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Today’s Talking Point

GE IFO business climate: Jan

Expected: 90.2

Prior: 88.6

Analysis: The January edition of the IFO German business climate surveys is expected to reflect improving sentiment and further evidence that Europe’s biggest economy may manage to avoid a technical recession. Inflation appears to have peaked, while the threat of an energy crunch has receded due to an unusually mild winter. The outlook is thus improving slightly, although the German economy remains in the doldrums with the full impact of the ECB’s aggressive rate-hike cycle yet to filter through into the real economy.

Rand Update

The SARB’s composite leading business cycle indicator, released yesterday, showed that economic activity in South Africa declined 2.8% y/y in November. Falling business confidence, economic headwinds in SA’s key trading partners, and persistent load-shedding are taking a toll on the economy, with further vulnerability expected through the year ahead. If SA’s economy does grow through 2023, that growth is likely to be marginal at best.

Against a backdrop of stagnating global growth, SA Inc. is having to deal with additional headwinds as load-shedding becomes a near-permanent fixture in the country. It is thus potentially a game-changing development that National Treasury has allowed the City of Cape Town to buy privately-generated electricity from households and businesses. It is long overdue and will help the metro turn even less dependent on Eskom’s failing grid.

The City of Cape Town’s privatisation experiment will be viewed as a case study for the rest of the country, and may well be followed by many other metros in due time. While it won’t solve SA’s electricity crisis overnight, it will incentivise private power generation that could help reduce the country’s collective electricity bill.

As mentioned many times before in this note, SA has no option but to forge a path that involves less of Eskom and more of the private sector. SA may well be near rock bottom with regard to Eskom and load-shedding, with the government being forced to reform and/or privatise after more than a decade of avoiding responsibility. While the country remains in the trenches for now, there is light at the end of the tunnel.

The USD-ZAR has remained in a consolidatory range as it pivots around its 50-session moving average at 17.2000. The market is reluctant to adopt any directional impetus as it awaits the outcome of the SARB’s policy meeting tomorrow. The SARB’s conservative monetary policy has been key in shielding the ZAR from any material depreciation against the USD in recent months, and therefore holds plenty of market-moving potential into the end of the week and month.

Bond Update

Bonds/Yield Curve: Bonds had a better day yesterday, responding to the modest recovery in the ZAR, US Treasuries and another strong weekly bond auction. Total bids amounted to R13.66bn generating a cover ratio of 3.5 times, with robust demand noted for the R2035. Ahead of the budget in Feb, this suggests there is some confidence in the government’s ability to sustain the status quo. However, in truth, the demand for bonds has more to do with the global shift in inflation and interest rates than it has anything to do with the ZAR. SA bonds offer tremendous value if one believes that inflation will moderate and that real returns will be high.

FRAs: No sea-change to the FRA market, although rates have subsided slightly ahead of the SARB’s decision on Thursday. Evidence that the SA economy is under pressure, that the ZAR retains its resilience and that inflation is set to moderate sharply in the coming months should be enough to moderate the SARB’s policy to one last 25bp rate hike. However, the SARB’s guidance will offer greater clarity on that. For now, all SA markets will continue to trade in a rangebound fashion.

Repo: The SARB has thus far kept in lockstep with the Fed to ensure that negative speculation against the ZAR is discouraged. They have been successful in that, and their conservative stance on monetary policy means that the

monetary space for inflation to take hold no longer exists. There may be one more 25bp hike at the first meeting of 2023, but after that, the SARB may signal that they have done enough.

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