Sasfin : Forex Daily Market - Fitch Ratings upgraded SA outlook to Stable

Today's Talking Point

EZ CPI y/y: Nov F

Expected: 4.9%

Prior: 4.9%

Analysis: The final print of Eurozone CPI is expected to confirm that inflation soared to 4.9% y/y in November, and will offer more detail on the drivers behind this surge. Broadly speaking, energy inflation was likely the primary driver, although core pressures are also starting to build as demand gradually recovers. The market will therefore dissect the underlying details with care to determine when the ECB may begin to tighten monetary policy conditions more aggressively.

Rand Update

Notwithstanding the risk events of the past week, the ZAR looks set to end the week on the front foot. On Monday, that was considered unlikely given how the Fed would signal a stronger push for normalisation and that the BoE could hike. In the end, that is precisely what happened. Still, instead of emerging market currencies responding negatively to the news that developed market economies would remove the excess liquidity that has supported them, they chose instead to focus on the rally in stock markets which helped boost risk appetite. Whether that will be sustained or not remains to be seen.

Heading into the end of year festive season where liquidity is severely constrained as SA closes down for summer holidays, there are still many risks that abound that are difficult to ignore. The court judgement declaring Zuma's medical parole as unlawful and that he should return to jail may be a win for the country overall concerning the rule of law, but threats of violence have resurfaced. Memories of the violence that erupted earlier this year stoke fears of a repeat, and the country's security cluster are now on high alert.

Secondly, although SA's tourism sector has been spared a shift to higher levels of Covid restrictions over December, the very rapid spread of the Omicron variant still has people concerned that we have not yet witnessed the full effects. Foreign countries that test a lot more than SA are reporting enormous waves of new infections and bracing for a sharp rise in hospitalisations. Although SA data has thus far shown the variant to be milder, it remains too soon to be conclusive, and one cannot rule out the possibility of more Covid-induced volatility in the coming weeks.

Finally, Eskom has indicated that for maintenance purposes, it will shut Koeberg's Unit 2 for maintenance for up to 10 months of 2022. The pained maintenance will remove 928MW of electricity generating capacity, raising the risk of load-shedding. After that, Unit 1 will then be shut for similar reasons and a similar amount removed from the grid. Load shedding has historically been bad for the ZAR. It severely constrains growth, especially in the productive sectors that generate the bulk of SA's exports, including the mines, smelters, and vehicle manufacturing plants.

Bond Update

Investors will welcome the news that Fitch Ratings has notably upgraded the outlook on the SA government's rating to "stable" from "negative," albeit two notches below investment grade status. This is one of the first positive outcomes we have seen in a long time, which Fitch has linked to a "faster than expected economic recovery, the surprisingly strong fiscal performance this year and significant improvements to key GDP based metrics".

The rating agency also said that while the pandemic continues to hold downside risks for public finances, the "likelihood of severe negative effects on creditworthiness has declined," which suggests that concerns regarding the Omicron variant are abating. Deaths remain surprisingly low, while hospitalisation rates are also giving scientists reason to be more optimistic.

The agency's comments support National Treasury in its efforts in reform from a political legitimacy perspective. However, one should remember that the surprisingly strong fiscal performance was driven by lofty commodity prices rather than policymakers' steps in reform.

Statistical factors leading to GDP revisions were primarily to thank for the better fiscal metrics, too, suggesting that the government's risk reduction has by and large been exogenously and statistically driven. While Fitch's comments imply a lower risk of a fiscal crisis, SA is still deep in the proverbial woods of fiscal profligacy, which the Auditor General's recent report has highlighted.

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