SA trade balance disappoints; ZAR nervous

• The Rand tested new lows against the dollar yesterday. Weakness came on the back of the disappointing trade balance in October for South Africa but also some dollar strength as is evident in the weakness seen in the currencies such as the TRY and BRL yesterday.

• Into Friday, when we also see the release of the US non-farm payrolls data for November, we expect the rand to remain on the back foot. However we maintain that local bonds do not necessarily have to track the rand weaker to the same degree.

• Australia, which like South Africa is also suffering from the commodity slowdown, has seen its central bank keep interest rates at a record low of 2% today.

• The IMF welcomed the Chinese Renminbi into its SDR basket yesterday, cementing a vote of confidence in Chinese economic reforms and its bid to internationalise its currency. The acceptance comes after many years of consideration around whether the RMB meets the criteria to be included in the SDR basket.

• SARS released the trade balanced data for October yesterday. The trade deficit ballooned to -ZAR21.4 billion in October from a revised deficit of -ZAR1.3 billion in October. The widening of the trade deficit has given rise to fresh concerns that the current account could widen in Q3:15 from -3.1% of GDP in Q2:15 – this is one of the key drivers in our rand view which sees the rand on the back foot into 2016.

• Fiscal figures for October also widened, to a deficit of –ZAR26.55 billion from -ZAR5.55 billion in September, but still far off the deficit high of -ZAR71.86 billion in July 2015.

International developments

The Rand tested new lows against the dollar yesterday. Weakness came on the back of the disappointing trade balance in October for South Africa but also some dollar strength as is evident in the weakness seen in the currencies such as the TRY and BRL yesterday. However, we note that the rand has depreciated more than its emerging market peers – clearly country specific events, i.e. the weak trade data and the upcoming South African ratings review by Fitch and S&P this Friday is weighing on the rand (for more on how we read the ratings action on Friday with respect to the currency and bonds, see our report Reading the ratings, dated 23 Nov’15). The widening of South Africa’s trade deficit has given rise to fresh concerns that the current account could widen in Q3:15 from -3.1% of GDP in Q2:15 – this is one of the key drivers in our rand view which sees the rand on the back foot into 2016.

Into Friday, when we also see the release of the US non-farm payrolls data for November, we expect the rand to remain on the back foot. However we maintain that local bonds do not necessarily have to track the rand weaker to the same degree. Today sees the release of manufacturing PMI’s in various countries. Already this morning the China manufacturing PMI was released and disappointed on the downside. The official PMI came in at 49.6 pts, down from 49.8 pts in October and is consistent with other data in recent days – such as industrial profits – which indicates that the Chinese manufacturing sector remains on the back foot. To us this remains a sign that the cyclical underpin, via sluggish commodity demand growth, remains weak. Softer growth in China and deflationary pressures could see the PBoC ease monetary policy further in the coming months and continue with its fiscal policy expansion plans in 2016. In contrast to the slippage in the PMI, the non-manufacturing index picked up pace, increasing to 53.6 pts in November from 53.1 pts in October

Australia, which like South Africa is also suffering from the commodity slowdown, has seen its central bank keep interest rates at a record low of 2% today. While South Africa and Australia are both commodity exporters we note that unlike in South Africa, inflation in Australia remains at very low levels and the Reserve Bank of Australia (RBA) views the risk to inflation as lower, not higher. This hold stance follows two rate cuts this year, in February and May, to stimulate the economy. The RBA further noted that the “prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate”.

The IMF welcomed the Chinese Renminbi into its SDR basket yesterday, cementing a vote of confidence in Chinese economic reforms and its bid to internationalise its currency. The acceptance comes after many years of consideration around whether the RMB meets the criteria to be included in the SDR basket. The RMB is the fifth currency in the basket with the USD, EUR, GBP and JPY, and marks the first change in the SDR composition since 1999. The inclusion of the RMB, which takes effect on 1 Oct’16, comes at a crucial time amid challenges to manage its economic slowdown. Overall we believe that the inclusion of the RMB into the SDR basket would not have a marked impact on local markets. However, we believe that the inclusion of the RMB as an SDR currency mitigates, on balance, depreciation pressures on the rand. We would therefore read the inclusion in the basket as mildly rand-positive.

