News in South Africa 30th May:

1. Sanction warning:

The South African Reserve Bank (SARB) has warned of dire consequences should the country face censure due to its stance on Russia’s invasion of Ukraine.

Sanction warning
Photo by Pascal Ingelrest

At worst, secondary or indirect sanctions could be imposed on the country and lead to a sudden halt to capital inflows and increased outflows, the bank said in its latest financial stability review published on Monday.

It cautioned that South Africa’s financial system would be unable to function if its ability to make international payments in dollars was impeded.

More than 90% of South Africa’s international payments are processed through the Society for Worldwide Interbank Financial Telecommunication system, Herco Steyn, the report’s lead author, told reporters.

“Should South Africa be banned from SWIFT due to secondary sanctions, these payments will not be possible,” he said.

South Africa has adopted what it says is a non-aligned stance toward the war in Ukraine, and it has abstained from several United Nations votes condemning Russia’s actions.

Its neutrality was called into question this month when US Ambassador Reuben Brigety accused Pretoria of supplying weapons to Russia.

Other critical risks of South Africa being sanctioned include:

  • It may be impossible to finance any trade or investment flows or to make or receive any payments from correspondent banks in dollars;
  • South Africa is highly dependent on foreign investment inflows to fund its current-account deficit, and those could dry up;
  • South Africa’s relations with its main trading partners could be damaged, and it could lose its preferential trade access; and
  • South Africa has already fallen out of favour with many offshore investors, with foreigners currently holding 25% of local government bonds, down from as much as 42% in 2018.

The most significant risk to the country’s financial system remains sustained power cuts that negatively impact domestic economic growth, investor sentiment and business activity and exacerbate other pre-existing vulnerabilities.

2. Markets rally over US debt deal:

Markets mostly rose Monday on news that President Joe Biden and House Speaker Kevin McCarthy have reached a deal to lift the US debt ceiling and avoid a calamitous default.

After weeks of wrangling, the two announced that an agreement had finally been reached and urged lawmakers on both sides of the aisle to vote for it before the government runs out of cash on June 5.

However, there is some nervousness on trading floors as the bill contains plenty of elements that are likely to anger Democrats and Republicans alike.

For now, dealers are upbeat as the breakthrough lifts the threat of a debt default by the United States that economists warn could hammer the global economy and cause market turmoil.

The bill will suspend the debt ceiling until January 1, 2025, and place curbs on federal spending that will please some Republicans, but it does not deliver the big cuts right-wingers wanted and progressive Democrats would have balked at.

“The agreement prevents the worst possible crisis,” Biden said at the White House on Sunday. “Which means no one got everything they want.”

“But that’s the responsibility of governing. I strongly urge both chambers to pass that agreement.”

He added: “It takes the threat of a catastrophic default off the table, protects our hard-earned and historic economic recovery and… represents a compromise that means no one got everything they want.”

McCarthy said: “We know anytime we sit and negotiate with two parties, that you got to work with both sides of the aisle. So it’s not 100 percent of what everybody wants.”

Hopes that a deal was in the works lifted all three main indexes on Wall Street on Friday, and Asia picked up the baton Monday.

Tokyo rallied one percent while Sydney, Shanghai, Bangkok, Mumbai, Taipei, Manila and Wellington were also in the green. But Hong Kong, Singapore and Jakarta were unable to maintain their early gains and turned lower.

Paris and Frankfurt rose in the morning. London was closed for a holiday.

3. Rand will breach R20 to the dollar:

Economists have warned that the rand is likely to breach the R20 mark to the dollar.

The rand reached a record low of R19.80 against the United States (US) currency last week after the South African Reserve Bank (Sarb) hiked the repo rate by 50 basis points.

A weaker rand could spell trouble for import prices, with the country importing most of its fuel and key crops like wheat and maize.

Chief economist at Econometrix Azar Jammine said it was also worth keeping an eye on developments in the labour market in the US.

“On Friday we have the big announcement of the number of jobs created in the US in May. If it still reflects a very strong performance, then the dollar will strengthen and that would weaken the rand.

“On the other hand, if there are signs from the employment figures that the US economy is weakening significantly, you could well see the dollar falling and the rand gaining ground.”

Economist Dale McKinley warned that the rand breaching the R20 mark was just a matter of time.

“I think it’s inevitable. We’re going to go through the R20 mark. It’s just a question of time – it could happen in the next week or so, but it’s going to happen.”

4. Worries over money outflow:

The South African Reserve Bank (SARB) said capital outflows and declining market depth and liquidity are additional risks to the country’s financial stability.

This was revealed in the SARB’s latest Financial Stability Review (FSR) published on Monday, 29 May 2023.

The SARB publishes the FSR twice a year to communicate its views on the potential risks to financial system stability and the policy actions to address them.

The SARB’s latest FSR listed the usual risks, including tight global and local financial conditions, high interest rates, the FATF grey listing, load-shedding, and poor economic growth.

Since its latest FSR release in November 2022, two new risks have been added.

•            Capital outflows and declining market depth and liquidity.

•            Secondary sanctions amid heightened geopolitical polarisation.

It said a sustained decrease in the value of South African government bonds (SAGBs) held by non-residents causes greater concentration within the domestic financial system.

“The orderly functioning of the government bond market can be disrupted, potentially requiring repeated episodes of support by authorities,” the report states.

It also warned of a less diversified capital markets ecosystem, which reduces the financial system’s ability to absorb systemic shocks.

There is also a risk of a decrease in the exchange value of the rand if foreign investor appetite wanes and commodity prices decline.

The SARB added that remaining on the FATF greylist for an extended period would contribute to capital outflows and a higher country risk premium.

5. Gas power station gets green light:

Following court approval to rescind its own decision against the project, the National Energy Regulator of South Africa (Nersa) now concurs with a determination for Eskom to build a new 3 000MW gas power station in Richards Bay.

A treasury ban on additional debt however complicates matters and environmental groups are also determined to block the project.

Nevertheless, Eskom hopes to proceed and deliver the first power to the grid before the end of 2028.

The utility has been preparing for the project for a long time and submitted an application to build a new combined-cycle gas power station in Richards Bay to Minister of Mineral Resources and Energy Gwede Mantashe in January 2022. Mantashe’s approval, with the concurrence of Nersa, is a legal requirement for Eskom to be allowed to go ahead with such a project.

After requesting more information, Mantashe gave it the green light and forwarded the application to Nersa for concurrence in July last year.

Environmental battle ahead

Eskom will still have to defend the project against further onslaught by environmental groups.

An earlier application by the South Durban Community Alliance for the Environment and groundWork for the environmental approval for the project to be reviewed and set aside was dismissed and the organisations were denied leave to appeal. They however approached the Supreme Court of Appeal directly and were granted access earlier this month.

Melissa Groenink, programme manager for Natural Justice, which also supports the litigation, expressed the organisation’s relief that the appeal will now go ahead.

“A gas power plant has the potential to have worse climate change implications than a coal-fired power station when considering the full lifecycle of the power generation process,” she said.

“While we have an electricity crisis on our hands, this power plant is not the answer. The climate crisis is real and will cripple our livelihoods in time to come.”

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

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