The downside
In July, the Reserve Bank's Monetary Policy Committee (MPC) dashed the hopes of millions of indebted South African households and businesses by maintaining the highest lending rate in 14 years. In refusing to depart from an overly restrictive monetary policy stance, the ratio of debt costs to disposable income reached 9.2%—the highest in 15 years.
Therefore, It is no surprise that an array of key indicators of economic activity (in real terms) remain declining. These include the Afrimat Construction Index, retail trade sales, new vehicle sales, the Altron Fintech Household Resilience Index, and the value of new building plans passed. Of particular concern is the apparent deviation by the MPC from a flexible approach towards the inflation target range of 3% to 6%.
The consumer price index (CPI) has been comfortably within this target range for over a year. Still, the MPC continues to cling to a policy approach inflicting considerable harm on the South African economy. Another area for improvement is the return of load-shedding in another guise in certain country areas. Eskom refers to this as "load reduction", which usually occurs during the peak demand periods of 5 to 7 am and pm. The need to switch to renewables remains firmly in place, mainly due to Eskom's excessive price increases.
The upside
A welcome decline in the bond yield
Over the past three months, South Africa's 10-year bond yield has dropped by 178 basis points. This makes a mockery of the Reserve Bank's refusal to follow the lead of the country's benchmark capital market rate.
A positive medium—to long-term relationship exists between the money market and long-term interest rates. Should the declining trend in the long-term bond yield continue, it would serve as a clear signal that the repo rate and commercial lending rates are falling significantly behind the curve.
The chances of easing lending rates sooner rather than later have also improved for other reasons, mainly because of further declines in the producer price index (PPI) and the food price index, which act as leading indicators of the consumer price index (CPI).
The latest readings for these two indicators are 4.6% and 4.1%, respectively, well within the inflation target range of 3% to 6%. A lowering of the repo rate (and, automatically, the prime rate) will be firmly on the cards in September.
New life in Absa PMI
The Absa Purchasing Managers' Index (PMI), compiled by the Bureau for Economic Research at Stellenbosch University, has started the third quarter of the year on a solid footing, returning well above the neutral 50 index point level. The first two quarters were disappointing due to high interest rates and political uncertainty over the national election outcome.
The increase in the business activity index was supported by new sales orders rising by an impressive 17.5 points to 55.4. Export sales also increased significantly in July following four consecutive months of declines. It is particularly encouraging that respondents to the PMI survey were notably more optimistic about business conditions in six months, with this sub-index increasing to 69.4 points in July from 68.1 in June – reflecting the highest confidence level about business conditions in the future since early 2022.
New Cabinet to prioritise growth
The appointment of South Africa's first Cabinet under the new government of National Unity (GNU) has been met with an overwhelming positive response from business leaders. It has also received a thumbs-up from global capital markets, mainly due to its commitment to market-friendly policies.
For the first time since the transition to democracy, the country's second-largest political party, the Democratic Alliance (DA), has the opportunity to introduce its track record of sound governance at the provincial and municipal levels, zero tolerance for corruption, and pragmatic policymaking at the highest level of government in South Africa.
In the economic cluster of the Cabinet, the reappointment of Enoch Godongwana as finance minister and David Masondo as his deputy was most welcome, mainly due to the steadfast way in which the National Treasury has been managing the country's public finances, which have been under pressure ever since the occurrence of state capture and the lockdowns implemented during the Covid pandemic.
Visible signs of the new policy approach have appeared, with the new Minister of Transport announcing the formation of a private sector participation (PSP) Unit aimed at harnessing private sector support for repairing and expanding the country's transport infrastructure.
On Balance by Dr Roelof Botha deliberately emphasises positive news that, more often than not, emphasises the resilience of the South African economy and the immense scope for new business opportunities.
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