Sasfin : Forex Daily Market – SA’s terms of trade are still on the rise

Today’s Talking Point

Trade balance: Dec

Expected: –

Prior: 35.8bn

Analysis: South Africa’s trade fundamentals remain relatively robust after the trade surplus widened for the second consecutive month to R35.8bn in November. SA’s terms of trade are still on the rise (ZA Citi commodity terms of trade index), keeping the ZAR resilience intact in the face of the increasing financial market volatility. While trade dynamics are likely to remain positive, the discovery of the new Omicron variant late last year, which triggered lockdowns across the globe and a stronger ZAR, could weigh down outbound shipments and, by extension, the trade balance in the month ahead. Further out, the easing of restrictions in SA’s main trading partners, together with booming global commodity prices, could keep SA trade dynamics favourable.

Rand Update

As the USD surged last week, it gained ground against most currencies, including the ZAR. The USD-ZAR rose back up to levels seen early in Jan but still looks set to close the month off a little stronger than the 16.00 handle it was trading at when the year began. Of particular interest to traders, this week will be whether the USD is able to hold on to its gains or whether it will come in for a bout of profit-taking. Asian shares are generally in the green this morning, and this after Wall St finished strongly higher on Friday. Overall levels of risk aversion are collapsing alongside the VIX, which has pulled off its recent highs, and the ZAR holds the potential to recoup some of its losses this morning when liquidity returns.

Domestically, the focus will all turn to some high profile legal and court developments. Former President Zuma will be back in court, doing everything in his power to avoid prosecution. However, his options are running out, and his trial could still begin this week. This will be of interest but unlikely to move markets much. Arguably more important for financial markets will be this week’s release of the second part of the Zondo commission’s reports. As with the first report, the second is likely to finger more wrongdoers and participants in state capture. Although this does not amount to prosecution, it is reputationally damaging, as recently seen with Bain. Whether the NPA can use this information and prosecute remains to be seen, but there is plenty of evidence and information to work with.

Unrelated to the courts but extremely important ahead of the budget in Feb, Fin Min Godongwana’s brief to Parliament’s standing committee on finance on the R11bn World Bank Loan, whether it was warranted, and the terms of the loan will be. At face value, if the terms are favourable and it eases the pressure on the bond market due to lower levels of issuance, then the Fin Min will likely use that for his justification. All this takes place against a backdrop of fiscal data that is likely to show that the revenue numbers have remained resilient and may have even beaten expectations. This would allow Godongwana to present a much more favourable budget in Feb and help ease the pressure on SA financial markets.

On balance, the market forces look a little more constructive for the ZAR and with major risk events now behind us, it will be more market-specific dynamics that drive the ZAR. These too, are looking more upbeat, and the ZAR is likely to try and make back some of the losses it sustained the previous week.

Bond Update

The government finance data for December reflected a vastly better picture for tax intake than was the case in 2020, with a 22% y/y increase in revenue. This took December revenue to R163.7bn and led to a net surplus of R42.9bn when adjusted for government spending. 2021’s figure was also up, albeit marginally, from December 2019 figures of R160.4bn.

Year-to-date y/y figures similarly suggest that tax intake has improved significantly, with total national revenue up 31% y/y or R270bn to R1.14tn. This suggests that the economy continues to recover from the initial shock of 2020, with personal income tax up over R50bn on 2019-2020 figures at R391bn from April to December. Corporate income tax on a year-to-date basis has also rebounded by around R107bn to R252bn.

According to the report, government spending remained well above this at R1.36tn YTD, while a net deficit of R219bn has been generated so far. However, the figures compare favourably with full-year estimates of R1.89tn in main budget expenditure, revenue expectations of R1.48tn and a full-year deficit expectation of R410bn with revenue collections around 5% higher than expenditure when represented as a percentage of the budget. Finance Minister Godongwana will therefore have good news heading into the February budget presentation, although much focus will sit with the forward-looking assessment on structural reform.

Thus far, reform efforts have been painstakingly slow. The government has been caught up with fighting off unsustainable social spending demands, rather than focussing on the much-needed labour market, ease-of-business, and fiscal policy changes that will help SA overcome some of its structural hurdles.

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