The South African economy and the currency are greatly influenced by what happens in the world economy to the extent that some commentators say that our local problems almost become insignificant and investor decisions are driven by global changes in sentiment. For example, South African bonds have seen inflows in November 2020 after the US elections and improved global sentiment, despite our poor government debt outlook and slow growth.
Murtaza Moulvi Head of Financial Markets South Africa and Southern Africa, at Standard Chartered answers some questions and shares his insights about the impact of the global economy on the South African markets.
Q & A with Murtaza Moulvi on global economy impact on South Africa
What are your views on the impact of the global economy on South African markets as progress through 2021?
Murtaza Moulvi: We maintain a bullish outlook across the EM spectrum especially in South Africa for various reasons. Firstly, the metrics, the Bond yield continues to perform, so does the stock market. The FX seems like it’s just getting started all this on the back of a pandemic – exclusion from the world bond index and more disappointed with a far less vaccine rollout than originally estimated. Secondly, US rates markets have come under increasing pressure, particularly at the long end of the curve. EM currencies face mounting headwinds as a result, with higher-yield FX generally bearing the brunt of the pain. Analogies to the taper tantrum are unavoidable, but we believe the difference in the behavior of real yields is key for EM FX. Negative real yields suggest to us that EM FX gains are delayed, not aborted – hence to the point that it’s the start of the buyback of risk i.e. EM i.e. ZAR.
Will South Africa continues to be subjected to global trends, or will there be a point where our local debt levels and problems become so great that investors will just shun South Africa categorically?
Medium & Longer term yes – but in the short term the hunt for yield will continue to benefit South Africa – and if the issuances continue to attract short-term money over some time – this will also be lesser of a concern.
What is your broad view on the dollar going into 2021 and what would a weaker dollar environment mean for South Africa, specifically as a commodity exporter?
It’s never the absolute level of commodities or the USD that hurts or benefits – but rather the pace and the circumstances which go along with it. For now, with a moderate commodity price, controlled inflation, lower real interest rates, and a stable FX – all these seem to be playing in the favor of the medium-term outlook for South Africa.
News reports about the COVID-19 vaccine have dominated headlines over the past few weeks. How big a factor will a vaccine be in driving the global economic recovery this year? Is the positivity we have seen in markets around this justified? Or do you think it will recede once the realities of administering a vaccine over the long-term become clearer?
Vaccine rollouts have been slower than initially expected, but the market has been patient with it – given the fact, there is talk of a certain amount of herd immunity also creeping in simultaneously. That combined with the governments ensuring that they will be supportive as long as it takes for the economy to recover – showcases the intent between making sure no stone is unturned in the recovery process.
American President, Joe Biden has appointed his leadership team. Most notably, he has appointed Janet Yellen as Treasury Secretary. How do you see the change in administration in the US affecting SA and other emerging markets?
Once again – our view is the USA and other central banks will continue with the wait and watch mantra and make sure to provide ample stimulus both fiscal & monetary if need be. In that case, the EM space will continue to attract investors.
What is Standard Chartered’s broad outlook for the South African economy in the new year? Are there any other global trends or developments that we should be watching closely in the new year from a South African vantage point?
We are positive on emerging markets globally. The combination of a weaker USD outlook contained UST yields (and related rates volatility) and a more constructive global trade backdrop supports our view. For the ZAR specifically, we point to several positives in 2021:
· Foreign equity positioning in South Africa is low. We project $5-7 billion of equity inflows through 2021, and even this would only return passive investors to the benchmark.
· Foreign bond positioning in South Africa is at a nine-year low, following the 2020 Moody’s downgrade. The SAGB curve is the steepest in EM and real yields the highest. This could generate $5 billion of inflows in 2021.
· The trade (and current account) positions turned sharply positive in 2020; this should continue in 2021 as domestic demand (and therefore imports) remains weak.
· While South Africa’s weak growth has resulted in a deteriorating debt-to-GDP profile, a supportive global backdrop and lower interest rates locally mean debt servicing has not deteriorated significantly.
What are your thoughts on Finance Minister Tito Mboweni’s budget speech?
Timing is everything. The announcement of South Africa’s Budget comes amid new inflation concerns in fixed income markets in developed and emerging markets. The bar for a positive market reaction to the budget will be high. While markets were more lenient with fiscal expansion plans announced by other emerging markets, in South Africa the relationship between fiscal expansion and faster growth has been more tenuous. Markets will want to see evidence of fiscal consolidation and improved spending (away from consumption towards investment). In short, they will seek reassurance on both debt and growth.
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