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The perceived risk of investing in South Africa has subsided. The gap between South African and US government bonds has fallen to the bottom of the range over the past 10 years, indicating that the market is already pricing in a credit-rating upgrade of at least two notches - from speculative to investment grade.

The rand followed the same trend and traded near the best levels against the dollar since February 2015 as foreign direct investment boosted the currency, although it has since weakened.

Net foreign purchases of South African bonds and equities totaled more than R34 billion since the beginning of the year. 

That compares to net foreign sales of more than R19bn in total for 2017.

After a bumper performance in the fourth quarter last year, our equity market in terms of dollars performed in line with global equity markets in the first quarter of this year.

The strongest headwind facing the South African and global economy are the developments in the crude oil market. 

The oil price, as measured by Brent crude, has jumped to $75 (R9442.35) from a low of $63 per barrel in February, and is 44% higher than a year ago.

 Opec and non-Opec members met a few days ago and are of the opinion that the global economy can afford higher oil prices and are pushing for $80 per barrel.

The jump in oil prices will undoubtedly lead to higher inflation and inflation expectations. Long-term interest rates reflect inflation expectations, as it is an indication of to what levels central banks will hike lending rates as part of their monetary policies, given the stage of the economic cycles of the respective countries and economic zones.

The US economy already finds itself at an advanced stage in the economic cycle and the Federal Reserve’s policy stance is already no longer accommodative. Should the oil price stay at the current levels or move higher, it is likely inflation will overshoot the inflation targets set by the Fed.

What it means is that the yield on longer- term bonds such as the US 10-year government bonds will move higher, as the Fed will need to hike rates higher than originally anticipated - yes, for the “investocrats” - the entire yield curve will shift higher.

Apart from higher lending rates hurting the US consumer, the higher oil price is likely to act as a tax on the consumer.

The impact of the surge in the oil price on the South African economy and domestic financial markets is significant.

 Even if the yield spread between South African and US 10-year government bonds stays steady, the yield on South African long-term bonds are likely to increase on the back of higher US rates.

South African financial stocks, and especially banks, are likely to come under pressure due to their sensitivity to interest rates. 

And the rand is likely to weaken further against the dollar, due to the prospect of a tighter monetary policy being brought forward by the Fed, while the tightening of South Africa’s monetary policy is unlikely.

The mix of a surge in the oil price and a weaker rand exchange rate to the dollar is lethal for the domestic economy. While business confidence in South Africa was on the up, the prospect of the acceleration of growth is limited.

The upward pressure in global inflation due to the surge in the oil price will probably cool global growth momentum further.

The price of oil in rand terms has already risen more than 23% since mid-February, and 57% since June.

The surge could result in the producer price inflation increasing from 4.2% year-on-year last month to more than 5% in the not too distant future.

Expect headline consumer price inflation to follow the same trend from 3.8% year-on-year last month to more than 5&.

Cash-strapped consumers are already battling with high fuel prices and further increases will worsen their financial positions.

The uncertainties about the public-sector wage talks and strikes by the unions could spill over to the private sector, especially if the state sets a precedent by giving in on the public-sector wage demands.

Business confidence has also been dealt new blows following the mayhem in North West, while the land reform issue has brought about much uncertainty.

Ryk de Klerk is an independent analyst.

The views expressed here are not necessarily those of Independent Media.

- BUSINESS REPORT