Bond outflows point to negative sentiment on SA

Mine woes likely to defer rate cut NEGATIVE investor sentiment was reflected in big bond outflows last week. Leon Myburgh, a strategist at Citi, recorded a net R1.2 billion in non-resident sales of domestic bonds on Friday and R2.2bn in the week as a whole. This followed strong inflows into South African bonds earlier this month.

The reversal came as disruptions, which started at Lonmin’s Marikana mine, spread to other mines and the Reserve Bank reported South Africa’s current account deficit had widened from 4.9 percent of gross domestic product (GDP) to 6.4 percent in the second quarter. The deficit is the gap between earnings from exports of goods and services and the cost of imports.

Lost mining production over the past five weeks will erode the country’s exports, widening the gap in the third quarter and increasing reliance on foreign investment to pay for imports. Against this backdrop, the chances of an interest rate cut, when the Reserve Bank’s monetary policy committee (MPC) wraps up its meeting on Thursday, are fading.

After the MPC cut the bank’s repo rate from 5.5 percent to 5 percent in July, markets expected further cuts. But, with risks in the economy rising, it seems a bad time to remove any investors’ incentive. Faced with low returns in advanced countries, foreigners have been tempted by South Africa’s comparatively high yields.

Kevin Lings, the chief economist at Stanlib, said: “The July rate cut was an insurance policy in case growth weakens further, but I think rates are on hold from here on unless the growth rate, excluding mining, slows further and if the slowdown appears broad-based.”

Inflation data for August, due tomorrow, will provide further input to the MPC’s discussions.

Bruce Donald, an analyst at Standard Bank, noted: “The July inflation print published since the last MPC meeting came in materially lower than the market and the Reserve Bank had expected.” But he said it was unlikely it would have “a profound effect on the inflation trajectory beyond the short term”. He predicted inflation would drift to the top end of the Reserve Bank’s 3 percent to 6 percent target range by the middle of next year, “mainly on higher fuel and food prices. The room for further rate cuts will be constrained.”

Meganomics economist Colen Garrow said the MPC meeting in November would probably be a better time to decide to cut rates.

“By then, the bank will have a better idea of the factors threatening the inflation target, like rising administered prices, the fuel price, and more expensive global hard grain prices.”

But it will remain a tough decision. Garrow noted: “The longer strikes