IMF URGES SA TO KEEP GOVERNMENT DEBT IN CHECK, GLOBAL BOURSES UNDER PRESSURE

The Week in Perspective written by Tracey-Lee Solomon

It was a busy week on the data front which caused sharp movements in financial markets. As a small open economy, international developments affect South Africa; however, by addressing domestic challenges, SA will minimise these impacts. On Wednesday, the International Monetary Fund’s (IMF) report on South Africa following its July visit and discussions with National Treasury officials brought these challenges into focus. The July visit was part of a post-financing assessment of the $4.3 billion (bn) loan granted in 2020 to mitigate COVID-19's impact. The IMF recognised South Africa’s resilience but stressed the need for reforms to tackle rising debt, high unemployment, declining GDP per capita, inequality, and poverty. They recommended a 3% GDP expenditure-based consolidation over the next three years to stabilise debt, with the goal of reducing debt to 60-70% of GDP within 5-10 years, while protecting vulnerable groups. In the end, the IMF judged South Africa's ability to repay the loan as adequate.

Weak economic data from China and the US, especially in the US labour market, led to a stock market sell-off, with the US S&P 500 falling by 1.3% w-o-w. A drop in job openings fuelled further market speculation about a possible 50bps Fed rate cut later this month. While this would typically boost stocks, concerns that it signals economic weakness have driven investors toward safer assets, causing US 10-year bond yields to decline. Labour market data was not only to blame. In addition, Nvidia’s shares plummeted, erasing $279 bn from its market value—the largest single-day drop for a US company. Nvidia alone had comprised 23% of the S&P 500’s year-to-date total return of 19.5% as of the end of August. It may also be that investors are cashing in profits. The S&P 500 has already risen to record highs and September is historically a weak month for stocks. Investors are likely pre-empting this and cashing in at the first available opportunity – after the labour day weekend.

European markets were also hit, with the UK’s FTSE 100 and Germany’s DAX dropping 1.6% and 1.7%, respectively. Political uncertainty in Germany, where the far-right Alternative for Germany (AfD) won its first state election in Thuringia, likely contributed to market jitters. Although the AfD did not secure a majority, its rise poses risks for EU policy.

South Africa’s JSE Alsi fell 2.8% week-on-week, despite positive economic growth in Q2 and improved business sentiment in Q3. Among the top ten companies by market capitalisation, only Naspers posted gains. Conversely, the rand performed well, appreciating against the dollar, euro, and pound sterling, aided by broader dollar weakness.

Crude oil prices declined (Brent closed at around $73 per barrel) due to heighted demand concerns and mixed signals from producers about supply increases. Data from the US Energy Information Administration (EIA) released on Friday indicated that US oil consumption in June slowed to the lowest seasonal levels since the COVID-19 pandemic in 2020. Meanwhile, crude oil production in the US increased by 25 000 barrels per day (bpd) in June, reaching 13.2 million bpd. In addition, May's production figures were revised upward by 11,000 bpd from the previously reported numbers. OPEC+ has yet to announce any changes to their production schedule with the group set to increase production from October. This would put further pressure on crude prices.

Finally, gold was little changed and remained close to record highs. The market appears uncertain whether faster-than-expected US interest rate cuts would be positive or negative and gold remains a good hedge.

Read the domestic and international sections in the rest of the publication here.

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