What’s Up Wednesday: 17 November 2021

TRANSCRIPT

Last week we spoke about the Budget Speech delivered by Tito Mboweni. How did things actually play out in the market after his speech?

• The initial reaction for the Rand was impressive as we strengthened significantly.  Tito surprised the market by not only scrapping R40bn worth of proposed tax hikes but also by bringing our corporate tax rate down from 28% to 27% which will help support local business as we look to recover from our lockdown induced slump.  He also announced a 3-year wage freeze for public servants which will save R300bn over the period which was welcomed by the market, and the Rand shot from R14.54 to R14.38 to the Dollar in double quick time.
• Unfortunately, the Rand could not hold onto these gains as the market turned its attention to the finer details around our debt situation, with particular attention being paid to our ballooning debt servicing costs which will see interest repayments alone in 2023 come in at R338bn.  A good analogy is that we took 10 steps backwards from the 2020 budget speech to the October mini budget thanks to COVID, and while we have taken 5 steps forward since October which is an admiral achievement and the highlights of Tito’s budget, we are still 5 steps behind this time last year and the Rand got hit. 

So, the Budget Speech first helped the Rand but then ended up hurting us, but why did we keep falling to R15.19 even after the debt news had been reported on? 

• Even without the Budget Speech the Rand would have come under serious pressure last week thanks to developments in the US so unfortunately a combination of the two saw us blow past R15.00 to the Dollar.  Bond yields in developed markets have been extremely low for a long time but last week the US 10-year bond shot up to 1.6% thanks to several reasons including fears over inflation as well as weak demand for their bond issuance which means rates have to go higher to attract investors.
• The result is that higher returns in the fixed income / bond market eventually makes these assets more attractive when compared to riskier alternatives and we saw a sharp selloff in global equities coupled with emerging market currencies and the Rand came under pressure.

Increasing bond yields in the developed world like the US, UK and Europe have been bad for the Rand all round.

• This is not the case as this story has two moving parts, one being the rising bond yields and the other being what the respective central banks have done in reaction.  In the US their central bank has largely ignored rising yields saying that they would not deploy any tools to curb rate increases and that saw the Dollar strengthen as investors didn’t need to worry about artificially lowered rates.  But in Europe the president of European Central Bank said consumers and businesses would be negatively impacted by higher rates and that the bank would act to bring yields down.  This hurt the Euro and helped the Rand gain against the Euro at a time when we lost ground against the Dollar. 

In parting is there anything on the immediate horizon that the Rand should be paying attention to?

• Locally there is nothing on the radar but internationally we have the Chair of the US central bank talking on Friday which always moves the currency market, and on Friday we get the February US jobs data release.  Lately US jobs data has been surprisingly poor which hurt the Dollar and has been good for the Rand so it will be interesting to see what this latest data point delivers. 

OFFSHORE INVESTMENT OFFERING