News in South Africa 22nd November:
1. Inflation rises ahead of SARB decision:
South Africa’s annual consumer price inflation (CPI) rose slightly in October, reaching the upper end of the South African Reserve Bank’s (SARB) target range.
StatsSA announced today that annual CPI was 5.9% in October 2023, up from the 5.9% recorded in September 2023.
In June, the inflation rate fell within the SARB’s target range for the first time since April 2022.
July’s rate was also within the SARB’s target range of 3% to 6% and far closer to its target midpoint of 4.5%.
According to StatsSA, the consumer price index increased by 0.9% in October 2023.
The main contributors to the 5.4% annual inflation rate were:
- Food and non-alcoholic beverages increased by 8.7% year-on-year and contributed 1.6 percentage points;
- Housing and utilities increased by 5.4% year-on-year and contributed 1.3 percentage points;
- Miscellaneous goods and services increased by 5.3% year-on-year and contributed 0.8 of a percentage point.
- Transport increased by 7.4% year-on-year and contributed 1.1 percentage points.
In October, the annual inflation rate of goods was 8.1%, up from 6.8% in September. It was 3.8% for services, down from 4.0% in September.
This data will inform the Monetary Policy Committee’s (MPC) interest rate decision at its meeting tomorrow.
At its last MPC meeting in September, the SARB elected to keep the interest rate hiking cycle that has been ongoing since November 2021 on pause.
However, the MPC warned that this was merely a pause in the hiking cycle rather than the end, and it would remain dependent on data for future decisions.
“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook,” said SARB Governor Lesetja Kganyago.
“Serious upside risks to the inflation outlook remain. In light of these risks, the committee remains vigilant, and decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook.”
Despite these warnings, many experts believe the SARB will keep the repo rate on hold and that interest rates have reached their peak.
2. Rand takes a hit:
The rand lost ground against the dollar on Tuesday (21 November) as market sentiment went risk-off following the release of the minutes of the latest US Federal Open Market Committee (FOMC) meeting, which points to higher global interest rates lingering for longer.
The rand weakened to R18.77 against the dollar on Tuesday, pulling back slightly to R18.63 on Wednesday.
According to Investec chief economist Annabel Bishop, the minutes showed concern about “only limited progress in bringing down inflation in core services excluding housing” in the United States, as well as the softening of prices and gradual decline in housing service inflation.
The overall read of the FOMC’s minutes was hawkish, keeping the general market sentiment in line with the view that global inflation is likely to stay higher for longer.
“Markets viewed the minutes overall as showing that the (US) Federal Reserve Bank needs to see more evidence of inflation cooling to be able to be sure of success in bringing it back to target, and so risks of higher interest rates have been flagged,” Bishop said.
“Risks around the inflation forecast were seen as skewed to the upside, given the possibility that inflation might prove to be more persistent than expected or that additional adverse shocks to supply conditions might occur.”
While this is a focus on US inflation, it is still highly applicable to South Africa, which has been in the same high-inflation, high-interest-rate boat as the rest of the world.
“Market expectations for interest rate cuts next year have been building, and the Fed worries this will positively impact consumers and businesses by causing spending and demand to rise, and so derail its efforts to lower inflation,” she said.
While expectations are that the South African Reserve Bank will hold on rates this week, and start its cutting cycle by mid-2024, markets have eyes on the FOMC for its next move, which might impact this view.
3. Two-pot pension fund escalated:
The retirement industry has been caught off guard – politicians voted on Tuesday that the proposed two-pot pension fund regime be implemented on 1 March 2024, instead of 1 March 2025 as National Treasury advised only a few weeks ago.
Treasury decided to delay the implementation as many financial service providers expressed concern that their systems would not be ready by March 2024. It is of the opinion that the South African Revenue Service (Sars) and the retirement industry need until 2025 to adapt to the proposed changes on how SA retirement funds are to be invested in future.
The operative word here is ‘proposed’, as changes to the Pension Fund Act to implement the new system have not been finalised and passed into law.
In addition, there is still a lot of confusion about the new system. Financial advisors, pension fund members and the general public are still not up to speed on how the new two-pot system will work – especially as there are actually three pots in the new two-pot system.
Most people have heard about the two-pot system, which was proposed a few years ago, and would probably agree that it is a good idea to keep a pension fund safe for retirement – not to be withdrawn and spent every time somebody changes a job.
The proposal was two separate retirement funds into two pots, one of which would have a tight lid that can only be lifted at retirement.
The second, a savings pot, can be accessed from time to time to grant temporary financial relief in cases of emergencies. The Covid-19 pandemic was often cited as such an emergency, and people were quick to ask how much of their retirement fund they will have access to, and when.
Eventually a three-pot system evolved, compromising a vested component, a savings component and a retirement component.
Why the rush?
Richard Carter, head of assurance at Allan Gray, says he is concerned about what this means for the industry and investors, and that there are significant risks to rushing through the legislation needed for the system to operate.
“We are surprised by [Tuesday’s] vote in favour of bringing the two-pot implementation to less than four months from now. This is a tough ask as most retirement funds and their administrators will simply not be ready in time,” he says.
“Given that consultations on the detail are still in progress and that regulation is still being finalised, we believe that moving it forward is premature.”
Carter points out that some of the changes can only be made once the regulation is finalised, because it is the legislation that governs the required changes.
“There must be time for the industry to make the administrative changes and make them properly so that people retain their trust and confidence in the system.
“If you push the legislation through too fast and rush the changes that must be made and then cannot pay people what they expect, it can be dangerous and end up doing more harm than good,” he says.
He believes the two-pot system is likely to positively change behaviour, if it delivers on its intention.
“Overall, if the idea is implemented well, it will move us in the right direction. However, as with everything, the devil will be in the detail, including in the legislation,” he says.
4. Load shedding pushed to stage 4:
Power utility Eskom has escalated load shedding once again, as the group’s emergency reserves and generating capacity fell short.
Due to insufficient emergency reserves and generation capacity as a result of four units not returning to service as planned, stage 4 load shedding was implemented on Wednesday morning from 02:31.
Stage 4 outages will continue until further notice.
The group had previously intended on keeping load shedding on rotation between stage 1 during the day and stage 3 at night, but was forced to increase this to a rotation of stage 2 and stage 3.
The escalation in load shedding comes amid warnings from analysts as well as government officials that the grid remains unstable.
Electricity minister Kgosientsho Ramokgopa said on Sunday that power cuts had to be ramped up this week to replenish emergency reserves after Eskom lost a “cluster” of units from different power stations across the country.
“If we had not experienced that, of course, you would not be seeing the kind of intensity of load shedding that we are experiencing,” he said.
Independent energy analyst Pieter Jordaan warned that Eskom’s unplanned outages had entrenched above 30% in recent weeks, meaning any failures – or increased demand – would result in an escalation of load shedding.
Eskom’s system outlook has forecast code red load shedding for the next 52 weeks, meaning South Africans should expect outages at stage 2 and beyond at least.
Meanwhile, the group’s executive has expressed their intention to cap load shedding at stage 4 over the coming months – which will require unplanned outages to be kept under control.
5. No changes to NHI Bill:
The National Council of Provinces (NCOP) select committee on health, and social services has adopted the contentious National Health Insurance (NHI) Bill without making any changes, dashing the private healthcare sector’s hopes that MPs would soften its provisions on the role of medical schemes.
The development takes the bill one step closer to final approval by the ANC-dominated NCOP, which is expected to vote in favour of it next week.
All information sourced from articles posted by: DailyInvestor, BusinessTech, Moneyweb, and BusinessDay.
