Sarb could hike repo rate, as IMF sounds US inflation warning
WHILE Eskom seems to have put its house in order over the past month with no load shedding, there is uncertainty about its staying power over the next year.
Eskom over the festive season brought on stream unit 4 of the Kusile power plant, which at full operational capacity is expected to add 800 megawatts (MW), but which is not expected at least for the next six months as the unit is commissioned gradually.
Meanwhile, concerns have been raised about the scheduled maintenance of the Koeberg nuclear plant’s generators which will have to be shut down over the 10-months maintenance period, taking about 900MW off the grid with each generator shutdown.
“We can be more positive about 2023. The current year is different… There is too much going on which might affect the supply of electricity,” energy specialist Chris Yelland said.
Chief among the uncertainties was the lost unit at Medupi power plant, which blew up in August, and which was expected to be out of commission for two years.
The commissioning of Kusile which was not expected to have an immediate impact; Koeberg’s maintenance; and the escalating sabotage of Eskom’s infrastructure – which culminated in the toppling of an important pylon at Lethabo power plant and evidence emerging that the supports had been cut deliberately – were other worries on the horizon for Eskom.
Eskom chief executive André de Ruyter confirmed in late November that there were clear acts of sabotage on infrastructure, including the pilfering of quality coal and tampering with truck loads in transit to power stations.
Yelland said the upside of the electricity supply issues included the move last year to allow the private sector to generate up to 100MW of embedded power by the mines and industries.
The awarding of the Renewable Energy Independent Power Producer (REIPP) window 5 bid late last year was also positive, though it was also likely to take over a year for power generated there to come on stream.
“It is going to be a hard year this year. Hopefully 2023 will be easier,” Yelland said.
Nuclear physicist Dr Kelvin Kemm said the Koeberg reactors, which were in service for over 40 years, needed to have its steam generators replaced, which he said was a complicated process.
Each of the two reactors would take about five months to be fully serviced, hence the projected 10 months scheduled.
“One reactor at a time will be switched off and with that we will lose about 1 000MW of reliable electricity. The reactors are key to South Africa’s energy supply. It could be faster if all goes well, but they will have to take the opportunity to update other things as well,” he said.
Eskom announced in December it would open some of its land in Mpumalanga initially for IPPs to utilise for production that would then be wheeled to the grid.
Eskom would provide connection up to the nearest network connection point.
THE South African Reserve Bank (Sarb) could be forced to continue hiking interest rates for the second time in a row, as elevated inflation further pushes ongoing monetary policy normalisation in the world’s largest economy, the US.
The International Monetary Fund (IMF) on Monday warned emerging economies to prepare for US interest rate hikes as the new Omicron variant has raised additional concerns of supply side pressures on inflation.
The US inflation rate from December is expected to come in at 7 percent, a four-decade high, and the markets are already betting on the US Federal Reserve (Fed) raising rates earlier on the back of this, strong unemployment data, and a strong economy.
In December, the Fed announced it would accelerate the pace of tapering and buy itself the option to start hiking rates in the second quarter on persistently high US inflation.
Economists agree that possible headwinds for global economic recovery will come from the US economy, which is seeing runaway inflation for longer than expected.
THE new vehicle market is expected to continue its gradual recovery during 2022, albeit at a slower pace than in 2021 and a year-on-year improvement of around 8 percent in aggregate new vehicle sales volumes is projected, Naamsa, the Automotive Business Council said yesterday.
Factoring an anticipated 15 percent improvement in vehicle exports, industry vehicle production of about 17 percent was projected for 2022 – the automotive industry is South Africa’s largest manufacturing sector.
Vehicle sales rebounded strongly
In a note yesterday, IMF senior economists said the impact of the US Fed tightening its monetary policy could be more severe for vulnerable countries.
“Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally,” said the IMF.
“These developments could come with a slowing of US demand and trade and might lead to capital outflows and currency depreciation in emerging markets.”
The IMF said while dollar borrowing costs remained low for many countries, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa to start raising interest rates.
The Sarb increased the repurchase rate by 25 basis points to 3.75 percent per year in November for the first time since March 2020, as the risks to the short-term inflation outlook were assessed to the upside.
DG Capital Forex managing director Ryan Booysen praised the Sarb’s monetary policy stance as “nothing short of brilliant” that had been a solid anchor in the domestic economy over the past few years. year-on-year by 22.1 percent to 464 122 units in 2021. This followed the massive 29.2 percent slide in vehicle sales to 380 206 units during 2020, due to the impact of the Covid-19 pandemic.
“It was a very satisfying performance by an industry that has had to deal with numerous challenges over the year, ranging from global supply chain disruptions, insufficient model availability, persistent load shedding, escalating logistics cost, as well as several domestic shocks,” Naamsa said.
