It was a busy week on the South African Investment calendar with two important events coinciding with one another. On Wednesday, Finance Minister, Tito Mboweni, delivered South Africa’s Medium-Term Budget Policy Statement (MTBPS), followed by ratings agency Moody’s announcement on South Africa’s credit rating.
Whilst the market anticipated a poor assessment of South Africa’s current fiscal position, Minister Mboweni’s sobering but realistic update was below most analyst expectations. Unsurprisingly, the Rand along with the South African bond yields weakened shortly after the announcement.
Key takeaways from the MTBPS included:
- A downward revision to economic growth estimates. GDP in 2019 has been revised down sharply to 0.5% from 1.5% expected in the February budget. Medium-term estimates have also been lowered with growth reaching 1.7% in 2022 from the 2.1% projected in February.
- Revenue collection has again been disappointing, with a likely R53 billion shortfall in 2019/20. This year’s budget deficit estimate goes up to 5.9% of GDP from 4.5% at the time of the budget.
- Gross debt is now expected to continue rising significantly, to over 70% in 2023/24 excluding support for Eskom, but 73.7% including projected support. The escalation continues over the longer term.
On Friday evening, Moody’s lowered its outlook on SA’s credit rating from stable to negative, signalling that the country has an 18-month window to get its house in order to avoid being cut to junk status. It kept SA’s debt at Baa3, one notch above sub-investment grade, or junk.
The change in outlook was largely expected by the market. A more severe decision by Moody’s would have been to place South Africa on negative watch, whereby a credit rating decision is typically concluded in a much shorter time period (typically 30 – 90 days) and would have signalled to the market a probable downgrade.
The JSE All Share Index ended the week up 2.73%, led higher by the resource (+4.92%) and Industrials (+3.75%) sectors. Financial stocks (-0.71%) ended the week in negative territory.
Market Moves of the Week
U.S. stocks climbed to fresh record highs after the October jobs report showed that the economy added more jobs than expected. Annualised third-quarter GDP was also better than expected (1.9% vs 1.7% expected). The Fed cut rates for a third time this year, as was widely expected, while indicating that further cuts were on hold as policymakers awaited incoming economic data.
On the trade war front, U.S. and China on Friday said they made progress in talks aimed at defusing a nearly 16-month-long trade war. The Chinese Commerce Ministry said the world’s two largest economies had reached “consensus on principles” during a “serious and constructive” telephone call between their main trade negotiators. Meanwhile, President Trump said he hoped to sign an agreement with Chinese President Xi Jinping at a U.S. location, perhaps in the farming state of Iowa.
Staying with politics, The European Union agreed in principle to extend Brexit until 31 January 2020. EU Council President, Donald Tusk, termed it as a “flextension” - meaning that the UK could leave before the deadline if a deal was approved by Parliament.
Meanwhile, Prime Minster Johnson finally got his way with a U.K. general election set for the 12th of December. With the U.K. still in the EU during the election, the poll is likely to turn into a proxy referendum on Brexit. It will be potentially the final opportunity for voters to choose between parties offering to stop Brexit or force through the split at any cost.
For the week, global equities were mixed. In the U.S., the Dow Jones (+1.44%), S&P 500 (+1.47%) and Nasdaq (+1.74%) posted positive gains. Similarly, Asian markets were also marginally stronger with the Nikkei 225 (+0.22%) and Shanghai Composite (+0.11%) both ending the week slightly higher, whilst European markets were slightly weaker: Euro Stoxx 50 (-0.03%), FTSE 100 (-0.30%).
Chart of the Week
South Africa’s total gross loan debt is budgeted to rise to a revised 60.8% of GDP in 2019/20, much higher than the 56.2% forecast in the February 2019 Budget Speech, and to continue rising to 71.3% in 2022/23. Even excluding Eskom bailouts, the figures are unflattering, with a move to 68% over the period.
Source: World Bank | Statista Charts (Based on 12 regulations that enhance/constrain business activity).
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