The Weekly Focus A Market and Economic Update 25 June 2018
Contents Newsflash...3 Economic Update...3 Rates...7 STANLIB Money Market Fund... 7 STANLIB Enhanced Yield Fund... 7 STANLIB Income Fund... 7 STANLIB Extra Income Fund... 7 STANLIB Flexible Income Fund... 7 STANLIB Multi-Manager Absolute Income Fund... 7
Newsflash There will be no commentary from Paul Hansen for the next 2 weeks. Economic Update 1. SA consumer inflation surprised on the downside in May 2018, easing to 4.4%y/y despite the higher fuel price. Lower food inflation helped, but overall little sign of upward pressure on prices. Still expect rates on hold. 2. SA current account deficit widened sharply in Q1 2018 to a massive -4.8% of GDP. Worse than expectations, hurt by a decline in exports. Rand to remain under pressure, especially if the "global trade war" rhetoric persists. 3. Namibian economy still grapples with recession although there are some signs of improvement. 1. In May 2018, South Africa s headline CPI inflation increased by a modest 0.2%m/m, which was less than market expectations for an increase of 0.4%m/m. As a consequence the annual rate of inflation eased to 4.4% from 4.5%y/y in April 2018. This was also lower than market expectations for inflation to rise to 4.6%y/y (STANLIB 4.6%y/y). Core consumer moderated from 4.5% to 4.4%. Most of the increase in headline inflation this month was due to the 49c/l increase in petrol price. Although SA inflation reached a lower turning point in March (3.8%y/y) and will tend to move higher over the coming months, there is little sign of significant upward pressure on prices, apart from the higher fuel prices. All of this supports the view that the Reserve Bank is likely to leave interest rates unchanged in the short to medium term, but closely monitor development in the currency market and the risk of Rand weakness resulting in broad-based upward pressure on prices. For 2017 as a whole, South African inflation averaged 5.3%, down from 6.3% in 2016, but up from 4.6% in 2015. SA inflation has averaged a respectable 5.6% over the past five years, and 6.1% over the past 10 years. For 2018 we forecast that SA inflation will average around 4.7%, and average about 5.5% in 2019. As mentioned above, most of the increase in the headline inflation during May was due to the higher petrol price. In May Petrol inflation rose by 3.6%m/m, with the annual rate rising to 9.4%y/y. This largely reflects the 49c/l increase in the petrol price during the month. Unfortunately the petrol price increased by a very substantial 82c/l in June, and is expected to rise noticeably further in July (possibly around 20c/l) given the weaker exchange rate. All of this means that petrol inflation will rise to around 24%y/y in July 2018, adding some upward pressure to the overall rate of inflation. In contrast, food inflation fell by -0.1%m/m, with the annual rate falling from 3.7%y/y in April to 3.0%y/y in May. This moderation in food inflation continues to reflect the benefits of the 2017 improvement in the summer agricultural season. While we expect consumer food inflation to drift somewhat higher over the next 12 months, the rate of increase is likely to be modest given current stock levels in the agricultural sector as well as the expectation of a respectable agricultural season for 2018 as a whole. CPI excluding food and petrol is still well within the inflation target at 4.3%y/y, while core inflation (CPI excluding food, fuel and electricity) eased to 4.4%y/y. Services inflation was recorded unchanged 5.3%y/y, while administered price inflation remained above the target at 6.2%y/y, mainly due to the higher petrol price. The inflation rate for pensioners also remained somewhat elevated at 4.7%y/y.
