Sasfin: Forex Daily Market – Current account surplus widened
Today’s talking point
Current account balance: T3
Expected: R 238 billion
Before: 343 billion rand
To analyse: The current account surplus widened for the second consecutive quarter in the second quarter to reach a record high of Rand 343 billion, mainly due to strong terms of trade due to higher commodity prices supporting the economy. exports. The strengthening of the external position remains a key contributor to the resilience of the ZAR in the face of shocks. Given the decline in the trade surplus recorded in the third quarter and the weakness of assets such as the ZAR and SAGBs, the surplus most likely narrowed quite sharply in the third quarter. Expectations according to Bloomberg are for a drop to 238 billion rand. While this is a significant drop from the second quarter numbers, it is still high by historical standards.
The depreciation of the trade-weighted USD, coupled with a surge in commodity prices, resulted in a further appreciation of the ZAR without much significant positive news for the SA to justify it. While one could argue that the first reports and data on the Omicron variant are encouraging as they reflect only mild symptoms for those infected, an IMF report on South Africa is a signal of alarming policy makers to focus on reforms and fiscal prudence if growth and jobs will never be achieved.
The powerful message to the government was not to waste the opportunity that high commodity prices and favorable global financing conditions created. The IMF cautions that these two factors supporting the South African economy are cyclical and, therefore, temporary. They have also done very little to help tackle unemployment, with the reasons for unemployment being more structural in nature and resulting in reductions in investment and productivity. THEREFORE, the IMF has joined calls on the government to implement sweeping reforms, reduce the role of government in the economy by removing existing regulatory barriers to the private sector, and get rid of poorly administered and poorly functioning public enterprises. What public enterprises are supported must be done with reforms that have a chance to succeed while key grid industries of electricity, telecommunications and transport must be liberalized.
The IMF added that more flexibility was needed in the labor market, in what will likely prove to be a contentious issue for unions. In addition, imposing a debt anchor and a debt ceiling to depoliticize deficit spending and hold finance ministers accountable for non-compliance with fiscal rules would be a step towards real fiscal consolidation. Finally, the IMF added to calls from the SARB that the SA should consider a lower inflation target.
Update of obligations
Retail sales were slightly lower in October with a contraction of 1.3% m / m noted, while the y / y number compressed to 1.8% from 2.1% previously, roughly in line with the expectations of consensus. The seasonally and inflation-adjusted figure was just under R80 billion, compared to a pre-COVID trend projection of around R83 to 85 billion. Households continue to spend 3-5% less than what was common before the pandemic. In contrast, QLFS data suggests that the total number of employees had declined by 13% by the end of the third quarter.
An emerging theme is the potential for further downward pressure on sales as special COVID subsidies end in 2022. Retail sales divided by number of people employed (QLFS) (sales per capita employed) have increased north of R16,000 / quarter. This is oddly 9% higher than the levels seen at the start of 2020. This could be partly supported by changing spending patterns, but just as plausible in the context of rising unemployment is that social subsidies have supported a sustained level of demand.
Note that the Auditor General offered bond bulls a reason to take a break yesterday. The annual report found that a significant percentage of government spending remains irregular and outside formal processes, with PRASA and NSFAS being the largest contributors. Final figures are likely to be higher than the first estimate of R167bn, with the report still awaiting some R2.14bn of incomplete expense reports. The budget overrun remains a concern at this point, as it would leave many ministries without a rudder if taxes suffered structural deterioration.