Rates, Rand & Ratings

South Africa’s first interest rate cut in five years, and a surprise one at that, probably won’t be enough to break the rand’s resilience. The currency fell after the South African Reserve Bank reduced its key rate on Thursday to 6.75% from 7% to boost an economy in recession, defying predictions of 20 out of 23 economists in a Bloomberg survey. But it soon reversed most its losses to trade at R12.9587 per dollar at 19:00 on Thursday, around the same level as before the SARB’s announcement. By 08:30 on Friday, it was trading 0.17% stronger at R13.01 to the dollar.

h3. Rand

The rand has been one of the main beneficiaries of an emerging-market rally this year, driven by the belief that the US Federal Reserve will only enact rate increases slowly. The high returns on South African bonds mean it’s unlikely to weaken much, especially as the central bank will be cautious about further cuts with inflation near the top of its target range, according to Aberdeen Asset Management and Rabobank. “It’s not obvious why the currency should weaken from here,” said Kevin Daly, a money manager in London at Aberdeen, which oversees $11bn of emerging-markets assets, including South African debt. “We’re still looking at very high real rates and it’s not like these guys will be on a rate-cutting spree like Brazil. They’re very limited in what they can do.”

Heading into the weekend of another tumultuous week, investors will feel like they need a break given all the fresh revelations, developments at Eskom, around the mining charter, comments from former Fin Ministers Gordhan and Jonas and calls from ANC Secretary General that those implicated in the Gupta-leaks scandal should be arrested. Politics will unfortunately remain front and centre through the weekend ahead with the ANC holding another lekgotla this weekend.

h3. Ratings

The focus will be economic growth and how to reverse the ratings slide into junk. Given that the driver of the slowdown in growth has been a function of ANC ideology, policy, corruption and maladministration, it will take a radical approach to economic transformation to turn the economic ship around, but one that the ANC is not capable of making. There is a very low probability that any meaningful reforms will be adopted at this Lekgotla that would stand any chance of changing the economic trajectory and so we continue to build strategy around the very high probability that economic growth will continue to stagnate, that the credit cycle will remain tight, that confidence and consumption will remain weak and that the lack of investments will persist.

h3. Bonds

Local bonds were boosted by the rate decrease, with the yield on the government’s benchmark notes due in December 2026 dropping 10 basis points to 8.54%, the lowest in more than three weeks. The benchmark equity index climbed 0.4%, led by gains among insurers and retailers.

h3. Budget Deficit

Government’s budget deficit shrunk slightly in May, to R21.2bn from R30.7bn in April, keeping with the seasonal trend typically observed between these two months. The data compares with a R22.8bn shortfall in April 2016. When adjusting the data for inflation and assessing the figures on a cumulative basis, it becomes clear that South Africa has not yet made material progress in consolidating its fiscus. Going forward, the major challenges remain, with government’s lack of progress in implementing growth-enhancing reforms that aid in bolstering tax revenue, as well as an inability or unwillingness to meaningfully curb government spending. On this, June data is likely to reflect a seasonal shift into surplus territory.

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