THE LAY OF THE LAND

Tito Mboweni took centre stage this week, delivering the 2021 National Budget in a time of significant economic turmoil for South Africa.The country’s financial position is far from healthy, but Mboweni did what he does best by adding a positive spin to the not-so-appealing address. However, whether this will be enough to appease credit ratings agencies remains to be seen.

FED TAKES THE SPOTLIGHT

While the Budget Speech commanded local attention this week, global focus shifted to Federal Reserve Chairman Jerome Powell’s testimony regarding the state of the US economy, as well as the central bank’s monetary approach and view of the path ahead. As expected, the Fed maintained its dovish stance, and some other key takeaways from Powell’s testimony included:

• The Federal Reserve will continue to use patience in tapering down on the super-easy monetary policy currently in play;
• There are no concerns regarding inflation at this point, as price volatility does not mean persistent price gains;
• The sharp rise in bond yields owes to an optimistic outlook, and is not seen as problematic;
• The US economy is still a long way from tip-top shape, but signs of optimism are beginning to show.

It’s been rather quiet on the political front in the United States since former President Donald Trump left office and compared to the excitement and volatility that Trump’s twitter account used to stir, markets seem to be far more at ease with under Biden’s leadership. As many will be aware, the US president’s first 100 days in office are normally seen as the most important, setting the tone for their ability to execute on policy changes. Some of Biden’s most significant acts have included:

• Ending the withdrawal process from the WHO
• Rejoining the Paris climate agreement
• Requesting that agencies extend eviction or foreclosure moratoriums
• Reversing travel bans targeting primarily Muslim countries
• Blocking the construction of the border wall
• Repealing the ban on transgender people serving openly in the US military

Additionally, one of Biden’s most highly anticipated proposals over the past few months has been the deployment of a staggering $1.9 trillion package focussing on stimulus payments, COVID-19 vaccine funding and jobless benefits.

Meanwhile, the focus of the EU summit that began yesterday is squarely on the rollout of COVID-19 vaccines – a task that the bloc has found extremely challenging. In a joint letter to the EU Council President which was published online by Polish government this week, the leaders of Lithuania, Poland, Denmark, Belgium and Spain wrote, “Our key message today is that we urgently need to integrate and strategically steer our value chain to boost our vaccine production capacities in Europe.”

Taking a look at some of the data released this week:

MBOWENI DELIVERS UPBEAT BUDGET

The National Budget came and went without too much noise or fallout for the local unit. The rand traded to a fresh high of R14.38/$, but Thursday was a tough day for the local currency as it tested the R14.80/$ level again during the afternoon before soon breaking past the R15.00/$ mark in the overnight session under pressure from a spike in US bond yields.

Minister Mboweni did his best to deliver a positive view on the country, and the budget is not as bad as it could have been considering the current economic and fiscal environment. But the devil lies in the details – or, in this case, the numbers. Some of the key numbers and risks to note are as follows:

The proposed wage bill cuts (which were implemented last year) are planned to slice the public wage bill by R303 billion between 2020/21 and 2023/24. However, unions will not be too impressed, and this could stoke labour market tensions in the coming months.
National Treasury forecasts 3.3% growth for the year ahead, before moderating to 2.2% for 2022 and 1.6% for 2023. Notably, 1.6% is well below the number needed to put South Africa back onto a more prosperous road.
Debt-service costs are conservatively expected to approach 21% of tax revenue – among the highest in the world.
However, while there are many risks attached to the budget, one cannot overlook the progress made:

Debt-to-GDP is now projected to peak at 88.9% in 2025/26, rather than around 95%. This, as Citadel Chief Investment Officer George Herman has noted, will bring some form of relief, and is one bit of “good news” we can take from the budget.
Corporate tax will be lowered to 27% from the beginning of April 2022.
An increase in personal income tax brackets by more than inflation will bring much-needed relief to households.
To read a review of the budget by Citadel Chief Economist and Advisory Partner Maarten Ackerman, click here

Local unemployment in Q4 2020 increased from 30.8% to 32.5%, while PPI year-on-year for January exceeded expectations, coming in at 3.5%.

LOOKING AHEAD

Supported by a dovish Fed and carry trade, the rand has been trading in a fairly wide range of between R14.40 and R14.80/$, with a continuing bias towards a weaker rand as the year progresses. However, a sustained move above R15.00/$ remains on the cards.

We will continue to monitor the US labour market, as well as the deployment of the stimulus package by the Biden administration.

Data expected during next week includes:

Monday:

• CN Caixin Manufacturing PMI FEB
• EU Markit Manufacturing PMI Final FEB
• ZA Total New Vehicle Sales FEB
• US Markit Manufacturing PMI Final FEB

Tuesday:

• ZA ABSA Manufacturing PMI FEB
• US Total Vehicle Sales FEB
• EU Inflation Rate YoY Flash FEB
• US ADP Employment Change FEB

Wednesday:

• CN Caixin Composite PMI FEB
• ZA IHS Markit PMI FEB
• EU Markit Composite PMI Final FEB

Thursday:

• EU Retail Sales YoY JAN & Unemployment Rate JAN
• US Initial Jobless Claims 27/FEB

Friday:

• US Unemployment Rate FEB
• The rand started the day trading at R15.06/$, R18.31/€ and R21.02/£.