News in South Africa 20th June:

1. Roads leading to food shortage:

Farmers are being driven to desperation over the poor state of roads.

Roads leading to food shortage
Photo by Rodolfo Clix

Some are now maintaining roads themselves to get their produce to market.

AgriSA says poorly maintained roads are just one of the many issues faced by local farmers.

This results in increased input costs which are unfortunately passed onto consumers.

“Indeed it has this fall-over impact because somewhere along the value chain, this cost must be absorbed, and sadly though, it’s consumers that then experience the brunt of it,” said AgriSA’s Christo van der Rheede.

“I know some of our big agribusinesses are already spending a lot of money to just maintain roads. The big question is for how long can the agriculture sector really absorb all of these additional costs.”

2. Good news for SARB interest rates:

Consumer price inflation (CPI) for May is expected to ease further, which could signal a break in the South African Reserve Bank’s (SARB) interest rate hiking cycle.

The SARB has been in a hiking cycle since November 2021 and has implemented a cumulative 475 basis points of hikes.

The hikes were implemented to bring South Africa’s high, sticky inflation back within the SARB’s target band of 3% to 6%.

Since the hiking cycle started, the SARB has remained steadfast to keep raising rates until inflation is back within its target range and anchored around the midpoint (4.5%).

The SARB’s efforts had been largely unsuccessful until recently – in April, South Africa’s annual inflation rate cooled for the first time in months. 

Annual CPI was 6.8% in April 2023, down from 7.1% in March 2023. April inflation was the lowest the country had seen since May 2022 and the first time the rate decreased month-on-month since January 2023.

Some experts believe this trend will continue when May’s inflation data is released later this week.

Absa forecasts headline CPI to print at 6.4% year-on-year, mainly reflecting lower fuel and food inflation. 

Food and fuel inflation have been the two largest drivers of South Africa’s high inflation over the past few months, with food inflation reaching decade-high levels.

Absa expects a marked slowdown in food and non-alcoholic beverage inflation to 12.4% year-on-year in May. This would be a notable slowdown from the 13.9% recorded in April.

Absa attributes this optimistic prediction to a strong base effect created by the 2.1% month-on-month jump in prices last May. 

However, Absa expects core CPI to have remained unchanged at 5.3%, though it sees some upside to this given the recent upward momentum in core goods inflation.

The Bureau for Economic Research (BER) shared Absa’s prediction for May’s inflation data, expecting annual CPI to slow to 6.4%.

3. More loadshedding incoming:

Minister of Electricity, Kgosientsho Ramokgopa, says that South Africa has not yet reached higher than stage 6 load shedding in terms of scheduled outages – but more than 7,000MW has been taken off the grid.

Responding to a written parliamentary Q&A from May, Ramokgopa noted that the country was able to avoid escalating load shedding beyond stage 6 thanks to load curtailment.

Load curtailment refers to contracted loads on the national grid that can be pulled at the System Operator’s behest. Most contracts are with large industry players, but the government is currently looking to cast the net wider to be able to secure even more power during peak times or times of pressure.

According to Ramokgopa, the partial reduction of demand from large industrial customers through load curtailment goes up to stage 4.

This has been implemented in conjunction with stage 6 load shedding at times.

Each stage of load curtailment is approximately 5% of the large customer demand – with stage 4 load curtailment being up to 1 000MW of demand that is removed from the power system.

Thus stage 4 load curtailment is roughly the equivalent of one stage of load shedding.

However, this burden is not shouldered by South Africans at large through load shedding schedules, but through the contracted Eskom customers who cut power use.

Eskom has maintained that load shedding has not moved above stage 6 in South Africa, despite its own data contradicting this on several occasions.

During some of the worst load shedding experienced this year, the group reported over 7,000MW of load being shed from the grid, which would technically equal stage 8 load shedding.

4. SA unattractive to investors:

Seelan Gobalsamy, CEO of chemicals and explosives group Omnia, says it is very difficult to invest in South Africa due to load shedding, logistical constraints and socio-political issues, such as crime and service delivery protests.

Speaking at the release of the group’s full-year results to end March, Omnia’s CEO said it is better to invest offshore due to the difficulty in investing locally.

However, he said closer cooperation between government and business could help solve these issues.

5. Fed halts and the rand strengthens:

At its latest Monetary Policy Committee meeting, the US Federal Reserve decided to leave interest rates unchanged at between 5% and 5.25%, following 10 consecutive hikes over a 15-month period – but it remains unwavering in its commitment to bringing inflation down to its 2% target.

Fed chair Jerome Powell therefore made the comment that more hikes may be needed later this year.

According to dot-plot projections, two more hikes may still be on the table in 2023. Investors anticipate a 61.5% chance that the Fed will hike rates during its July meeting.

The Fed deemed it appropriate to moderate the pace of increases, albeit only slightly. Powell explained that the brief halt in the increasing cycle will allow the US central bank to assess more data, which it hopes will help it make better decisions going forward.

But a halt also allows the economy a little more time to adapt to the tightening environment. Now that rates are at, or very close to, what most believe are restrictive levels, the Fed’s job becomes increasingly difficult. If it does not do enough, inflation might spiral out of control again. But if it does too much, as it tends to, then the US may experience that hard landing many thought possible not too long ago.

This is good news for South Africa’s capital markets. The rand has already responded positively, strengthening to R18.19 levels, down from the R19.88 high that we were at only two weeks ago. Soon, short-term capital will look elsewhere for yield and emerging markets will be all too ready to receive it.

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

Leave a comment

Your email address will not be published. Required fields are marked *