News in South Africa 19th July:

1. EU carbon levy impact:

The European Union’s plan to put a carbon levy on imported goods from outside the bloc is an attempt to shift the burden for climate action to developing countries and may contravene World Trade Organization rules, South Africa said.

EU carbon levy impact
Photo by Sascha Hormel

The so-called carbon border adjustment mechanism, which will start coming into effect in October, would risk $1.5 billion (~R27 billion) of annual exports from South Africa, which generates more than 80% of its power from coal, the country’s Department of Trade, Industry and Competition said in a submission to the European Commission.

“CBAM has the effect of transferring the burden of climate action onto developing economies and places undue and unjust burdens on our country and industries,” the department said in its submission this month.

“The high dependence on the extraction and export of raw materials for beneficiation elsewhere is a historical legacy that was imposed upon us,” it said in a reference to Europe’s colonial past.

While South Africa is pushing to build more renewable power plants, it’s struggling to raise the finance to do so and is grappling with placating interest groups in the coal industry, including workers who may lose their jobs.

Its key exports include coal and metals such as platinum and gold, which are largely produced using electricity generated from fossil fuels.

Its manufactured exports, such as cars, also rely on coal-generated power.

The department, in the submission, stressed its commitment to the energy transition, including an ambitious emission reduction target, but said that the CBAM planned by the EU was unfair, protectionist and would be counterproductive.

“The framing of the EU’s CBAM policy is considered to be coercive, as it imposes climate mitigation policy onto developing countries,” it said.

“Rather than driving climate ambition, it risks compromising our ability to achieve our climate objectives.”

The result, it said, would advantage exports coming into the EU from richer countries and increase inequality, poverty and unemployment in countries like South Africa.

The country is not alone in its concerns. The EU plans have already caused diplomatic unease in China and India, while a Cameroonian aluminium refinery pleaded for assistance to reduce its emissions in its own submission to the commission.

For its part, the EU argues that the CBAM is in line with international trade rules as an environmental measure designed to stop the industry from moving carbon emissions outside of the bloc as it imposes stricter climate measures on the industry.

It also says the mechanism has been designed to be WTO-compliant and will assess the impact of the measure on the poorest countries.

Still, that argument hasn’t won favour with South Africa.

2. Inflation data today:

Statistics SA will release the Consumer Price Inflation (CPI) data for June later today.

Analysts anticipate inflation to have reverted to the Reserve Bank’s target range of 3% to 6% after rising persistently for over a year. This comes as Statistics South Africa prepares to release the consumer price inflation figure for June 2023.

It is further expected that the Reserve Bank will leave interest rates unchanged this week due to a recovery in the rand and the anticipated slowdown in inflation.

Inflation slowed down to a 13-month low in May to reach 6.3% from 6.8% in April 2023.

Food inflation has been the biggest driver of the consumer price index.

A Chief Economist at Investec, Annabel Bishop, says inflation is expected to ease significantly before rising again after July due to base effects.

“We expect that CPI inflation in South Africa will drop towards 5.5% for the June reading. In fact, we actually have a figure of 5.4% which is well within the Reserve Bank inflation target of 3 to 6%. This will be the first month that South Africa’s inflation falls back within target after experiencing very high inflation over the past years.”

A Chief Economist at Standard Bank, Goolam Ballim, says due to the anticipated slowdown in the CPI, along with other supporting factors, the Reserve Bank is likely to keep interest rates unchanged this week.

“We are going to focus on food and rental inflation to suggest whether this deceleration will be enduring and we do think it will be enduring. We think that the inflation number combined with the rand’s recent recovery following the material relapse with the Lady R matter will likely hold the Reserve Bank’s hand. In other words, we think that the Reserve Bank is unlikely to raise rates when it meets in incoming days.”

3. Truth behind lower load shedding:

While electricity minister Kgosientsho Ramokgopa has been quick to attribute lower stages of load shedding to a better performance by Eskom, the latest data shows that things at the embattled power utility haven’t changed much at all.

This means that the lower stages of load shedding seen in June were largely thanks to other factors – like lower demand from consumers and more input from renewables.

Independent energy analyst Pieter Jordaan compiled the data made available through Eskom’s Data Portal to find the real reason behind Eskom’s surprisingly good performance in June.

“Why did we have less load shedding in June? The two main reasons given by the utility are that there was lower power demand than expected and that they had more generating capacity available than in May; that was helped by better renewable generation,” he said.

This is mostly supported by the data, which shows that the utility did improve its performance. But little else changed.

While Eskom’s performance – measured by its energy availability factor (EAF) – did improve compared to previous months (59% vs 50-55% in the preceding months), the number of breakdowns were generally the same as when load shedding escalated in September 2022 (~33%).