Local developments

SARS released the trade balanced data for October yesterday. Bloomberg consensus expectations were for the trade balance to have widened to -ZAR7.8 billion in October from –ZAR0.9 billion in September. In the event the trade deficit ballooned to -ZAR21.4 billion in October from a revised deficit of -ZAR1.3 billion in September and giving rise to renewed pressure on the current account. Exports fell by 6.0% m/m in October to ZAR86.350 billion from ZAR91.844 billion in September. The main drivers of the decline in exports emanated from lower exports of vegetable products (-36% m/m), precious metals and stones (-19% m/m), vehicles and transport equipment (-9% m/m) as well as mineral products (-6% m/m). Exports of machinery and electronics increased by 6% m/m.

Imports increased by 15.7% m/m in October to ZAR107.743 billion from ZAR93.105 billion in September, despite the weaker exchange rate. The main drivers of the increase in imports came from: vehicles and transport equipment (45% m/m), machinery and electronics (19% m/m), mineral products (17% m/m) and chemical products (16% m/m). Imports of vegetable products declined by 45% m/m in October.

Despite the widening of the trade deficit in October, on a YTD basis the trade deficit is lower at -ZAR59.393 billion compared to the comparable period in 2014 (-ZAR95.143 billion).

Fiscal figures for October also widened, to a deficit of –ZAR26.55 billion from -ZAR5.55 billion in September, but still far off the deficit high of -ZAR71.86 billion in July 2015. In the fiscal year-to-date, the deficit stands at -ZAR147.72 billion, compared to -ZAR146.34 billion in the comparable period in 2014/15.

Revenue collections amounted to ZAR66.31 billion in October (or 51.5% of the Budget estimate) from ZAR91.04 billion in September, while expenditure slipped to ZAR92.86 billion (or 56.2% of the Budget estimate) in October from ZAR96.59 billion in September.

The main driver of revenue continues to be personal income tax, which is up 13.5% compared to the same period last year. In contrast, corporate income tax (CIT) growth remains the laggard, showing growth of 1.0%. The risk continues to lie with CIT growth underperforming expectations. Over the past five years, CIT revenue collection is heavily weighted towards the last six months of the fiscal year — especially December, February and March.

The Barclays manufacturing PMI is scheduled for release today at 11:00. Bloomberg consensus expectations are for the PMI to have increased in November, albeit only fractionally to 48.4 pts, from 48.1 pts in October. Recall in October the PMI came in well below expectations, slipping to 48.1 pts and remained in contraction territory for the third consecutive month, from a revised 49.9 pts in September. Four of the nine categories making up the index remained below the 50-benchmark line in October. In October, the business activity index slipped as did the employment sub-component and the new sales orders sub-index. The expected conditions index was the only sub-component that increased in October.

The Naamsa vehicle sales data for November is also due for release during the course of the day. Expectations are for vehicle sales growth to have fallen further in November, by -8.6% y/y, the same as in October. Vehicle sales growth has been in negative territory for seven consecutive months this year. Vehicle sales are unlikely to gain significant momentum into 2016 on the back of weak domestic demand.

Markets

The rand weakened further on Monday, closing at 14.45, compared to Friday’s close of 14.40. The rand’s depreciation against the greenback occurred in line with dollar strength against some of the major currencies; the dollar posted gains against the yen (0.3%) and the euro (-0.3%), but lost ground against the pound (0.2%). The rand’s performance was weaker against all of the major crosses; the rand lost ground against the pound (0.4%), the euro (0.1%) and marginally against the yen. The rand put in the worst performance amongst both the commodity currencies we monitor for purposes of this report, and put in the second worst performance amongst the EM currencies, only ahead of the BRL. The rand traded between a low of USDZAR14.3533 and a high of USDZAR14.4920.

Metal prices were mixed on Monday. Gold and copper were up on Monday, by 0.7% and 0.3%, respectively, while platinum was down by 0.5% on the day. Brent closed 0.6% lower, at $44.61/bbl. Both the developed world MSCI and the MSCI EM were down on Monday, by 0.4% and 1.5% respectively. The ALSI was down marginally on the day. The EMBI spread widened by 5 bps on Monday and SA’s 5yr CDS widened by 3 bps on the day. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 6.7%.