeks ended 25 December 2022, said it has passed on a 6.8% increase in selling prices to its shoppers.
While all retailers are under pressure to pass on additional costs to consumers, they will not be able to do so fully, as they are already operating in an environment with sticky inflation, says Casparus Treurnicht, research analyst and portfolio manager at Gryphon Asset Management.
“The consumer at the end of the day is going to basically pick up the tab for this … and the consumer can’t.
“[If] there was no inflation, and not to the extent we’ve seen, then they [the retailers] would have been in a better position to pass those costs on. At this point in time, consumer disposable incomes are under a lot of pressure, predominantly because of inflationary pressures,” says Treurnicht.
5. Sugar growers fighting reform:
The South African Sugar Association (SASA) plans to diversify into alternative new revenue streams such as aviation fuel and food additives to reduce its focus on the traditional refined sugar it says is under threat from taxes.
The industry has asked the minister of finance to give it time to diversify before imposing changes to the health promotion levy (HPL), known as the “sugar tax”.
SASA warned 6,000 jobs could be lost and the survival of 3,000 small-scale farmers threatened because of a drop in demand for sugar.
The minister will table his budget in parliament next week.
SASA executive director Trix Trikam said on Monday the industry needs three to five years to research and pursue product diversification.
“We are asking the government to hang on to HPL, give us time to come up with new products.”
A postponement of changes to the HPL would be the “fairest way of achieving a just transition of the sector into new activities and industries such as bioethanol and biogas, sustainable aviation fuel”.
Trikam said diversification had socioeconomic benefits for communities in sugar areas in KwaZulu-Natal through job creation and opening markets for new black entrants through manufacturing of new products.
Sugar content above 4g per 100ml is taxed. The sugar tax is 2.21c/g.
The sugar industry’s annual turnover is more than R18bn, with R10bn coming from the sugar cane value chain and about R8bn from the milling sector.
According to SASA, over the past 20 years annual sugar production has declined by nearly 25%, from 2.75-million to 2.1-million tonnes a year. The number of sugar cane farmers has declined by 60% during this period and industry-related jobs are estimated to have dropped by 45%.
The introduction of the HPL in April 2018 worsened the situation, with the industry losing revenue of about R1.2bn per season.
The industry provides 65,000 direct and 27,.000 indirect jobs. There are more than 20,203 small-scale farmers and 1,309 commercial growers.
All information sourced from articles posted by: Fin24, BusinessTech, DailyInvestor, Moneyweb, and TimesLive.