One of the more notable changes came from a massive reduction in planned maintenance, which halved from the work done in April (14% to 7%), keeping more megawatts on the grid. This is typical for the winter months.

In general, however, the picture of Eskom’s overall performance is not all that different from earlier in the year when high stages of load shedding were permanently in effect – and the group is still underperforming compared to previous years where load shedding was not always happening.

The key difference, then, is on the demand side, Jordaan noted.

The reality of the situation is that Eskom continues to operate on these thin margins, and energy experts have warned that higher stages of load shedding are again likely if this delicate balancing act isn’t successful.

If another cold snap hits the country – as is forecast for this week – demand will likely shoot up again, forcing Eskom to use up its reserves, burn more diesel, and eventually escalate load shedding to counter these effects.

Exiting winter, though, will see the regular maintenance schedules return, with more units being taken offline. If Eskom has not boosted its generation or added more capacity to the grid by then, load shedding will continue.

4. Inflation reverberations:

US interest rates act as an irresistible gravitational force for global markets, but inflation seems to be moving in different directions across the world.

The post-Covid inflation surge and accompanying jump in interest rates was a global phenomenon.

There were a few important exceptions, notably China and Japan, but almost all other economies experienced broad and sustained price increases, as well as higher interest rates.

European countries such as Sweden and Switzerland abandoned negative interest rates, a dramatic reversal after years of sub-zero policies. Some emerging markets hiked early and aggressively, both in response to domestic inflation and to get ahead of the US Federal Reserve. American interest rates, after all, act as an irresistible gravitational force for global markets.

Today, the picture is a bit blurrier. Inflation seems to be moving in different directions across the world, and with that, the policy stances of central banks.

This has implications for investors.

Starting with the US, consumer inflation declined more than expected in June. This provided much cheer to markets, as it potentially reduces the need for substantial further interest rate increases from the US.

The consumer price index rose 3.1% from a year ago in June, excluding fuel and food at 4.8%. These are the lowest inflation rates since 2021 and indicate ongoing progress towards the Fed’s 2% target. Even some of the stickier items in the inflation basket seem to be coming unstuck.

However, just as one swallow does not make a summer, one data release does not change everything.

Investors and policymakers should consider a range of indicators to determine signal from noise. For instance, the consumer price index (CPI) is not even the Fed’s preferred inflation measure. Its favoured measured is produced by a different statistical agency from a different sample, the personal consumption expenditure (PCE) estimate. Some regional Federal Reserve banks also produce their own inflation measures, such as the Atlanta Fed’s sticky inflation series, which isolates prices that don’t move much, and the Cleveland Fed’s median inflation rate, which tracks the item that is exactly in the middle of the inflation basket.

Then there is the fact that the US labour market continues to be fairly tight, with demand for workers outstripping supply.

This puts upward pressure on wages, which in turn means companies, especially service companies, will attempt to increase prices to protect margins. Whether they succeed depends on what consumers are willing and able to absorb. Ironically, the decrease in inflation – and rising real wage – gives consumers more spending power and therefore the ability to pay more. This process is by no means automatic, but until the Fed has confidence that the labour market is sufficiently in balance, it is not going to be cutting rates simply because of one better-than-expected inflation print.

A 25-basis-points increase later this month remains likely. However, unless you are a money market trader, there is not much point in obsessing whether the Fed hikes by another 25 or 50 basis points.

5. Rand gains on interest rate bets:

The rand has now gained almost 4% against the dollar over the past week, as the US currency comes under increasing pressure.

After reaching R18.18/$ on Monday, the rand strengthened to R17.81/$ by Tuesday afternoon – around its best levels in more than 15 weeks. Last week, the rand was still trading above R19/$.

The local currency is now down only 4% against the dollar from a year ago. At the start of June, it was 26% weaker than a year before. The euro hit its strongest level against the dollar since the start of 2022 on Tuesday.

The dollar is being sold off as investors bet that the Fed won’t hike interest rates much further following much cooler-than-expected inflation data recently.

US interest rates are key to the rand. Investors are used to South Africa offering much higher interest rates than the US, which made rand investments attractive in the past. But following aggressive US rate hikes, that differential shrank and interest offered on rand assets now looks less appealing.

The SA monetary policy committee is due to announce its latest interest rate decision on Thursday. Economists are divided about whether it will keep rates unchanged or announce a small 25 basis point hike.

A week later, the Fed will make its interest rate decision. If the Fed decides not to hike, the rand could see more gains. But a hike and a more hawkish stance by the Fed on future increases could dampen the recent rand gains.

Investec economist Annabel Bishop warns that the domestic currency is likely to remain at a high risk of volatility and beholden to the outcome of US data and financial market events.

All information sourced from articles posted by: DailyInvestor, SABC News, BusinessTech, Moneyweb, and Fin24.

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