The downside
The results of the most recent Altron FinTech Household Resilience Index (AFHRI) were released in October. They confirm the continued financial pressure on South African households, mainly due to the high interest rates over the past two years, which have raised the average debt cost burden to its highest level in 15 years. South Africa’s residential property market has been exceptionally hard hit by the high interest rates, which have served as a disincentive for home buying.
Since the higher interest rates started to bite, bond originators have experienced declining trends in new home loan applications. Still, the deposits that banks require for home loans have risen to record highs, leading to a measure of exclusion for many prospective home buyers. During October, the annual gathering of BRICS countries took place in Russia, with the usual bout of anti-American and anti-European statements and threats of establishing a BRICS currency, ostensibly to eventually challenge the mighty US dollar.
This qualifies as a textbook example of a “pipe dream”. The close relationship that the ANC has with Russia’s president, who has a warrant of arrest for war crimes hanging above his head, is an embarrassment to many South Africans and has led to a degree of tension in the government of national unity.
The upside
Consumer & producer inflation continues to drop.
The consumer price index (CPI) has continued its downward trend, with the September figure of 3.8% being the lowest in 42 months. The fact that the CPI has been comfortably within the Reserve Banks’s target range of 3% to 6% for 16 consecutive months has raised questions over the hesitance of the monetary authorities to lower interest rates more aggressively. Until now, the only rate cut has been a meagre 25 basis points in September. Due to the sustained drop in the CPI, this cannot be regarded as a switch to less restrictive monetary policy, as the real prime rate has increased from 7.1% to 7.7% over the past two months.
Shops that sell furniture and appliances fared the best, posting a rise of 4.7%, followed by general dealers (the largest group) at 4.4%.
The dramatic decline in the producer price index (PPI) from a double-digit figure in March 2023 to merely 1% in September has probably guaranteed a hefty decrease in lending rates in November. The PPI serves as a leading indicator for consumer prices, and further reductions in the CPI are on the cards. Lower interest rates will encourage consumer spending over the festive season, boosting fourth-quarter GDP.
The welcome decline in the bond yield
Over the past six months, the yield on South Africa’s 10-year bonds has taken a nosedive, dropping by almost 190 basis points. This makes a mockery of the Reserve Bank’s refusal to follow the lead of the country’s benchmark long-term interest rate.
US dollar strength knocks most currencies.
The fourth quarter of the year it started on a high note for the US dollar, with the so-called “Dixie” ending October 3.1% higher than at the end of September. The “Dixie” is an index that measures the value of the US dollar relative to a basket of foreign currencies and is widely regarded as an accurate gauge of the dollar’s value against most stable currencies.
Predictably, the greenback has taken revenge on most critical currencies around the globe, with no currency monitored by Currencies Direct managing to escape the dollar’s wrath in October. The South African rand was in the middle of the 16 monitored currencies. It was marginally undervalued at the end of October (regarding its real effective exchange rate – REER). Despite a measure of uncertainty over the possible outcome of the US presidential election, further rate cuts by the Fed are bound to diminish the attractiveness of the dollar, and the “Dixie’s” next significant move is likely to be downward, which should lead to a strengthening of the rand.
On Balance by Dr Roelof Botha deliberately emphasises positive news that, more often than not, emphasises the resilience of the South African economy and the immense scope for new business opportunities.
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