New Minister of Finance will put his stamp on medium-term budget – TreasuryONE’s Andre Cilliers

In this episode of the Currency Focus podcast, Bronwyn Nielsen discusses the local unit’s movements with currency expert Andre Cilliers of TreasuryONE. Cilliers says that while the Evergrande situation and electricity issues in the Northern Hemisphere could create more volatility for the rand, it is also not quite a ‘crisis’ either. The currency strategist says he does not expect an interest rate increase for SA until the first quarter of 2022, and he is curious to see what happens when the new Minister of Finance delivers his first medium-term budget speech. – Claire Badenhorst

Andre Cilliers on the risk-off scenario hitting the rand:

Yes, that’s an interesting one. I’ve done some other work, apart from looking at what happens in China, and America, and wherever, and I’ve gone back till 2016 and there’s a very interesting pattern unfolding since then. From the last week of September towards the middle of October, the rand has always weakened and always moved in a negative direction, so now one wonders whether this is a timing issue or whether it has to do with any changes in the fundamentals in the market as it stands.

On the electricity issues affecting the Northern Hemisphere:

If you look at the Northern Hemisphere and you look at the oil price, then the oil price traditionally comes under a bit of pressure as we go into the winter season in the Northern Hemisphere. The energy crisis always unfolds around these periods because that’s when their energy usage reaches high levels and imports of oil and so forth reaches high levels as well in anticipation of a winter season that lies ahead. We should be careful to call it a crisis or whether it’s really just this time of the year.

That’s a seasonal norm. It happens every year, and you can go and do the graphs. You can go and do the sums; that happens every year. Obviously, there are other reasons that come in at times like this that exaggerate the situation and create more volatility. We do have the whole situation surrounding Evergrande – we know about that. They did make the payment at the end of the day last week, but that does not take them out of the woodworks and it still puts China and that sector under the spotlight. We had seen that the Chinese central bank had pumped in some $55bn last week to shore up liquidity in the markets. So, yes, obviously these things do have an impact at times like this and create more volatility and more of a risk-off situation.

On the South African Reserve Bank meeting last week keeping interest rates low:

We’ve had a central bank for the last couple of years that moves swiftly and that moves proactively. If we look at the changes that they’ve made on the inflation targets and the expectations thereof, I would not be too concerned because a 0.1% upward change is nothing significant. What’s more significant is the growth figures for the 2022 and 2023 year that was revised quite aggressively lower. That’s more of a concern because that’s the areas that we would actually want to see revised upwards. That’s what we need in this economy because that’s ultimately what will stimulate the employment sector and the creation of jobs. Low growth does not stimulate that and we’ve had a backlog. We still have a very high unemployment [rate]. So those are areas of concern. But that also tells us that even if they do move interest rates upwards, it would not be aggressive moves upward. It would not be drastic moves. It would be small and that would have less of an impact than we really think is significant.

On when we can expect an interest rate increase:

Well, I look at America; I look at the Northern Hemisphere. I look at their stance on the movement of interest rates and I look at our inflation rate that is still very much contained at levels just slightly above the mid-target where Mr Kganyago wants it. Then I’ve penciled in, only in the first quarter – towards the end of the first quarter of next year – an interest rate increase in South Africa.

That would only be a 25 basis point increase, not much more than that. And then on top of that, maybe a further 25 basis points in the second quarter.

On the medium-term budget and its impact on the rand:

The government finances are important but what’s more important to me is we’re getting closer to the medium-term budget speech of our new Minister of Finance. That would be, I want to say, his first real public appearance in parliament, where he gives us the statistics, the rundown, and his outlook going forward into 2022 and 2023. That would give us an idea of how a budget change can be imminent coming from him early next year. I think that’s more important to me than anything else at this point in time.

I don’t think he will make radical moves, but he would certainly want to, you know, put his rubber stamp down on things and say, I am now in charge and this is my way forward. I can definitely not expect him to just follow in the footsteps of Tito Mboweni as it was. He will [put] his own stamp on it and make sure that people know who’s in charge – no doubt in my mind as to that. I think he gets a bit of a windfall in the sense that when we get to the medium-term budget speech, he could come in with some relatively good figures. That would be windfalls from the tax income side because we had such significant increases in profits from the financial sector, from the mining sector, basically from many sectors in the country. He’s had some windfall income that came in. We’ve also seen that retail sales increased quite a bit – that could give him a bit of a windfall income on the VAT side as well. So he gets a bit of a positive one. But that also gives him room to, as I said, you know, put his stamp on it.

On elections and rioting being key risks for the rand:

It is still a red flag to me and the political intolerance between political parties – the mudslinging between political parties to me is still a problem. You know, I don’t think it’s being fought as adults. I think it’s being fought as children. Damaging placards and killing people is definitely not the way adults do it. It’s definitely not a way that sophisticated people do it. I think it’s ridiculous. I think, once again, you know, when you speak to the masses and you start promising them all sorts of things, and I’ve listened yesterday about how everything by one political party is just being offered as free, and the one thing that they continuously miss is, where does the income come from this? But they seem to be taxing, increasing property taxes, increasing this, increasing that, you know, that’s dangerous things to tell the masses. It creates the wrong expectations and those wrong expectations is what ultimately leads to unrest, is what ultimately leads to looting, etc. So to me, still very much quite a big risk.

We will shoot up to the 16 levels and most probably breach it slightly. And the come back from there would be extremely difficult because the investor confidence that we will lose, if that happens again, will have a tremendous impact on the economy. It will have a tremendous impact on local consumers and how they look at the economy and how they look at spending their money and a drastic impact on how quickly and swiftly people will start taking money out of the country. Ultimately, very negative. So a comeback from those high levels, if these things do happen in a bad and aggressive way, would be very, very terrible for us.

On his outlook for the rand following the medium-term budget speech:

I think it will be positive. I’m going to remain positive. I’m going to remain positive in the sense that I think that the risk that I’ve just pointed out on looting and a horrible election, that has got a low scenario probability for me. And the strongest probability is that from the middle of October onwards, we will see the rand coming back and strengthening again and we will go back down into a trading range of R14.20 to R14.70 and end the year in those ranges. I would not even rule out that the rand could slightly breach a 14 level right towards the end of the year.

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