Coffee table economics with Anchor

Anchor’s coffee table economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.

 

Executive summary

In this week’s edition, we highlight the following:

  • This past weekend, the world saw one of the most remarkable socio-political events in some time – the first coup attempt in Russia in three decades. Over 36 hours, a private Russian mercenary army denounced the country’s leadership, trooped through towards Moscow in an act of open military revolt, and then agreed to a truce that ended the hostilities almost as quickly as they began – leaving most of us wondering what in the Putin just happened? However, the big question for many South Africans remains much of the same – what does this mean for the country, given our government’s problematic ‘friendship’ (or, in their words, ‘neutrality’) with Russia?
  • Hawks abound…but not in China. Even though global inflation is starting to ease, central banks remain as hawkish as ever – quelling any hope that financial markets were feeling (perhaps pre-emptively) that interest rate hiking cycles were nearing an end. Meanwhile, in China, monetary policy appears to be at odds with the hawkish West.
  • From rising costs to relieved wallets: South African (SA) food prices continue to moderate. While food inflation has given us some indigestion, the latest data brought a breath of fresh air. Although food inflation remains high, the May 2023 data recorded a sharp decline from recent months and have provided the first solid indication of a turnaround.

 

What in the Putin just happened?

Over the weekend of 23-25 June, the world saw one of the most remarkable socio-political events in some time – the first coup attempt in Russia in three decades. Over 36 hours, a private Russian mercenary army (Wagner) denounced the country’s leadership, trooped towards Moscow in an act of open military revolt, and then agreed to a truce that ended the hostilities almost as quickly as they began – leaving most of us wondering what in the Putin just happened? Long-simmering tensions appeared to boil over on Friday (23 June) when the erstwhile Vladimir Putin confidant and prominent oligarch who leads the Wagner private army for Russia, Yevgeny Prigozhin, intensified his ongoing dispute with the country’s military leadership. Using the social media app, Telegram as his platform of choice, he made explosive claims that Russia’s defence minister was responsible for bombing his troops. Prigozhin declared his intention to stage a “march for justice” aimed at challenging the Russian defence system. Throughout the ongoing conflict, Russia has relied heavily on the services of Wagner’s mercenaries in its war on Ukraine.

As Prigozhin and his Wagner army marched toward Moscow, Russia charged him with mounting an open rebellion. Bizarre scenes of everyday life comingling with an armed revolt in the major Russian city of Rostov-on-Don spread across social media. Ultimately, a deal brokered by Belarus resulted in Prigozhin’s departure from Russia to seek refuge in the allied country. Meanwhile, his Wagner mercenaries, who had advanced close to Moscow from the Ukrainian border, retreated instead of launching a potential assault on the capital. Seizing the opportunity amidst the turmoil in Russia, Ukrainian forces escalated their counterattack. However, despite the resolution, the Russian government affirmed its intent to persist with its ongoing invasion of Ukraine, leaving the situation unresolved. For some, the armed uprising was not all that surprising as it followed months of increasingly fierce infighting between Prigozhin and the leaders of Russia’s armed forces. How this situation will continue to unfold is anyone’s guess.

The bottom line

The big question for many South Africans remains the same – what does this mean for us, given our government’s problematic ‘friendship’ (or, in their words, ‘neutrality’) with Russia? If anything, recent events have further lowered the probability that the Russian president will attend August’s BRICS Summit (to be held in SA) in person. This has been a critical sticky point and source of tension between SA and the international community, considering that the International Criminal Court (ICC) has issued an international arrest warrant for Putin and SA is a signatory to the Rome Statute. The warrant is for alleged war crimes regarding the unlawful deportation of children from Ukraine to Russia. Whilst a formal political coup in Russia appears to have been averted (at least for now), recent events seem to point to a weakening of Putin’s traditionally authoritarian grip on power. Furthermore, one cannot deny the potential for further internal rebellions against him and his greater administration over the coming months, as his political armour has been sorely dented.