Although inflation is still expected to remain largely under control over the coming year, it will tend to drift towards the top-end of the inflation target in the first half of 2019, before stabilising at around 5.5% for 2019 as a whole. Importantly, the Reserve Bank has recently highlighted the importance of inflation stabilising around the midpoint of the inflation target (4.5%) and not at the upper-end of the band (6%). In addition, the weaker exchange rate, higher oil price, and above inflation increase in public sector wages will add some upward pressure to inflation. Consequently, we expect the Reserve Bank to keep rates over the short to medium term while trying to gauge the impact of current global developments (ie higher US interest rates, an escalation in the global trade-war, and increased nervousness about the economic fundamentals in many emerging economies) on the Rand exchange rate as well as inflation expectations. 2. In the first quarter of 2018, South Africa s current account deficit widened sharply to a massive -4.8% of GDP. This compares with a deficit of -2.9% of GDP in Q4 2017. The Q1 2018 deficit was much worse than market expectations, which was for the deficit to increase to -3.9% of GDP. In value terms, the current-account was recorded at R229.1 billion up substantially from R137.5 billion in Q4 2017 (these are annualised numbers). For 2017 as a whole, the current-account deficit was recorded at -R114.3bn (-2.5% of GDP), which is somewhat better than the 2016 deficit of -2.8% of GDP and a lot better than the 2015 deficit of -4.6% of GDP. For 2018 as a whole, we now expect the current account to widen to around -4.0% of GDP. Crucially, South Africa has been able unable to sustain the trade surplus that persisted throughout 2017, mainly as a result of a very substantial fall-off in exports. In Q1 2018, the trade balance recorded a deficit of R24.8 billion compared with a surplus of R74 billion in Q4 2017. This deterioration in the trade account is entirely due to a massive decline in exports both in terms of volumes as well as price. This decline was clearly aggravated by the relative strength of the Rand in the early part of 2018. The deterioration in the trade balance occurred despite a meaningful contraction in imports. Looking forward, the current rhetoric surrounding a global trade war is extremely unhelpful. Already there is evidence that the growth in global trade has softened. This together with a moderation in the pace of global growth will most likely continue to undermine South Africa s export performance. All of this implies a sustained trade deficit in 2018. In Q1 2018 there was only a modest change in South Africa s net dividend flows, which actually improved somewhat from R76.8bn in the fourth quarter of 2017 to R70.8bn in the first quarter of 2018 (see charts attached). This improvement reflected the net effect of a jump in dividend inflows, which rose by R19.4bn in the quarter, that were partly offset by a R13.4bn increase in dividend outflows. Dividend and interest outflows from South Africa are likely to remain a substantial drain on the current account in the years ahead given the large foreign holding of South African bonds and equities. Unfortunately, South Arica recorded a decline, albeit modest, in travel receipts during Q1 2018 (-R3.5bn), mainly as a result of Rand strength. And although travel payments also declined in the first quarter of the year, this decline was very modest (-R0.1bn). The net result was that the surplus on SA s travel account fell from R77.65 billion in the final quarter of 2017 to R74.27 billion in Q1 2018. Overall, South Africa is still not fully exploiting its full potential as a vibrant and growing world travel destination. The tourism sector has the ability to provide a much needed boost to employment, employing many low and semiskilled service industry workers. Looking forward, we are concerned that the latest weakness in SA exports could intensify if the current increase in global trade protection leads to slowdown in global trade. While this effect might be partially offset by recent Rand weakness, it does highlight that South Africa remains extremely vulnerable to changes in global economic activity. (This situation would be aggravated by the return of load-shedding and increased strike activity).
