Daily Commentary - 22 June 2018

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za

USD / ZAR 13.5124 - EUR / ZAR 15.7202 - GBP / ZAR 17.9436 -

Economic Events:

22 June: EC Eurozone PMI  - US PMI

Market Commentary:

South Africa’s seasonally adjusted current account deficit swelled to 4.8% of GDP in Q1 18, up from 2.9% in Q4 17. Some widening was expected, given previously released monthly trade data from SARS and, earlier this month, SARB data on trade in merchandise and services (with SARS data adjusted for balance of payments purposes). Even so, the deficit was slightly wider than expected. Bloomberg consensus called for a deficit of 3.9% of GDP. The widening was largely due to deterioration in the merchandise trade balance. Net trade in goods deteriorated by 2pp to a deficit 0.5% of GDP in Q1 18, after seasonal adjustment, the first quarterly deficit since Q1 18. Merchandise exports fell a sharp 31.9% q/q saar in Q1, more than offsetting a smaller of 5.2% contraction in merchandise imports. We forecast a gradual widening of the current account deficit, but view the Q1 18 data as something of an outlier. The April merchandise trade data (with a seasonally adjusted surplus of ZAR1.5bn compared with an average monthly deficit of ZAR1.3bn in Q1) suggest an improved current account picture for Q2, especially if May’s monthly trade surplus is close to our ZAR5.8bn forecast. That said, crude oil imports are likely to work in favour of a wider deficit given crude’s recent price spike, especially since many of our export commodity prices remain flat. Source Absa

Minister of Health Aaron Motsoaledi, yesterday unveiled further details on the National Health Insurance and medical schemes amendment bill, which aims to provide universal healthcare to all South African citizens,  however, details as to how the bill will be financed remain unclear. The submission of the bill amendment today is the ministry’s first major step in the eventual implementation of the bill. Motsoaledi said that the objective of the fund is to provide universal and accessible health care to all South African’s and looks to address the exorbitant costs of private healthcare after previously stating that “under NHI, the rich will subsidise the poor. The young will subsidise the old. The healthy will subsidise the sick. The urban will subsidise the rural."

For now, it will be nearly impossible for investors to price in the risk the NHI might pose to the fiscus. There is simply not enough information, the burdens on the fiscus are multi-faceted and National Treasury will be extremely wary of exposing the budget to further potential drains as has been the case with SOEs and other poorly run state organisations. What is certain is that this tax base cannot afford more profligate spending. The intensions with the NHI may be noble, but the government will need to do something it has not been able to do. It will have to run it all extremely efficiently for it to work and its track record thus far in the healthcare sector leaves much to be desired. It is not wonder that there is much scepticism on whether this bill is workable, especially when given the current constraints on the fiscus

The USD-ZAR extended its drop on the day by more than 0.6% to 13.5600 after topping out near 13.7870 having previously looked likely for a fresh move north following the release of the latest current account numbers that showed a larger than expected deficit in Q1. The main driver of the USD-ZAR retreat was the economic prints out of the U.S. that took the wind out of the USD’s sails. The Philadelphia Fed Index surprised to the downside at 19.9 vs consensus of 29 which saw the DXY pare back its gains for the day. President Ramaphosa also made an appearance in Johannesburg at roughly the same time the USD-ZAR retreat, but whilst it is refreshing to know that the country has a much more inspirational leader, this was not the reason.

It seems most likely that the retreat was more a function of exhaustion on the part of USD bulls than just about anything else. One would have thought that the worse than expected current account data was all that was required to send the ZAR substantially weaker, yet the ZAR resisted the temptation. As we finish off the week, the ZAR is making back some ground. The sell-off recently has been extreme just as it has been for other emerging markets and the emerging market basket of currencies now offer much better priced assets compared to two months ago. Although the fears around trade wars will persist and may intensify, one could argue that emerging markets have adjusted a long way and are appropriately positioned to attract foreign investment. Should the data out of the US continue to point to an economy that is holding its own and risk aversion subsides, the ZAR along with its emerging market peers stands to extend its recovery. A break below 13.5000 would signal the start of a deeper retreat whilst a strong argument could be made for buying SA bonds at current levels, more proof is needed. Source Investec

Our range for the day : R 13.4000 – R 13.65000