Stats SA yesterday reported the PPI data for January based on revised weights. Producer inflation for final manufactured goods fell for the third consecutive month to a ten-month low of 12.7% y/y in January from 13.5% in December.
This result was somewhat lower than our prediction of 12.9% year on year and the Thomson Reuters average of 12.8%. The easing was primarily driven by a strong drop in fuel inflation to 16.9% year on year in January from 26.0% in December, owing mostly to base effects.
In January, PPI inflation for ‘food’ items remained constant at 10.5% year on year. In contrast, the January CPI statistics revealed that food inflation increased by 1 percentage point to 13.4% year on year. While we expect PPI inflation to moderate further in the coming months, recent currency weakness and increasing fuel prices to alleviate the current power crisis provide downside risks to the forecast.
Other areas of the value chain also reported lower PPI inflation in January.
Specifically, PPI inflation for intermediate manufactured goods fell for the fourth consecutive month to 5.6% y/y in January from 8.0% y/y in December and after its most recent peak of 13.7% in September 2022.
Lower PPI inflation for basic iron and steel (-7.1% y/y in January; -3.2% in December) and basic and ‘other’ chemicals (1.8%; 8.0%) were the key contributors.
However, agricultural, forestry, and fishery PPI inflation fell further from 16.0% year on year in December to 11.7% in January. This was mostly due to farm inflation slowing to 10.6% year on year in January, down from 15.7% in December, and a significant 11.1% year on year drop in the PPI for fruits and vegetables, compared to a 2.3% increase the previous month.
Figure 1: Stats SA has updated the weights for PPI for final manufactured goods*
Fitch Ratings released a statement that on balance presented a neutral assessment of South Africa’s 2023 Budget. It remarked that the Budget and, specifically, the magnitude of the Eskom debt relief package was largely as it had expected. Fitch also picked up the interpretation challenges posed by the changed accounting treatment for Eskom’s debt relief and said that correcting for the move of previously budgeted state-owned company support to below-the-line stock-flow adjustments suggests a moderate increase in spending amounting to 0.3% of GDP per annum.
“Like us, the agency also pointed out that the public sector wage bill could be much higher than the 2023 Budget assumption of a 0% wage increase in FY23/24, and it forecasts public sector compensation in FY24/25 to be R54bn (0.7% of GDP) higher than what the government now projects. Fitch also said that it had previously assumed ‘significantly lower revenue growth’ with a revenue forecast for FY24/25 that was R47bn (0.6% of GDP) lower than the government’s new projections,” stated Absa in their report.
Absa continues that, “although Fitch does not explicitly discuss the important ‘compliance dividend’ from SARS’s institutional rehabilitation, it said that while ‘continued stronger performance of revenue in line with government projections would be a favourable development’, the power supply crisis could depress growth and revenues ‘consistently’. Overall, Fitch’s view on the 2023 Budget is broadly similar to ours (see South Africa: Generous support for Eskom is one key 2023 Budget takeaway, 22 February 2023, for more details). Though Fitch has termed its remarks as a ‘non-rating action commentary’ with no explicit view on how the Budget will affect Fitch’s BB- Stable Outlook rating, our take is that the view expressed by Fitch suggests that it will leave the ratings unchanged for some time.”
The Financial Action Task Force (FATF) is expected to announce its judgement on whether or not to greylist South Africa today.
Due to weaknesses in South Africa’s anti-money laundering and anti-terrorist funding regulations, grey listing simply imposes greater scrutiny.
On balance, we still expect South Africa to be grey-listed, but the likelihood of this happening has likely increased in the last six months due to the passage of key laws, such as the General Laws (Anti-Money Laundering and Counter-Terrorist Financing) Amendment Act 22 on December 31, 2022, and FICA rule changes, which bring new types of entities under the Act’s obligations.
There has also been some improvement in terms of enforcement/implementation. We believe that grey-listing South Africa would not result in a rapid decline in capital flows, partly because such an outcome is likely already priced in. It might, however, give cross-border financial transactions a bit more grit through expanded due diligence procedures and the like.