It is also clear that any serious endeavour to lift SA s economic growth through an increase in domestic demand will most likely lead to a sharp rise in imports, adding to concerns about the size of the current account deficit. All of this implies that the Rand remains vulnerable as foreign capital flows adjust to a world of rising developed market interest rates, unresolved structural weaknesses in the Euro-area, increased global trade protection, more modest world economic growth and increased vulnerabilities in a number of key emerging markets. Already, one of the key economic discussion points in the first half of 2018 has been the weakness in emerging market currencies and their associated vulnerabilities as the US tightens monetary policy. While not every emerging market currency has weakened against the US Dollar year-to-date, most have including the extreme depreciation of the Argentinian Peso, the Turkish Lira, and the Brazilian Real. Although many factors have contributed to the recent emerging market currency sell-off, we have been highlighting that not all of these currency movements can be attributed to changes in interest rate differentials or the expectation that the US will continue to increase rates. Instead, there is an argument to suggest that those emerging economies with weak or weakening economic/political fundamentals including large current account deficits have, in general, been more heavily impacted by the recent emerging market sell-off. 3. The Namibian Statistics Agency released first quarter 2018 GDP data which indicates that economic performance is still weak at -0.1% y/y. This is an improvement on the fourth quarter 2017 figure of -1.5% y/y but indicates that Namibian economic performance is facing challenges. Construction seems to have staged a strong comeback at 23.7% after contracting sharply in 2016 and 2017 by 26.2% and 25.1% respectively. The completion of the Husab mine, lower building plans passed and completed as well as a pullback in government capital expenditure led to the downturn in the sector. In fact most of 2017 s recession was largely due to the fall off in construction activity. Again, government dragged down overall performance contracting by -2.9% from growing by 0.7% in the previous quarter. This was largely due to government finances being under strain. The Namibian budget deficit widened due to lower than expected revenues whilst expenditures continued to increase. What is concerning, is that most of the increases in expenditure came from recurrent expenditures which are difficult to reduce when the budget comes under pressure. The agricultural sector weakened to 1.4% off a high base of 16.5% in the first quarter of 2017. The sector is quite cyclical in nature and improvements are expected from the second quarter 2018 however nothing like what was seen in 2017. Mining slowed to 4.7% from 13.1% in the fourth quarter of 2017. With the completion of the Husab Uranium mine, one of the largest uranium mines in the world, it was expected that mining activity would drive economic performance. So far the mine has failed to reach expectations with production being continuously disrupted. Activity in metal ores is also slowing which will continue to put pressure on overall mining. After declining by a massive 12% in the final quarter of 2017 manufacturing continued its decline and contracted by 2.1% in the first quarter of 2018. Wholesale and Retail Trade continued to contract showing weakness in the Namibian consumer. The sector fell by -1.3% in the first quarter of 2018 with the sector contracting by 7.2% for the whole of 2017. Vehicle sales were down 22.4% during the period as credit extension to the private sector remained at subdued levels.
Namibia s economy was in recession in 2017 contracting by -0.8%, and is currently undergoing the most drawn-out contraction on record. Looking at the low base that was set in 2017 the Namibian economy is likely to produce positive growth from the second quarter of this year however the recovery will be fragile. We expect 2018 GDP growth to be recorded at 1.2% which is not enough to reduce the unemployment rate or raise sufficient revenues to reduce the fiscal deficit. At this point the Namibian economy will struggle to raise tax revenue from the income and consumption side. Added to that is the lower SACU revenue which is expected to impact overall revenues for the current and next fiscal year. Please follow our regular economic updates on twitter @lingskevin Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)
Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.42% Effective: 6.61% STANLIB is required to quote an effective rate which is based upon a seven-day rolling average yield for Money Market Portfolios. The above quoted yield is calculated using an annualised seven-day rolling average as at 22 June 2018. This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 7.77% STANLIB is required to quote a current yield for Income Portfolios. This is an effective yield. The above quoted yield will vary from day to day and is a current yield as at 22 June 2018. The net (after fees) yield on the portfolio will be published daily in the major newspapers together with the all-in NAV price (includes the accrual for dividends and interest). This yield is a snapshot yield that reflects the weighted average running yield of all the underlying holdings of the portfolio. Monthly distributions will consist of dividends and interest. Interest will also be exempt from tax to the extent that investors are able to make use of the applicable interest exemption as currently allowed by the Income Tax Act. The portfolio s underlying investments will determine the split between dividends and interest. STANLIB Income Fund Effective Yield: 8.45% STANLIB Extra Income Fund Effective Yield: 7.74% STANLIB Flexible Income Fund Effective Yield: 6.15% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.13% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 22 June 2018. For the STANLIB Extra Income Fund, Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The historical yield over the last 12 months is reported for the STANLIB Multi-Manager Absolute Income Fund.
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