Today's Talking Point SACCI Business Confidence: Jan Expected: 92.5 Prior:
Today’s Talking Point
SACCI Business Confidence: Jan
Expected: 92.5
Prior:
Analysis: Although the SACCI BCI dropped in November, it remained near pre-pandemic levels, suggesting that focus is turning to SA’s usual structural issues rather than just the rebound from last year’s lockdowns. While the government has laid some foundation to enact reforms, implementing these reforms will be needed to help boost business sentiment and to attract much-needed capital for economic growth purposes. However, note that less stringent restrictions and the possibility of them being completely removed is likely to provide some support to business sentiment in the near term.
Rand Update
It is not entirely clear what specific catalyst helped trigger the bout of appreciation on the ZAR, but there was at least some good news for the ZAR market to digest yesterday. For starters, Eskom appears to have called an end to load shedding and one can only hope that it will last this time. Loadshedding does tend to influence the value of the ZAR; however, just as important if not more important has been the recovery in commodity prices and the assistance it has give to boosting SA’s terms of trade.
The CRB Industrials Metals index has surged in the past two weeks, which is difficult to ignore. For a commodity currency such as the ZAR, this is indeed good news and suggests that commodity prices excluding oil can rise even further as the global economy gradually recovers and bolsters demand. Given the role that high commodity prices have played in boosting the trade and current account surpluses as well as the boost it gave the fiscus, this is a windfall that SA traders will latch on to.
Interestingly, the ZAR appreciation comes when the USD has steadied, so none of the ZAR’s appreciation can be attributed to a weaker USD. In fact, through yesterday’s trade, the opposite holds true. Also assisting the ZAR has been the rally in the gold price while the platinum price has also caught a more bid tone.
Bond Update
It is interesting to note that the Land Bank has announced the departure of its CEO, appointed during COVID, and another executive manager. Note that management changes have been ongoing for some time, with the finance minister appointing a new board in December, while the government is in the process of recapitalising the agricultural lender possibly as soon as the end of the financial year. An agricultural economist, Thabi Nkosi, has been appointed as the board chair. This signals a new approach to SOE reform, seeking to establish some accountability and sustainability within internal processes. Nkosi has paid homage to finance minister Godongwana, saying that the minister is looking “at the problems facing the bank from a different perspective”.
The SOE has also announced significant plans for a turnaround, intending to return to proper financial function by the end of the financial year. The government issued a bailout of R3bn to the lender following a COVID-induced cross-default and has committed another R7bn of capital over the next three years. From a bond market perspective, this will assist in assuring stakeholders that the government is working to alleviate the problems of recent years. Nkosi is clearly focussed on improving lending practise and is quoted as saying that the board has ” revived discussions with the bank’s lenders, and we have started looking at the efficiency of the bank’s internal controls systems and financial processes.”
For the bond market, this could hold some significance as the move out of default and the continuing bailout of the SOE could offer some attractive entry points for yield-hungry investors. According to Bloomberg data, the 2028-maturing bond currently holds a YTM of 9.75%, which is down from COVID peaks north of 11.60%. The bond matures in August 2022 and reflects expectations that it will be honoured with its yield dipping down to 5.093% from yields towards 10% just last year. Coupon rates are also very high, even for South Africa, with a range of 9.715%-10.565%. All the bonds are trading at a premium to their coupon rates, with maturities ranging from 2022 to 2028.
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