Short Note 15 November 2016
Changing SA scene
by Cees Bruggemans words 570
We face a policy switch in the US in 2017, meaning fiscal taking the lead through bigger deficits and monetary becoming defensive through higher rates. Higher bond yields and stronger Dollar anticipate this and otherwise will follow. Also, any trade accords may suffer revision, naturally at our expensive. Thus directly & indirectly we face possibly steep Trump premiums. This implies downside for the Rand, given our sizeable current account deficit near 3% of GDP.
As if any of this isn't enough, there is our domestic angle. The nuclear deal has become ever more ominous following reported August talks between Gwede and Julius. What is coming more clearly into focus is the Zuma staying power and voice in the succession. As a consequence we face short-term risks (rating agencies giving up on us, downrating us, giving further downside risk to the Rand). But on a slightly longer time frame we face much more momentous risks if the Zuma presidency were to throw its weight around, shuffle cabinet and force through the nuclear deal. Would that be sudden death?
While the Trump win is momentous and the imminent policy changes significant, it frankly all pales into insignificance next to the risks we are apparently running domestically in SA. If, as reportedly suggested, the Russians have already been committed upfront, and it now requires a political act in SA to formalize this deal, it doesn't look like the national interest has been served. Instead, it may have been sunk. If so, markets won't be slow to reflect this once confirmed, and rating agencies may need to have another look at our contingent liabilities these next 50 years.
So if a stronger Dollar implies a weaker Rand, formal inking of a nuclear power deal might suggest further weakening of the national finances warranting yet more degrading and Rand weakening.
A substantially undervalued Rand in 2017, though supportive for exporters, will likely boost our inflation performance anew. In turn, such a prospect is likely to keep the SARB highly vigilant, in any case assured by the US policy switch to a more defensive monetary stance, and more Fed interest rate hikes in 2017-2018, with markets yet to fully discount this (promising yet more turmoil for us?).
It suggests renewed SARB emphasis on a still rising rate trajectory, rather than confirming rate peaking and potential rate cutting next year. Only an ending of the Zuma era, and a nuclear deal being prevented, with rating agencies keeping the fate, might bring the Rand back anew and at some point lower the inflation performance enough for SARB to confirm rate peaking followed by rate cutting.
For now that appears a bridge too far. We have yet to see how severe the Trump policy switching impact will be for us. The bigger question involves the Zuma succession and whether it will turn out to be affordable or totally beyond reach, being a peach of a pension send-off.
Meanwhile Judge Dennis Davis of the tax committee reportedly doesn't see a VAT hike next Feb, but he does see a top income tax rate of 45%. And various sources suggest the university chaos hasn't been resolved yet. Quality academics, and higher income students, are draining away overseas, and what remains can be expected to protest and cost a lot more over the next three years. These are non-sustainable trends in a stagnating economy structurally getting weaker.
Bruggemans & Associates, Consulting Economists