As a result, logically, Putin is unlikely to be willing to travel far from Moscow for the foreseeable future, knowing that by doing so, he may provide an opportunity for such an event to resurface. Interestingly, it has been widely reported that Putin had agreed in principle (during a bilateral engagement with President Cyril Ramaphosa in Moscow earlier in June) to send his Minister of Foreign Affairs Sergey Lavrov to the BRICS Summit in his place rather than attending the event virtually. Naturally, there is always the chance that Putin may still view attending the BRICS Summit in person as an opportunity to show geopolitical strength.

Still, this appears increasingly unlikely if recent events are anything to go by. This is a widely positive development for SA as it reduces the country’s risk of being caught up in another international political whirlwind that would further isolate SA from our important trading partners. Ultimately, as a member of the BRICS (Brazil, Russia, India, China, and SA) grouping and a major emerging market (EM), we must seek to balance our relationships with multiple global powers. Maintaining a balanced approach and avoiding over-reliance on any single country is crucial for SA’s foreign policy independence and ability to address its domestic challenges effectively. Simply put, we may just have dodged the proverbial bullet on this one.

 

Hawks abound…but not in China

Even though global inflation is beginning to ease, central banks remain as hawkish as ever – quelling any hope that financial markets were feeling (perhaps pre-emptively) that interest rate hiking cycles were nearing their end. June has seen a spate of surprising rate hike decisions by international central banks, adding pressure on local markets.

Following a higher-than-expected consumer price inflation (CPI) print in the UK, the Bank of England (BoE) surprised markets by hiking its key lending rate by a bigger-than-expected 50 bps, taking the rate to 5% – a level not seen since April 2008. Whilst the BoE did not explicitly signal further increases, it equally did not point to ending the cycle following this latest rate hike. Another hawkish surprise on the monetary policy front was Norway’s central bank hiking rates by 50 bps instead of 25 bps as was broadly expected. June also saw a swathe of 25-bp rate hikes by developed market (DM) central banks, notably the Swiss National Bank, European Central Bank (ECB), Australia’s central bank and Canada’s central bank. Whilst the US Federal Reserve (Fed) decided at its last meeting to hold the policy rate steady at the current 5%-5.25% range (interrupting what had been a string of ten straight increases aimed at stomping inflation), in recent testimony to Congress, Fed Chair Jerome Powell reiterated the Fed’s commitment to bring back inflation to its 2% target, saying more rate hikes are “likely” this year. This suggests that we have not yet seen the end of the advanced economy rate-hiking cycle. In EMs, the Turkish central bank also recently hiked its interest rate to 15% – but the 650-bp increase was actually lower than general market expectations. There were no other changes to its unorthodox broader policy framework, and the lira hit another record low against the US dollar after the interest rate decision. For now, Türkiye inflation remains very high, with analysts seeing inflation of about 40% by the end of the year vs the targeted 5% – suggesting that further rate hikes are sure to come.

Meanwhile, in China, monetary policy appears to be at odds with the hawkish West. China’s central bank has cut its main benchmark lending rates for the first time in 10 months in its latest effort to bolster growth as the world’s second-largest economy falters. The interest rate cut was small – a tenth of a percentage point for the country’s benchmark one-year and five-year interest rates for loans. However, as almost all of the country’s corporate lending and mortgages are linked to these two rates, the reductions could affect the overall pace of economic growth. Nonetheless, the modest scale of the interest rate reductions suggests a level of concern among China’s economic policymakers – albeit not panic. In contrast, during the 2008 global financial crisis (GFC), China’s central bank cut its benchmark loan and deposit rates by 1.08 ppts in a single day. And during the Asian financial crisis of the late 1990s, China cut loan rates by 1.44 ppts in one day. This latest cut brought the benchmark one-year rate to 3.55% from 3.65%. Essentially, these latest cuts send the message that Beijing wants to stabilise output, given that exports are falling, construction has stagnated, and consumer confidence is weak. The government’s abrupt abandonment of its zero-COVID policy at the end of 2022 spurred hope that China’s economy would snap back – unfortunately, it has not come to fruition.

