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It was another roller-coaster week for the South African economy and the rand as politics still played a role with the new cabinet announced late Sunday night.
It was also hard to pin down the rand as it was all over from the lowest point at below R18/$ to ending the week at R18.28/$.
Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says both the Absa and S&P Global PMIs came in below the neutral 50-point mark in June and it is concerning that both point to weak demand with lingering political uncertainty weighing on orders.
However, she says, Sunday’s announcement of the new cabinet brings much-needed certainty, although it is too soon to tell how these ministers will perform.
“The cabinet is big, but this was perhaps to be expected given that many parties and people within parties had to be considered.
“On the one hand, it is encouraging that all GNU (government of national unity) parties seem broadly in agreement with the national cabinet or at least none have disagreed publicly. On the other hand, a bloated cabinet can make the day-to-day workings of government more complicated.”
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She says it will require consistent cooperation between GNU parties across and within ministries, which will not always be easy. Indeed, in Gauteng, ANC premier Panyaza Lesufi announced a minority cabinet after negotiations with the DA failed.
“Without commenting on each individual appointment to the national executive, it is welcome that Finance Minister Enoch Godongwana remained in his post. Indeed, he since said that fiscal consolidation will continue and that Treasury aims to have the debt-to-GDP ratio peak next year in line with the Budget’s latest forecast.”
She also finds the clarity regarding the energy portfolio, with all the power in the hands of Electricity and Energy Minister Kgosientsho Ramokgopa, a positive.
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The rand exchange rate recovered from Tuesday’s losses on Wednesday and Thursday. The weaker dollar, in turn, led to a higher gold price. Meanwhile, Brent crude traded close to a two-month high mid-week following data showing a sharp decline in United States inventories and worries that hurricane Beryl could threaten production.
Nkosiphindile Shange, economist at the BER, points out that although the Absa PMI increased by 1.9 points to reach 45.7 points in June 2024, it was in contractionary territory for a second consecutive month.
“Despite the stable electricity supply through Q2, insufficient demand seems to have weighed heavily on the sector’s performance in May and June. On a positive note, cost pressure is subsiding on the back of a relatively stronger currency towards the end of the second quarter, giving some relief as fuel prices decline.”
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The index tracking expected business conditions in six months’ time came out very positive, with respondents likely hoping for diminished political certainty and (global and local) monetary policy easing.
However, new vehicle sales indicate a sector under pressure, Shange says. According to the National Association of Automobile Manufacturers of South Africa (Naamsa), new vehicle sales declined sharply by 14% in June compared to a year ago, following another sharp decline of 14.2% in May.
“As reflected in the still negative FNB/BER Consumer Confidence Index in the week before, consumers continue to grapple with a weak economic environment and high-cost pressures, which is reflected in the new vehicle sales.
“A possible interest rate cut before the year’s end will benefit the sector and we expect that the downward trend in inflation can be maintained.”
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Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand closed at R18.24/$ against the dollar on Thursday, stronger than the R18.40/$ on Wednesday. The weaker dollar, as US economic data reinforced expectations of the Fed cutting rates in September, benefitted the local unit.
The dollar continued to depreciate as US economic data continued to support the case for a Fed interest rate cut in September, they say.
“The contraction in vehicle sales moderated slightly from 14.2% which was broadly in line with our expectations. The outcome reflects the continuing impact of the high-interest rate environment, which is squeezing discretionary incomes and stifling demand for credit, while there is some indication that uncertainties around the election outcomes led to the postponement of purchases of big-ticket items, particularly by the commercial sector.”
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FNB economists Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano also noted the unsatisfactory PMIs and say in addition to weak demand, supplier performance worsened, indicating that port issues remain a drag on the sector.
“On the positive end, purchasing prices are easing and expectations for near-term business conditions are upbeat, likely reflecting easing political uncertainty as well as an anticipated improvement in global activity as monetary policy eases.”
They also noted that South Africa’s gross foreign exchange reserves were barely changed at $62.1 billion in June. “The decline in gold reserves was outweighed by higher foreign exchange reserves, including Special Drawing Rights holdings. Overall, changes were mainly driven by valuation and asset price adjustments, which were offset by foreign exchange payments made on behalf of the government.”
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