The first quarter of 2019 did not disappoint in headlines. The United States (US) and China continue to stretch out trade deal talks in an attempt to find a palatable solution for both parties. The United Kingdom (UK) remains in a deadlock with the European Union (EU) over Brexit. The EU Council President Donald Tusk helped secure an Article 50 extension of up to 6 months. In Emerging Markets (EM) the Turkish Lira was under pressure after the ruling party of Erdogan lost control of key cities in their local elections. Overall, in the last year the South African Rand (ZAR), Turkish Lira (TRY) and Argentine Peso (ARS) were the worst three EM currencies.
Source: Bloomberg; Absa WIMI (April 2019)
Locally, the biggest fiscal event of the year, the National Budget was delivered in February. National Treasury estimates of 1.5% growth in 2019 and 2.1% in 2020 now seem overly optimistic. The R23 billion allocated to Eskom in the 2019/20 financial year and R69 billion over three years were the biggest eyebrow raisers. Details of the deal terms are yet to surface, but market experts anticipate the number might be larger, given the issues the utility is currently facing. The budget deficit at 4% by 2021/22 and Gross debt of 60.2% by 2023/24, unfortunately, indicative of fiscal slippage, much to the disappointment of market participants. Overall, National Treasury clearly has a limited amount of tools at their disposal and the levers to pull to improve the fiscal metrics are even more limited.
Eskom stage 4 load-shedding in March created anxiety for businesses and for the man on the street. Since then, the system status report for week 13 of 2019 estimated the energy availability factor (EAF) across all Eskom’s plant at 66.18%, up from a record low of 61.75% during the Stage 4 load shedding episode. Eskom’s target is an EAF of 80%, which has not been met since 2012. It remains to be seen if the power utility will be able to come up with sustainable solutions, which will benefit the economy as a whole. In the meantime, the National Energy Regulator of South Africa (NERSA) announced tariff increases of 9.4% (plus the initial 4.41% granted end of 2018), 8.1% and 5.2% for 2019, 2020 and 2021. Cumulatively, the SA consumer has had to stomach increases of close to 200% since 2007.
Source: ENCA; Absa WIMI (April 2019)
The final key event for Q1 was the non-announcement by Moody’s. The agency chose not to release its rating action announcement on the 29th of March. Instead, they released a Credit opinion on the 2nd of April. SA remains investment grade, at Baa3. They state that the credit is supported by a diversified economy; a sound Macro-economic policy framework; a deep pool of domestic investors; well-developed financial sector and markets; institutional strength (the Judiciary; The Reserve Bank and National Treasury); and low foreign debt. They highlight the constraints as elevated government debt; contingent liabilities risk from State Owned Entities (SOEs) which is limiting government ability to absorb shocks or use fiscal stimulus; low growth; deep-rooted social and political issues, hampering structural reform; bottlenecks stopping employment creation and finally growth opportunities. Most importantly, they stated two key catalysts for a downgrade as:
- Government debt and contingent liabilities from SOEs continue rising, beyond Baa3 levels
- Medium-term growth remaining at the low levels seen in 2018 of 0.8%
|Metric||12/31/2018||3/31/2019||Change||Positive ↑/ Negative ↓|
|Benchmark bond (R186)||8.88%||8.60%||-3.15%||↑|
|JSE All share index||52736||56463||7.07%||↑|
|Source: Bloomberg, Absa WIMI (April 2019)|
The quarter was tough on the rand, global and local headwinds resulted in the currency ending the quarter weaker by over a percent. The bond market benefited from a better than anticipated budget and the lack of a downgrade by Moody’s, which therefore resulted in strengthening over the quarter, by around 3%. The equity market was the biggest winner, with a 7% improvement on the JSE All-share index levels.