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South Africa and Sweden follow Fed with rate hikes – Industry roundup: 25 November

South Africa follows Fed’s lead with latest 0.75% rate hike

South Africa is following the US Federal Reserve’s policy of regular, sharp interest rate hikes in response to resurgent inflation.

The South African Reserve Bank’s (SARB) monetary policy committee (MPC) agreed a 0.75% hike in the benchmark repurchase rate from 6.25% to 7%. It marked the seventh rate increase since the current hike cycle started a year ago in November 2021, when the repo rate rose from 3.5% to 3.75% and extends the central bank’s most aggressive monetary policy tightening cycle in more than two decades.

Lesetja Kganyago, SARB’s governor, announced the latest decision as the MPC met for the last time this year. He said that although two members of the MPC preferred to limit the latest increase to 50 basis points (bps) the three other members had voted for a 75 bps increase.

Dr Andrew Golding, chief executive of the Pam Golding Property Group, said the rate increase would be met with dismay. “This seventh consecutive hike in the repo rate, ticking up to 7% means that the prime interest rate rises to 10.5%,” he commented.

However, while October’s inflation rate disappointed, edging up to 7.6% from 7.5% in September, business confidence showed surprising resilience in the final quarter of the year with a reading of 38, marginally below 39 in Q3 2022. While admittedly a slightly weaker reading, there were concerns that recent bouts of prolonged load shedding might have caused a further sharp deterioration in business confidence.”

Maarten Ackerman, chief economist at Citadel Investment Services predicted that the the SARB would continue hiking interest rates to mirror what is happening in the rest of the world, particularly looking to the US Federal Reserve’s actions in the current environment.

“Although South Africa’s inflation is not as high as the United States, we are nearing peak inflation,” he said, adding that the effect on the South African economy is unfortunate. “The demand side is already weak, and our consumers are under pressure for various reasons like high-interest rates, high unemployment, high debt levels, and the increasing cost of living.”

Ackerman added that rate hikes typically take months to impact the real economy – usually taking six to nine months to show up in the data. This painted a difficult picture for South Africa’s consumers in mid-2023.

“Since the SARB is almost a mirror image of the Fed, which is likely to keep hiking into next year before slowing down, as they get more confident that inflation is slowing, one can assume that as South African inflation drops below the upper target early in 2023, the SARB will also start to slow the speed of hiking rates.”

Ackerman said things may begin to stabilise to the target inflation range of below 6% in H1 2023, which will allow the SARB to start slowing or even pause the pace of rate hikes.

However, Jeff Schultz, senior economist at BNP Paribas South Africa, suggested that it was still too early to predict a hiatus in SARB’s hiking strategy. “We expect a cautious tone, with the central bank unlikely to commit to any imminent ‘pivot’ until it is confident its 4.5% target midpoint is achievable in its forecast horizon,” he said.

Schultz said that the SARB is not yet assured of bringing inflation back sustainably to its 4.5% target midpoint and estimates that headline CPI will struggle to come back to within the upper 6% target range before late Q2 2023 and will only approach its 4.5% midpoint by the end of 2024.

“The SARB will also be sensitive to the fact that its own two-year inflation outlook looks to be at least 50 bps higher than the two years preceding the pandemic… Therefore, we expect the central bank to be steadfast in its view that it still has more work to do to ensure that CPI and inflation expectations continue to shift lower.”

SARB’s forecast for global growth in 2023 has been revised lower to 1.9% (from 2.0%), while South Africa is expected to grow by 1.8% (from 1.9%) this year. The country’s economic forecasts were also trimmed, with growth now expected of 1.1% in 2023 (from 1.4%) and 1.4% in 2024 (from 1.7%), below previous projections. GDP growth of 1.5% is forecast for 2025.

Sweden hikes interest rate by 0.75% to 2.5%

Sweden's central bank has raised its key interest rate by 0.75 basis points (bps) to 2.5% and signalled further hikes next year to tame resurgent inflation.

In his final decision as governor of the Riksbank, Stefan Ingves and his colleagues lifted the key interest rate to its highest since 2008 in a move that most economists had anticipated. The Riksbank started to raise the rate in April from zero and implemented its first-ever 100 bps rate increase to 1.75% in September.

