AGAINST logic, rational thinking and economic theory, the devastating looting and “political” unrest in KZN and Gauteng last week had no serious effects on South African Financial markets, for now.
Although the rand came under pressure, losing 50 cents against the US$, to R14.72/$, last Wednesday, the currency started to improve again to close on Friday on R14.48/$.
Foreign investors started to buy South African bonds last Thursday and Friday (after some heavy sales the first half of the week). This after President Cyril Ramaphosa called up the SANDF to support the SAPS in the looting strike areas of KZN and Gauteng.
On the JSE, share prices, against logic, had a bullish first part of the week and especially on Wednesday as the ALSI ended 2.3% higher since the opening last Monday, with resources (+4.0%) and industrial shares (+3.3%) gaining strongly as the weaker rand boosted these shares.
Last Thursday and Friday, as the R$ started to appreciate again as well as negative economic data from the US and lower commodity prices, a sell-off of resources and industrial shares was experienced.
The volatility had led to most share indices to end flat or at the close on Friday. The ALSI ended the week marginally with 0.2% higher. The Industrial 25 gained 2.8%, with the Financial 15 losing 4.0%; listed property was down by 5.0% and the Resources 10 index shedding 0.8%.
The warning, however, for financial markets after the unrest and looting lies in the medium- to longer-term effects on the economy.
The shortages of food and other essentials will lead to increases in the prices for these commodities. Together with a possible further depreciation of the rand, as the dollar strengthen on possible sooner than later hikes in US interest rates, domestic inflation may increase much more quicker than forecasted.
This again may lead to pressure on the Reserve Bank to increase domestic interest rates. It is also expected that economic growth may come in 1.0% lower than previously expected.
Most analysts and economist put the growth in the GDP rate between 3.6% and 4.0% for this year after most were bullish calling for an expected growth rate of 4.5% and higher. This is, however,l above the 3.6% that the Department of Finance forecasted during it budget in February and May not necessary put further debt burden on the fiscus.
Unemployment is expected to rise even further strongly during the latter part of the year and one may expect that the unemployment rate may rise quickly from the current 32.6%, to around 34.0%, putting huge pressure on the government to render social services and social grants, as food shortages increases.
The biggest challenge is to open infrastructure and road transport as quickly as possible in order not to further hamper South African exports further. Agriculture exports, especially from the summer rainfall areas, like maize and soya beans are expected to be the highest yet, after record crops are forecasted.
The Covid-19 vaccination programme must also continue aiming at 300 000 vaccinations a day.
Grading agencies also may keep the trash grading of South Africa’s sovereign debt longer, which may affect bond rates and foreign investment
This coming week, investors and analysts will concentrate on a few top 40 companies that will release their earnings results for the first six months. The Monetary Policy Committee will start its July meeting on Tuesday and Statistics SA will announce South Africa’s inflation rate for June on Wednesday. It is expected that the inflation rate came down, from 5.2% in May to 4.8% in June. Therefore, it is expected that the MPS will keep the repo rate on 3.5% when it make its announcement on Thursday afternoon.
On global markets, investors will keep their eyes on the Europe Central Bank press conference on Thursday. The US weekly jobless data that will be released on Thursday will be of importance. On Friday the UK will announce its consumer confidence index for June, while the US and most of the European countries will publish their Purchasers Managers Indices for July.
Chris Harmse is the economist of CH Economics (Pty) Ltd.
BUSINESS REPORT ONLINE