In a week of drama on the political front, both domestically and in Hong Kong, financial markets were uncertain and volatile, and could not share in the strong recovery on Wall Street.
Domestically, Finance Minister Enoch Godongwana delivered his second Medium-Term Budget Policy Statement (MTBPS). The Department of Finance is expecting that that local gross domestic product (GDP) will grow at 1.9% this year, lower than the estimate of 2.1% during the main budget.
Over the next three years, the economy is expected to grow at an average of 1.6%
Godongwana said: “This level of growth is too low to support our developmental goals. Accordingly, we must take action to put our economy on a higher growth trajectory.”
The minister announced a policy framework that differs considerably from the one used by government over the past few decades, where there was growing debt financing, almost no government investment, the bailing out of state-owned enterprises, a worrying increase in the wage bill and more money for social services.
As a result, government debt is projected to be more than R4.7 trillion in the current financial year, compared to R627 billion in 2008/09. In contrast, the minister announced that a “surplus” income of R83bn, generated from higher tax income received, will be applied to reducing the deficit in the current financial year and over the next three years in the Medium-Term Expenditure Framework (MTEF).
The surplus tax income will also be used for infrastructure projects and critical public services, such as education, health and policing; and, addressing fiscal risks that were identified in February. These include higher-than-projected debt service costs, the public service wage bill and financial risks from state-owned companies.
This change in the policy framework was welcomed by investors, and on Wednesday the rand improved by more than 50 cents against the dollar and traded at one stage at R17.75.
Unfortunately, worries in Hong Kong as well as fears of a strong increase of 0.75% in the US Federal Reserve rate this coming Wednesday had severe negative effects on the rand, and at the close of the US markets on Friday evening, the local currency traded much weaker at R18.18.
Political worries over Hong Kong increased after Chinese President Xi Jinping tightened his grip on power after he was elected for a historic third term. The renewed Covid-19 outbreak in China also contributed to economic uncertainty in that country, including in Hong Kong, as well as in Japan. This had a devastating effect on share prices in Hong Kong and in China.
The Hang Seng index is now already down more than one-third (35.25%), the Shanghai composite close to one-fifth (18.56%) for the year to date.
For the two JSE-listed giants Naspers and Prosus, as fears for big losses in the Hong Kong-listed Tencent mounted, the past week was a nightmare, with the Chinese threat leading to big sell-offs in all three of these listed companies. Naspers holds 30% of the shares of Tencent. Tencent has lost more than half its value (55.6%) already during the year.
On the JSE, Naspers lost 8.33% last week and now trades 30.0% down for 2022 to date. Prosus was down 8.6% last week and has already lost 43.3% for the year.
The International Monetary Fund forecast for Asia’s GDP growth in 2022 was downgraded to 4.0% this year and to 4.3% in 2023, with the IMF citing as reasons the war in Ukraine, higher interest rates worldwide and China’s slowdown.
The JSE improved strongly.
And while the JSE All Share Index lost 1.1% on Friday, it still managed to close higher than 66 000 points and 1.3% higher for the week. But the announcement of the sharp increase in the petrol price – of 51 cents a litre, and especially of diesel at R1.41 a litre – will put share prices under pressure this coming week.
On Wall Street, US shares ended the week strongly, up for the third consecutive week. Investors had discounted this coming week wth the expected 0.75% increase in the Fed rate. The Dow Jones Industrial Index gained 5.37% last week and is now only 10.8% down for the year-to-date, against 20.5% year to date at the beginning of October 2022. Analysts expect US shares may even end positive for the year.
This coming week, Absa Bank will release its manufacturing Purchasing Managers Index (PMI) for October, and the National Automobile Dealers’ Association (Nada) will announce the new vehicle sales numbers for October on Tuesday.
Globally, investors will turn their attentions to the interest rate decision by the Fed on Wednesday, and the US non-farm payrolls for October on Friday. The unemployment rate and new jobless claims numbers will be monitored closely as they will give an indication of wage-pressure on the US inflation numbers and therefore interest rates. Most developed market economies will also publish various PMI data during the week.
Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.
BUSINESS REPORT