The central bank’s latest forecast “shows that the policy rate will probably be raised further at the beginning of next year and then be just below 3%.

“It is still difficult to assess how inflation will develop and the Riksbank will adapt monetary policy as necessary to ensure that inflation is brought back to the target within a reasonable time,” it announced in a statement.

The Riksbank also expects Sweden’s house prices to fall more than it has forecast so far, driven down by a string of interest-rate hikes. The largest Nordic nation is one of the front-runners in the global housing downturn, with a nominal drop of about 14% in prices from a peak earlier this year. The slipping property prices are fuelled by resurgent inflation and increased borrowing costs

Sweden’s consumer prices rose 9.3% in October from a year earlier, slightly lower than the September figure of 9.7%.

Trafigura chief upbeat on gas supplies

Mild weather across Europe in recent weeks is improving the chances of the region avoiding a natural gas shortage for winter this year and next, according to Trafigura Group, one of the world’s biggest commodity traders.

Europe’s gas inventories are likely to drain by roughly two-thirds this winter, provided there is regular weather and Russian flows continue through Ukraine, said Trafigura Chief Executive Officer Jeremy Weir. That means the region will be able to survive the upcoming winter period, and could have enough of a fuel buffer to help avoid a crisis.

Speaking at a commodities conference in London hosted by the Financial Times, Weir also expressed optimism for next winter. He reported that according to Trafigura predictions, Europe will emerge from winter with 30 billion cubic meters still in storage, which will make the subsequent refill for winter 2023/24 an easier task than previously expected.

“Should that be the case, we may not have so much of a problem the following winter, which was actually the real concern,” Weir added.

He had less welcome news on the global oil market, which this year has witnessed the mushrooming of smaller trading firms that are moving Russian oil much longer distances to regions such as Asia in older ships, potentially raising the risk of shipping errors and accidents.

Following Russia’s invasion of-Ukraine nine months ago, these smaller companies have been set up to fill the trade gap due to bigger companies, such as Trafigura, cutting back on Russian oil trade to comply with international sanctions on Moscow, he said.

"A lot of new companies are being established or smaller companies are growing significantly. We are seeing that all the vessels that typically should have been scrapped are being acquired and are used to transport these fuels. Quite frankly, that's not acceptable in today's world," Weir said.

"And the problem is when oil is going much greater distances -- historically the Russian barrel went to Europe and now they are going to India and China -- it means much more oil on the water. You have got heightened risk of accidents occurring. It's a concern ultimately," he added.

According to S&P Global Commodity Insights, Russia's seaborne crude exports to Asia increased by around 31% year on year to an average 1.6 million barrels per day (b/d) in the first 10 months of 2022. While China's seaborne crude inflows from Russia surged by 36% year on year to an average of 780,000 b/d in the January-October period, India's buying from Russia jumped to 450,000 b/d during the same period, compared with 90,000 b/d in the same period a year earlier.

Trafigura reported a 27% jump in net profit for the six months to March 31 at $2.7 billion, citing sharply higher prices, market volatility and higher trading volumes. But Weir commented: “It has not been an easy year. What we are seeing is that the market has become more fragmented.

“If you look at pre-Covid period, it was a very efficient global market when customers used to say -- this is what I want and what's the price? During Covid, they used to say -- when can I get the cargo due to supply disruptions, this is what I want and what's the price?

“And now they say -- this is what I would like, who is producing it, where is it coming from, what are the multiple supply chains, what's the carbon footprint of this material, how is [it] going to get here, when it's going to get here and what's the price?"

This change of scenario for commodities trading has made the landscape extremely complex and difficult to navigate, as it requires huge amounts of capital to sail through these volatile markets. Trafigura has also seen demand from Europe and the US become a key driver of global metal prices, along with that from China, as a rise in electrification in those regions boosts appetite for metals.

Trafigura has also revealed that it is in advanced talks with Korean Zinc to form a joint venture to build a nickel smelter as part of the Korean company's expansion in renewable energy, batteries and resource recycling, Nickel is one of the key materials used to make electric vehicle batteries.

