File Photo: IOL
File Photo: IOL

OPINION: Geopolitical cracks globally and locally dominate

By Dr Chris Harmse Time of article published Jul 29, 2019

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Statistics SA announced last week that the inflation rate was at 4.5 percent in June, the same as in May and that the producer inflation rate came down from 6.4 percent to 5.8 percent.

SA Reserve Bank governor Lesetja Kganyago said the bank’s forecasting model suggests there might be room for interest rate cuts in the next year or two.

Despite this favourable economic data suggesting that the economy is stabilising and recovering somewhat, geopolitical cracks globally and domestically had negative effects on the South African economic wall exposing the exchange rate, bond rates and equity markets. The ongoing legal battle between Minister of Public Enterprises Pravin Gordhan and the Public Protector Busisiwe Mkhwebane on issues like the SA Revenue Service’s “rogue” unit, set the tone.

The announcement by the Minister of Finance Tito Mboweni that the government would provide an additional R26billion to struggling power utility Eskom had negative effects on the rand and financial markets.

Rating agency Moody’s put South Africa on notice last Thursday that they could downgrade the country’s sovereign debt to junk given the further bailout of the power utility.

In reaction to last week’s geopolitical matters, foreign investors sold South African equities and especially bonds. The R186 government security had increased from levels close to 8percent the previous Friday to almost 8.4percent at the end of the week.

The rand started to lose ground especially last Thursday and Friday. The local currency lost 42cents against the dollar from a level of R13.86 last Tuesday to R14.28 on Friday evening.

Against the euro the rand depreciated by 26c to R15.87 and by 27c against the pound to R17.66.

A weaker rand may lead to an increase of at least between 5c and 20c a litre of petrol and diesel, respectively, at the beginning of August.

On the JSE, the all share index lost 677 points, or 1.2 percent, last week, while financials was down by 4 percent.

Despite higher prices for metals and resources and the weaker rand, the resources 10 index lost 2.3 percent.

This week investors will look out for the release of South Africa’s M3 Money Supply and Private sector credit extension data.

The US Federal Reserve will announce its interest rate decision on Wednesday and will release the latest non-farm payrolls on Friday.

Dr Chris Harmse: Economist and chief investment officer.


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