A NEW CHAPTER OF STABILITY AND REFORM
THE WEEK’S KEY THEMES:
- South Africa seems to be setting the tone for a better economic future
- Investors eye a 25 to 50 basis point rate cut by the Fed
- JSE climbs to two-week high
- Oil prices recover some lost ground
- Dollar up from seven-month lows, while euro hovers at highest levels since January
SO FAR, SO GOOD
South Africa has long been known as a country of immense potential but has struggled in recent years with economic stagnation, political instability, and structural challenges. The economy was and is still characterised by slow growth, high unemployment, and a persistent energy crisis, all of which have contributed to declining business confidence and dwindling foreign investment. However, as we move through 2024, a series of positive developments signal a potential turning point for the nation.
BACKGROUND: YEARS OF ECONOMIC STAGNATION
South Africa’s economic landscape was bleak for the better part of a decade. Gross domestic product (GDP) growth has averaged less than 1% per year, plagued by logistical challenges, crime, corruption, and mismanagement. The energy sector, in particular, has been a significant drag on the economy, with frequent bouts of load-shedding, which have crippled industries and eroded investor confidence. The political scene was equally troubling, dominated by the African National Congress (ANC) and marred by internal party conflicts, leading to a loss of public trust.
THE CATALYST FOR CHANGE: A NEW POLITICAL LANDSCAPE
The national elections in May 2024 marked a pivotal moment in South Africa’s political history. For the first time since the end of apartheid, the ANC lost its majority and was forced into a Government of National Unity (GNU) with the Democratic Alliance (DA) and several smaller parties. This shift was the catalyst for a series of economic and policy reforms that have begun to reshape the country’s trajectory.
Though initially met with scepticism, the formation of the GNU has so far exceeded expectations. From what has been witnessed, the coalition is managing to work together relatively smoothly. Within a few months of the new government’s formation, bond yields have fallen dramatically, the Johannesburg Stock Exchange (JSE) has gained notable ground, and the rand has appreciated against the dollar; all signalling renewed optimism in the country.
KEY REFORMS AND POLICY SHIFTS
The GNU has prioritised several critical reforms to address the long-standing issues that have hindered South Africa’s economic growth. One of the most significant achievements has been stabilising the energy supply. Since the election, there have been no reports of load-shedding, a stark contrast to the frequent power cuts that previously hampered economic activity. This improvement is primarily due to successful efforts to enhance the performance of Eskom, the state-owned power utility.
Another critical area of focus has been fiscal reform. The government has committed to reducing wasteful spending and improving the efficiency of public services. For instance, measures have been implemented to curb unnecessary expenditures, such as halting government rental of new office spaces. Additionally, the Finance Minister, Enoch Godongwana, is expected to present a budget that will further clarify the government’s fiscal priorities, including measures to support long-term economic growth and stability.
In parallel with these efforts, President Cyril Ramaphosa has actively engaged with the business community to forge a new era of collaboration. The partnership between the government and Business for South Africa (B4SA), initiated last year, has been instrumental in addressing critical barriers to growth. This collaboration has led to significant progress in electricity supply, improved logistics, and the reduction of crime, with business leaders providing expertise and financial resources to support these initiatives.
However, despite these positive developments, the GNU faces challenges, particularly in cutting bureaucratic red tape and managing the influence of labour unions. Analysts have noted that while the GNU has shown strong intent, the implementation of these reforms will be critical. Additionally, the ANC and DA must continue to find common ground, particularly in their approach to the markets and economy, to maintain the current momentum.
LOOKING FORWARD: WHAT THESE CHANGES MEAN FOR SOUTH AFRICA
The reforms and policy shifts in South Africa are already beginning to yield positive results. The surge in investment projects, with the total value reaching impressive levels in the first half of 2024, is a clear indication that business sentiment is improving. The government’s commitment to fiscal discipline will further bolster confidence in South Africa’s economic future.
These developments could mark the beginning of a sustained period of growth for South Africa. If the GNU can maintain cohesion and implement necessary reforms, the country could see a significant improvement in its economic performance over the coming years. This would not only enhance the standard of living for South Africans but also position the country as a more attractive destination for foreign investment.
However, the government must balance maintaining political stability within the coalition and pushing forward with bold economic reforms. Additionally, global economic conditions will play a role in determining the success of South Africa’s economic resurgence.
