SA Market Drivers - 18 November 2024

S&P Upgrades South Africa's Economic Outlook

S&P Global Ratings revised South Africa's economic outlook from "stable" to "positive" on November 15, 2024. This decision reflects optimism over structural reforms introduced by the coalition government between the African National Congress (ANC) and the Democratic Alliance (DA). Key reforms include streamlined energy procurement processes, improved governance at state-owned enterprises (like Eskom and Transnet), and initiatives to attract foreign investment. Economists believe this upgrade could lead to a credit rating improvement in the next 12–18 months if reforms remain on track. A better rating could lower borrowing costs for the government and encourage foreign direct investment, crucial for addressing unemployment and inequality. The announcement sparked a rally in local financial markets, with the rand strengthening against the US dollar.

Eskom Crisis Management Plan Gains Momentum

Eskom, South Africa's state-owned electricity provider, announced measures to mitigate load-shedding during the critical summer period. These include: - Accelerating emergency procurement of 2,000 MW of additional power from independent power producers (IPPs). - Repairing critical units at its coal-fired plants, with Medupi and Kusile projects prioritized. - Leveraging imported diesel to operate open-cycle gas turbines, despite the associated high costs. The energy crisis has long been a bottleneck for economic growth, causing disruptions to businesses and raising operational costs for sectors like mining and manufacturing. Analysts believe that Eskom's latest efforts, while costly, signal a commitment to stabilizing power supply, which could attract investment into energy infrastructure projects, including renewables.

JSE Index Sees Gains in Mining and Financial Stock

The Johannesburg Stock Exchange (JSE) experienced significant gains last week, particularly in mining and financial stocks. This was largely driven by: - Mining Sector: Recovery in commodity prices for platinum, gold, and coal boosted mining stocks. Companies like Anglo American Platinum and Gold Fields saw their share prices rise by over 3% during the week. - Financial Sector: Local banks, including FirstRand and Standard Bank, outperformed market expectations by posting higher earnings due to increased lending and better cost management amid high interest rates. Despite these gains, the retail sector underperformed due to a squeeze on consumer spending caused by elevated inflation and interest rates. The JSE All Share Index closed 2.4% higher for the week, reflecting investor optimism.

Local Bond Market Attracts Foreign Investment

South Africa’s local bond market attracted $250 million in foreign inflows last week, signaling renewed confidence from global investors. The appeal stems from: - High yields offered by South African government bonds (10-year yields remain above 10%), which are attractive in a global environment of moderating inflation. - The positive economic outlook upgrade by S&P, which reassures investors about South Africa's fiscal trajectory. Foreign investors were particularly interested in longer-dated bonds, reflecting confidence in the government’s reform agenda. These inflows are critical for South Africa, as they provide liquidity to fund government operations and reduce pressure on the local banking system. However, sustained interest will depend on continued reform implementation and global market stability.

Insights and analysis by Cameron Hewson, CFA

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