As part of the deal, Trafigura along with Morgan Stanley and Korea Investment & Securities will take a stake in Korea Zinc through treasury shares worth 372.3 billion won (KRW) – about US$280-million – of which Trafigura will contribute KRW202.5-billion. The proposed joint venture would also include a nickel sulphate refining project.

Korea Zinc also announced a KRW787-billion investment in green hydrogen and the battery sector through a partnership with LG Chem and Hanwha. “Diversifying supply chains and developing new refining and smelting capacity is urgently needed to meet the growing demand for electric vehicles,” said Weir.

Progress uneven as Africa moves towards CBDCs

Mobile money has been a strong competitor to central bank digital currencies (CBDCs) in Africa, but a Bank for International Settlements (BIS) report – based on feedback from 19 of the continent’s central banks – finds that many have greater faith in a CBDC. African central bankers also saw greater utility in CBDCs for implementing monetary policy than bankers in other parts of the world, according to the BIS.

Each of the 19 African central banks responding to the survey on which the report is based stated that they were actively interested in CBDCs. Only Nigeria has issued a retail CBDC, the eNaira, meant for public use, while Ghana has a retail CBDC project in the pilot stage, and South Africa begun a project for a wholesale CBDC, meant for institutional use.

Provision of cash was cited by 48% of respondents as a major motivation for the introduction of a CBDC, with the potential savings on the printing, transportation and storage of banknotes and coins cited. Financial inclusion was mentioned by all respondents. Less than half the adult African population was banked in 2021.

Sub-Saharan Africa accounts for two-thirds of the world’s money transfers by volume and more than half of all users. The launch of CBDCs could improve competition and lower costs, the report notes. A CBDC would “support new digital technologies and their integration with the broader economy.”

However, the issuing and operating a CBDC is acknowledged as a daunting task: “Here African central banks highlight aspects very similar to other emerging market economies (EMEs): network resilience, the cost, availability and combinability of technologies, and their scalability and functionalities. The operational cost of such a complex system is high,” the report states

That was combined with cybersecurity concerns while the risk of low adoption worried several of the central bankers. Bank disintermediation also ranked among the concerns, although bankers expected CBDCs to help implement monetary policy. Cost of remittances was a big concern for design.

UK businesses stockpile to counter shortages and inflation

UK businesses are stockpiling double the quantity of goods in a bid to navigate delays, shortages, and rising inflation, reports Supply Management, which is issued by the Chartered Institute of Procurement and Supply (CIPS)

UK manufacturers held 99.7% more inventory in Q3 2022 than the same period in 2019, analysis of 4,500 small to medium enterprises (SMEs) by inventory management provider Unleashed found.

The report advised companies to become more proactive and broaden their supplier base, as well as seeking out alternative products and parts. Stock-on-hand levels, which in 2019 stood at an average of £365,736 (US$442k), have doubled to £730,681.

Noah Warren, CEO of UK bicycle manufacturer Temple Cycles, who contributed to the report, said: “One of the biggest problems we’ve had is lead times going exponentially crazy. So we’ve had to move away from a just-in-time stock model to just in case. The only way we could be in-stock is to invest more money in it. But you can’t do that indefinitely.”

The five sectors with the largest percentage increase in stock-on-hand value were:

1.       Plastics and rubber (180.88%)

2.       Energy and chemicals (174.06%)

3.       Sport, entertainment and recreation (123.14%)

4.       Beverages, alcoholic and non-alcoholic (115.18%)

5.       Electronics, telecommunications, electrical and electronic components (89.94%)

Bryony Hampton, content marketing lead at Unleashed, told Supply Management that customers were trying to run stock down to make their business more stable.

“Many are spending more hours on projections and planning way into the future, making micro adjustments on a monthly, if not weekly basis,” she said. “Other service companies are adding proactive elements to their service model, so they know when a part will need swapping out and can demand a plan on the leaner side. 

“Some customers now have four times the suppliers and run a tender process so they can order high turnover stock much more last minute. The pressure also means customers are innovating with alternative products that aren't in such high demand. Ultimately, now's the time to review processes, get off error-prone spreadsheets, automate and harness that data to better plan.”

