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Take note of these economic drivers

Global-economy-

Photo credit: The Hindu

Prof Johan Willemse

We all agree that the world of doing business has changed in ways that we still need to understand. We are still figuring out how we are going to adapt. There are a couple of drivers already evolving that we can take note of that will shape our business environment for the next year.

The Monetary Policy Committee (MPC) of the Reserve Bank announced that interest rates were lowered by another 0,5 basis points and that the prime rate declined to 7,25% , the lowest level in decades. This is a result of two basic drivers.

The mandate of the Reserve Bank is to manage the monetary policy in such a way that inflation must be managed between 3 – 6%. The Reserve Bank indicated that it wants to anchor inflation in the mid range of the target band. The models of the Reserve Bank indicated that inflation will drop below 3% during the 2nd and 3rd quarters of 2020 for a projected average of 3,4% for the year. Economic analysts indicated that they expect that inflation could drop closer towards 2% during 2020.

Secondly, the Reserve Bank must also manage monetary policy in such a way that it takes cognisance of the economic situation and the growth of the economy. Current projections indicate that the economy will shrink between 7% (Reserve Bank projections) and in the worst case scenario – 16% (Treasury projection).

Therefore, the Reserve Bank had no choice, but to lower interest rates and their models indicate that we can expect two further decreases of at least 0,25% each during the next few months. They also indicated that we could expect that rates will stay low during the next two years as a result of weak consumer demand (limiting the potential for price increases/inflation) and that economic growth will be weak and unemployment will increase.

This scenario provides an opportunity to refinance existing debt at lower interest rates, while the lower rates also improve affordability of new external funding. Obviously, a strong cash flow will be very important during the difficult economic times the next year or two.

The exchange rate of the rand started to stabilise during the past two weeks and even showed some strengthening. Obviously, there are a lot of different views on the direction of the Rand exchange rate. Most analysts are of the opinion that, considering the past cyclicality of the Rand exchange rate, it will be unwise to expect a continued weakening.

During 2002, 2008/9 and 2015 the rand weakened sharply to reach a peak, then strengthening considerably. The view is that the rand has overshoot to R18/$ and that a more appropriate and expected level could be in the order of R16/$ towards year-end. If this expected trend becomes reality, it will be important in keeping a lid on maize and soymeal price increases.

The latest maize crop estimate was released on 27 May 2020, increasing the maize crop to 15,6 Million ton, an increase of 38% compared to last year’s crop and the second largest crop on record. This should be ample supply for domestic use and leaves yellow maize for overseas export markets (export prices increased by more than 20% due to the weaker rand).

There will be an expected 1,5 – 1,8 million ton white maize used in the animal feed market, at a discount to the yellow maize price. Current usage of white maize for maize meal for human consumption has increased strongly during the lockdown period, which is a new dimension in the market.

The USA is expecting a new record crop of up to 400 million ton maize. If all go well during their current production season, keeping a lid on dollar price increases and if the rand stay stable/stronger, we can look forward to a sideways/lower maize price.

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