Tag Archives: south african rand

Some Positive light for South Africans.

by Wandile Sihlobo

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Many of us South Africans have been feeling a pinch in our pockets since the 2008/09 economic crisis, but the pain worsened last year, May 2013, when the US Fed announced the tapering of the quantity easing (QE), which is basically “an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective”. This announcement resulted in a significant weakening of the Rand value against the US dollar, meaning that it became more expensive to import goods. On the other hand, there were hopes that this will result to an increased competitiveness of South African goods to export markets, and even economic growth. However, weak global economic climate curbed these gains. Nevertheless, this article will attempt to highlight some few expected positive news for South African citizens this festive season and early 2015. In doing that, we’ll highlight a brief overview of the major event “2013 to 2014” which happened in the in food (grain) markets.

In November 2013, South Africa’s maize (corn) prices, which serves as an input/feed in milk, meat and poultry production, increased by more than 20% per ton (from R2200/ton of white maize to R3200/ton). Meaning that South Africa’s meat, milk, eggs, poultry, maize-meal etc prices also increased significantly. All this added a burden to fellow South Africans, especially the poor, who consume a large part of the above-mentioned commodities. These maize price increases were mainly due to unexpected demand from Zimbabwe, which resulted to a sale of about 240 000 tons of South Africa’s white maize to Zimbabwe, as well as increased buying by Mexico.

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However, in the beginning of March 2014, South Africa’s great agriculture saved us all, as the early harvest started to get into the markets and prices responded to normal levels. Nevertheless, these gains were not as quick to reach consumer’s pockets, due to high fuel prices (Petrol and Diesel) which were mainly supported by high Brent crude prices, at the back of unrests in the Ukraine-Russia region, Libya, as well as the weak Rand.

Recently, Brent crude prices have weakened to levels below $80 per barrel, and this has started to filter in on South Africa’s fuel prices. As a result, on the 3rd of December 2014, petrol and diesel prices are expected to respectively decrease by 79 and 57 cents per litre. This is going to come in handy during festive season, as many families will be driving long distances to holiday resorts, as well as on food prices.

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In January 2015, South Africa might see further relief on fuel prices, as the “Organization of the Petroleum Exporting Countries (OPEC)” will continue with its elevated oil supplies (It was decided on the OPEC meeting held on the 27th of November that oil supplies won’t be decreased). Moreover, on the 27th of November, South Africa’s annual Producer inflation came out at 6.7% in October, from 6.9% in September. Additionally, 2014 South Africa’s maize production reached a record of 14.3 million tons. However, the country did not see large exports (white maize) as the previous years, owing to soft demand in the traditional African markets. In 2015, the International Grains Council (IGC) expects South Africa’s maize production to easy around 13 million tons. Currently, maize prices (spot price) are at low levels of R1900/ton, and expected to remain at low levels owing to available good stocks and expected normal weather conditions for the rest of the season. On the International markets, there is a lot of maize (mainly United States, South America and the Black Sea region) which will continue to put pressure on the international maize (corn) prices. On the continent, Zambia is expected to have a good crop, and will possible supply Zimbabwe, which will lessen South Africa’s export demand.

All the aforementioned aspects will translate to low inflation, which is already within the Reserve Bank’s target (3-6%), at 5.9% in October 2014. In conclusion, if spending is managed properly, Christmas time and January 21 might not be as bad as expected. There’s more exciting news in the food markets, which will indirectly translate to other gains in the economy.

The South African Rand and Brent Crude Oil Forecasts.

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There have been some arguments that the weakening of the South African Rand against the US Dollar will somehow stimulate the economic growth. However, this is rather a misleading advice as rand weakness raises inflation and so results in increased strike action (labour unrests) and higher wages. This article will give a snapshot of the exchange rate outlook (ZAR/USD), as well as the Brent Crude Oil outlook.

Exchange rates (ZAR/USD) Insights

The South African Rand has been one of the most volatile currencies amongst its peers, and continues to be rated amongst the “worst performing” currencies within emerging markets. Of course, there is no consensus on what a best performing currency is. The main driving factors behind this volatility have been ranging from domestic (i.e. labour relations) and international environment (i.e. US quantity easing and slow global economic growth) (Investec, 2014). The discussion relating to the level of the exchange rate has been around for a long time, with different financial institute sharing different views on future outlooks (see table 1 and 2).

The global economic outlook is still lacklustre; the IMF (2014) lowered the prospects for world economic growth for 2014 from an expected 3.7% earlier in the year to 3.4%. This decrease was mainly due to lower growth in the United States, China and emerging markets (SACCI, 2014). Additionally, the IMF expects this year’s domestic economy to grow by 1.7%.

There have been some arguments that the weakening of the exchange rate will somehow stimulate the economic growth. However, Investec (2014) reckons that this is a misleading advice as rand weakness raises inflation and so results in increased strike action and higher wages.

 

 

Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug15 Sep15
10.84 10.87 10.91 10.87 10.84 10.80 10.78 10.76 10.75 10.82 10.89 10.96

Table 1: Exchange rates outlook (ZAR/USD)

Source: (Nedbank, 2014)

 

Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug15 Sep15
10.25 10.05 9.85 9.80 9.90 10.00 9.65 9.75 9.85 9.45 9.55 9.65

Table 2: Exchange rates outlook (ZAR/USD)

Source: (Investec, 2014)

Brent Crude Oil Insights

For some time, the world oil prices have been quiet volatile. In the last two month, unrests in Iraq added upward pressure on the world oil prices, pushing the Brent crude oil prices to levels of $115/barrel (bbl) (EIA, 2014). However, oil prices are expected to soften in a medium term, owing to expected increase in supplies (see table 3).

The US Energy Information Administration (2014) projects world petroleum and other liquids supply to increase by 1.5 million barrel per day (bbl/d) in 2014, and by another 1.2 million bbl/d in 2015. Large part of production growth is expected to come from countries outside of the Organization of the Petroleum Exporting Countries (Russia).

At the same token, world oil consumption is expected to grow by an annual average of 1.1 million bbl/d in 2014 and 1.5 million bbl/d in 2015 (EIA, 2014).

However, it is worth noting that the geopolitical tension in North Africa, Black Sea and the Middle-East adds significant uncertainty into oil production outlooks.

Q1, 2014 Q2, 2014 Q3, 2014 Q4,2014 Q1, 2015 Q2, 2015 Q3, 2015 Q4, 2015
108.17 109.70 111.33 109.00 106.00 105.00 104.67 104.00

Table 3: Brent Crude price Outlook

Source: (US Energy Information Administration, 2014)

Further Reading:

EIA, 2014. Short-Term Energy Outlook, Washington: US Ernegy Information Administration.

IMF, 2014. World Economic Outlook, Washington: International Monatory Fund.

Investec, 2014. Economic Review and Outlook, Johannesburg: Investec Bank Limited.

Nedbank, 2014. Economic Outlook, Johannesburg: Nedbank Group Economic Unit.

SACCI, 2014. Business Confidence Index, Johannesburg: South African Business Chamber.