The building and construction sector was unique in not facing an increase in stock value, and instead saw a decrease of 41.56%. Manufacturers were also paying 10.24% more for their goods now compared to the start of 2022.

Gareth Berry, CEO of Unleashed, said: “What started as a supply chain crisis appears to have evolved into an inventory crisis at the individual business level. Yes we've seen shipping times and prices ease, but that’s at the expense of firms who are forced to hold far more stock just to stay operational. It’s a tough situation for manufacturers that will present real cash flow pressures. Managing those stock levels down in the coming months will be a delicate task.” 

Additionally, all sectors excluding food saw a decrease in their “gross margin return on inventory”, which calculates a firm's ability to turn inventory into cash above the cost of the inventory. This demonstrated an overall decline in the profit generated by each unit of inventory.

Lead times fell across six of the nine sectors surveyed, but some were facing increases in fulfilment times – most notably the plastics and rubber sector, which found its lead times almost tripled (266.8%) compared to pre-pandemic levels.

Kenya signs US$3 billion loan facility with Afreximbank

Kenya has secured a 369.9 billion shillings (KSH) – around US$3 billion – loan programme from African Export-Import Bank (Afreximbank), a pan-African multilateral trade finance institution, to strengthen the country’s infrastructure, the Kenyan WallStreet newspaper reports.

A technical team from the Kenyan government and Afeximbank will start working on the support structure. Much of the funding will be dedicated to establishing a Kenya climate change adaptation facility.

Afreximbank will arrange KSH98.64 million in financing towards building 100 dams, which will help the East African nation to double its irrigated area in regions experiencing water shortages.

Kenya aims to double the land area under irrigation over the next three years from 670,000 acres currently to 1.4 million acres, improving its food production and easing overdependence on rain-fed agriculture.

Kenya President William Ruto said the package will allow the country to expand its engagement with Afreximbank on several investment areas such as infrastructure, agriculture, commercial irrigation, housing and micro, and the small and medium enterprises ecosystem. 

Afreximbank Chairman Benedict Okey Oramah added that the institution’s climate change adaptation facility aims to disburse over KSH616.5 billion in the five years to 2026 under its sixth strategic plan.

UK Export Finance seeks more Moroccan trade

UK Export Finance (UKEF) has announced up to £4 billion (US$4.8 billion) is now available for Moroccan buyers for projects in the region, provided at least 20% of the content is sourced from UK businesses.

UKEF added that to promote UK and Moroccan trade, it has appointed a new International Export Finance Executive (IEFE), based in Casablanca, to help galvanise new opportunities for UK businesses to export to the region. The financing “will promote investment between the two nations by helping Moroccan buyers access support to deliver projects, provided that at least 20% of the overall contract value is sourced from UK suppliers.

“Morocco offers a range of opportunities for UK businesses, such as potential projects in energy transition, water desalination, and infrastructure, including rail, roads, ports and airports to boost the domestic economy through new transport links,” UKEF added.

The latest news follows UKEF’s recent announcement that it had deployed £2.3 billion in the region in 2021; triple the amount invested in 2018-19. Last year marked the 300th anniversary of the first trade treaty between the two countries.

Volt and Kriptomat unite on real-time payments for crypto

UK-based open banking provider Volt Technologies has partnered with Estonia crypto exchange platform Kriptomat to launch real-time account-to-account (A2A) payments for cryptocurrencies.

The companies said that their partnership will see Kriptomat enable near-instant speed and friction free transactions, enabling its customer to buy, sell, and exchange cryptocurrencies in real-time, thus aiming to remove barriers for more than 500,000 users in trading over 340 cryptocurrencies.

Kriptomat’s exchange platform has a growing customer base that exceeds 500,000 users, predominantly in emerging markets in Central and Eastern Europe. Apart from enabling the buying, selling, and exchange of cryptocurrencies, the platform also offers users a cost-averaging investment product that allows them to purchase crypto at fixed intervals in an automatic manner. Kriptomat enables trading in Bitcoin, Ethereum, Tether, Cardano, XRP, Polkadot, Dogecoin, Shiba Inu, Litecoin, Polygon, Avalanche, Solana, Tron, Enjin, Uniswap and over 300 others.

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