“Domestic economic disruptions caused by the civil unrest, the cyberattack on Transnet operations, the threeweek strike in the steel and engineering sector, the adjusted alert level 4 lockdown
“While the 25 basis points hike of November 2021 won’t have a massive effect on containing inflation, the expectation is that a 25 basis points hike at every meeting in 2022 is probable and should bode well for the rand in the face of US tapering and ultimately rate hikes,” Booysen said.
“With the warning of another rates hike already having been sounded, this confirms that monetary policy should be rand supportive in 2022.”
The rand, however, remained subdued at R15.68 to the dollar by 4pm yesterday, driven by a myriad of factors restrictions during the second half of the year, as well as record fuel prices and a first interest rate increase in three years did not deter sales too much. The industry has remained resilient, Naamsa said.
Renewed activity in the vehicle rental industry supported passenger car sales in the second half of the year, as the economy started to open to overseas visitors.
The buying down trend in the new passenger car sales continued, with sales of pre-owned vehicles offering the most enticing option during the year.
Sales of medium and heavy commercial vehicles also reflected signs of resilience and their performance mirrored and is expected to remain at risk of market volatility and weakness.
Investec chief economist Annabel Bishop said the rand was likely to trade in the R15 to R16 to the greenback this month, but much would depend on the likely speed of US interest rate increases.
“Increased certainty on the US monetary policy front has been positive for the rand, as is the upwards interest rate trajectory expected for SA,” Bishop said.
“However, the risk for SA is for higher, not lower interest rates which is also rand positive. The domestic currency has consequently been gaining from a number of factors, including the removal of most lockdown restrictions as Omicron proves mild.”
Economist at the Bureau for Economic Research Nicolaas van der Wath, however, said the rand’s performance might simply be a correction after it was probably unduly oversold late last year amid concerns about the Omicron variant in South Africa.
“Despite the resilience in early 2022, an environment of higher US interest rates does not bode well for the rand outlook, especially not if the domestic current account surplus declines and eventually moves back into deficit,” he said.
EDWARD WEST
DIEKETSENG MALEKE
the improved macroeconomic climate in the country.
Many Covid-19 disruptive elements were expected to remain in play in 2022, and prevailing conditions would continue to be hampered by rising costs and supply chain disruptions, such as the global semiconductor shortages impacting on the availability of certain models.
Load shedding would remain an area of “great concern”. Furthermore, rising interest rates and fuel prices were expected to impact vehicle affordability.
While the new vehicle market had seen substantial growth since the initial shock, it has not been sufficient to return to pre-Covid-19 levels in 2021, Naamsa said.
STEINHOFF’S shareholders appear more optimistic about the company’s future as its share price rose up to 8 percent to R5.39 on the JSE yesterday, following its announcement to list its American-based subsidiary Mattress Firm on the New York Stock Exchange.
In a statement, the retailer said it had applied to the US Securities and Exchange Commission for an initial public offering as part of a possible listing on the bourse. Steinhoff successfully listed its European discount retailer Pepco in 2021.
“The number of shares to be offered and the price range for the offering have not yet been determined. Mattress Firm intends to apply to list its common stock on the New York Stock Exchange, subject to notice of official issuance,” it said.
Steinhoff bought the 90-year-old Mattress Firm in 2016 for $3.8 billion (R59.4bn).
The company is a retailer of mattress brands that include Sealy and Tempur-Pedic. It has about 2 400 stores in the US, and Steinhoff has a 50.1 percent stake in the mattress retailer.
Steinhoff’s investment in Mattress Firm instigated the Viceroy report which questioned Steinhoff’s acquiring Mattress Firm for $64 a share, more than double the closing price on the day the deal was announced.
The Viceroy report, released by former social worker Fraser Perring and colleagues, flagged financial irregularities in Steinhofff International Holdings NV.
Steinhoff is considered an associate rather than a subsidiary in the mattress firm, due to its stake in the firm.
The furniture retailer said in August already that it was considering listing the Mattress Firm to raise cash.
Mattress Firm is struggling with a huge debt burden and filed for Chapter 11 bankruptcy protection in 2018. About 3 600 of its stores were closed, and the firm emerged from bankruptcy soon after.
The embattled Steinhoff group has been making headlines as it faced-off several claims and litigation actions against it.
The company, once celebrated as the success story in South Africa, came close to collapse following an accounting scandal and the resignation of its chief executive Markus Jooste in late 2017.
While Steinhoff has been battling financial woes, it has recently shown signs of moving towards recovery.
In December 2021, its share price increased by more than 20 percent after it announced that its creditors had voted to support Steinhoff’s settlements with the disgruntled former owners of Tekkie Town, and Trevo Capital.
The Tekkie Town settlement with Steinhoff involves the claimants being paid R500 million and receiving 29.5 million Pepkor Holdings shares. Pepkor has about 3.7 million shares in issue.