The bottom line

The general direction (or mix thereof) of global interest rate cycles remains a crucial factor for the SA Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) when determining local rates. With global central banks still keeping a tight grip on the current rate-hiking cycle, this may feed through to SA, which, as we know, has its own idiosyncratic economic issues. Since November 2021, the SARB has hiked rates in ten consecutive meetings, adding 475 bps in the cycle overall. Following better-than-expected inflation figures from Stats SA this month, local market participants have begun to feel more confident that the SARB could pause interest rate hikes at its next meeting in July. However, we are not as optimistic. The latest rhetoric from the SARB (and overall tone) remains hawkish, and we believe that the SARB will continue to hike rates by another 25 bps in July.

 

From rising costs to relieved wallets: SA food prices continue to moderate

According to the latest research by the Bureau for Food and Agricultural Policy (BFAP) on its Thrifty Healthy Food Basket (THFB), the average family of four in SA (consisting of two adults, an older and a younger child) now pay R3,614/month for groceries – around R443 more than a year ago. The THFB measures the cost of basic healthy eating for low-income households in SA. The methodology considers national nutrition guidelines, typical food intake patterns of lower-income households, official Stats SA food retail prices, and typical household demographics and consists of a nutritionally balanced combination of 26 food items from all the food groups. However, there is good news for local consumers, after eight months of local food inflation sitting at levels above 12.3%, the May 2023 data decelerated to 12.0% YoY, down from 14.3% YoY in April. The food product prices primarily underpinning this moderation in food inflation are bread and cereals, meat, fish, oils and fats, and fruit.

This latest decrease in local food prices is driven by the strong base effect created by the 2.1% MoM jump last May and the continued moderation in global food prices. The FAO Global Food Price Index (FFPI), which measures the monthly change in the international prices of a basket of food commodities, declined by 2.6% MoM in May 2023, marking the fourteenth consecutive monthly decline since reaching its peak in March 2022. The index has fallen by as much as 22.1% from its all-time high. However, this moderation in global food prices is taking longer to filter through to the local market, as SA’s rand depreciation has offset much of this global decline.

Nonetheless, these global declines are reaching retail markets for some products and will likely continue to filter through the value chain over the coming months. Moreover, the relatively lower farm-level maize prices will filter into the retail product prices mainly in the second half of the year’s data. The 2022/2023 maize harvest is estimated at 16.1mn – 5% higher than the 2021/2022 season’s harvest and the third-largest harvest on record. The soybeans harvest could reach a record 2.8mn tonnes. Other field crops and fruits also show prospects for decent harvest this season. Nevertheless, it should be noted that loadshedding and the consequential expenses incurred for alternative energy sources continue to significantly impact costs throughout the value chain. This may potentially counterbalance the decline observed at a retail level. Encouragingly, producers have received positive news, as the cost of agricultural inputs in May 2023 displayed a persistent downward trajectory from the levels recorded in December 2022, despite the rand depreciation. Notably, average fertiliser costs experienced a 4% MoM decline. Additionally, the cost of diesel continued its downward trend during May 2023. These cost reductions are poised to influence producers’ future decisions regarding planting and are expected to impact supply prospects in the upcoming season.

The bottom line

While food inflation has been giving us some indigestion lately, the latest May 2023 data bring a breath of fresh air. While food inflation remains high, May 2023 numbers provided a sharp decline from recent months and the first solid indication of a turnaround. This momentum is expected to persist over the coming months, with food inflation expected to continue trending downwards due to high base effects, the relative recovery in the rand’s value over the past month and the filtering through of recent lower producer prices to the retail level. The relative strength of the rand remains a key factor to watch, as the high-risk environment (both domestically and globally) could trigger sharp movements across markets. Another sharp depreciating cycle in the rand will again drive food prices higher. Let us hope for some rand stability to keep our wallets and taste buds happy.

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