While it is still early days, the signs are promising. South Africa is turning a corner, with the potential for a brighter economic future driven by thoughtful policy reforms and renewed political stability. The coming months will be crucial in determining whether this positive momentum can be sustained and translated into long-term prosperity for the nation.
MARKET SNAPSHOT
FED EXPECTATIONS CONTINUE TO DRIVE BOND YIELDS
In the bond markets, the 10-year United States (US) Treasury note yield climbed by 10 basis points, reaching over 3.93% on Thursday. This rise followed a robust set of economic data, which has cast doubt on expectations for significant interest rate cuts by the Federal Reserve (Fed). The increase in retail sales and a drop in new unemployment claims have fuelled speculation that the Fed might opt for a smaller 25 basis point cut in its upcoming September meeting, instead of the previously anticipated 50 basis point, or more, cut.
In the United Kingdom (UK), the 10-year gilt yield remained around 3.85%, as traders analysed recent economic data showing a slowdown in the UK’s GDP growth and a decline in inflation.
Meanwhile, in South Africa, the 10-year bond yield is at 9.42%, up from a one-year low earlier in the week.
JSE CLIMBS TO HIGHEST LEVEL IN TWO WEEKS
Equity markets experienced a joyous day on Thursday. In the US, major indices saw notable gains, with the S&P 500 rising by 1%, the Nasdaq by 1.2%, and the Dow Jones surging over 510 points. This uptick was driven by stronger-than-expected US retail sales data, which alleviated concerns about a potential recession. Consumer discretionary and materials sectors led the gains, with notable performances from tech companies like Microsoft, Apple, Nvidia, and Meta, as well as online retailer, Amazon. On the earnings front, digital communications conglomerate, Cisco, and retailer, Walmart, reported better-than-expected results, contributing to the positive market sentiment.
In Europe, the FTSE 100 increased by 0.8% to close at a two-week high, boosted by upbeat US retail sales data. Germany’s DAX also continued its winning streak, rising towards the 17,950 mark. Gains were broad-based, with financial and healthcare sectors performing well and auto manufacturers such as Mercedes and BMW extending their gains.
In South Africa, the JSE All Share Index climbed by 0.6% to 81,402, its highest level in nearly two weeks. The market was supported by moderating US inflation numbers and positive domestic retail activity data. Companies like entertainment company, Tsogo Sun, and home finishings manufacturer, Italtile were among the top performers.
OIL PRICES RECOVER
In the commodities market, Brent crude oil prices recovered to near $80/barrel on Thursday, following expectations of potential US interest rate cuts, which could boost economic activity and oil demand. This was coupled with concerns over tensions in the Middle East. The rise in oil prices came despite a surprising increase in US crude oil inventories, which ended a six-week decline.
Gold prices also increased, surpassing $2,450/ounce, as investors assessed the latest US Consumer Price Index data for insights into the Fed’s monetary policy direction. Although US consumer inflation eased to 2.9% in July, below market expectations, the possibility of a smaller Fed rate cut dampened some of the strong momentum for gold. Nonetheless, gold continues to benefit from its safe-haven appeal amid ongoing geopolitical tensions in the Middle East.
EURO AND US DOLLAR STEAL THE SHOW
The US Dollar Index climbed above 103.1, rebounding from a seven-month low, as strong economic data supported the case for a less aggressive dovish stance by the Fed; the recovery was, however, short lived. The euro rose above $1.10/€, hitting its highest level since early January, while the British pound hovered around $1.28/£, supported by recent economic data that aligned with market expectations.
The South African rand clawed back some ground this week, to trade just above the R18.00/$ mark at the time of writing – its strongest level since mid-July – driven by increasing expectations of a Fed rate cut. Locally, economists predict a 25-basis-point interest rate cut in South Africa in the coming months, contributing to the rand’s appreciation.
Key Indicators:
USD/ZAR: 17.97
EUR/ZAR: 19.74
GBP/ZAR: 23.15
BRENT CRUDE: $80.89
GOLD: $2,457.12
Sources: Trading Economics, Bloomberg, Reuters/Refinitiv, Financial Times, Daily Investor, and Biznews.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
Weekly Wrap content provided by Citadel Pty Ltd.
