Was the Sona enough to calm financial markets?

By Chris Harmse Time of article published Feb 17, 2020

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JOHANNESBURG - The long-awaited State of the Nation address (Sona) by President Ramaphosa on Thursday seemed to be welcomed by most foreign investors and investment analysts.

The president was honest in his commentary that the South African economy in general and the state-owned enterprises, in particular, are in dire straits.

According to most analysts, however, the address only gave partial detail on specific key areas like the electricity sector.

Once again it seems that most of the plans and policy changes are assessed by the rating agencies as weak and short on specifics.

Rating agency Fitch comments that: "He offered only partial detail on key policy areas, including stabilising the electricity sector and debt-stricken state power company Eskom Holdings, improving public finances, accelerating economic growth and land reform.”

The Sona was received with a sparkle of hope that the president is building up confidence, although many are sceptical on the delivery and the cost for the fiscus in light of the unacceptable high levels of debt.

It seems that investors remain nervous around the ever-growing government wage bill and expenditure cuts.

Preliminary calculations point towards a R120 billion cut necessary in expenditures to bring down the Budget deficit to levels acceptable for rating agencies and investors. Therefore, up to the main Budget on February 26 investors will stay on the sideline before committing new capital.

In reaction to the Sona both the rand and share prices on the JSE tend to ignore it, but rather stayed focused on the coronavirus and equity prices around the globe.

Although most bourses recovered last week in anticipation of a cure for the coronavirus and lower growth in deaths and infections, equities and bonds stayed volatile and nervous.

In reaction to better than expected US retail sales that rose in January for a fourth consecutive months, the Dow Jones (29551points), Nasdaq (9613points) and S&P 500 (3379points) indices reached new record levels on Wednesday.

Wall Street, however, started to contract again on Thursday and Friday as renewed fears for the supply chain effects of the virus emerged.

Domestically, financial market performances improved last week. This despite the news that South Africa's unemployment rate remains at the high 29.1percent, retail sales dropped to -0.4percent and manufacturing production had tumbled by -5.9percent in December.

The rand exchange rate after the initial depreciation in reaction to the effect of the coronavirus the previous week (February 7) started to recover strongly last week.

The rand/dollar appreciated from R15.09/$ to R14.88/$, to the pound from R19.47 to R19.36 and against the Euro from R16.52 to R16.13 on Friday.

On the JSE share prices last week recovered for the second consecutive week. The Alsi had increased from 57276 points the previous Friday to 57861points (1percent) last Friday at the close.

The Industrial 25 index gained 0.98percent for the week, the Financial15 index had improved by 0.8percent, while the Property index once again lost more than 3percent.

On the capital market the R183 RSA bond on Friday traded on 7.96percent, down from 8.02percent the previous week.

Dr Chris Harmse is an economist and chief investment officer.


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