New South Africa Central Bank Gov Boosts Confidence

By Dimitra DeFotis

The prospect of tighter monetary policy in South Africa with a new South African Reserve Bank president is giving some stocks a boost today.

AngloGold Ashanti  (AU) shares are up nearly 3% this morning to $11.48, while shares of energy and chemicals company Sasol (SSL) rose nearly 2% to $54.10. The  iShares MSCI Emerging Markets ETF (EEM) is up 1.7% this morning, while the The iShares MSCI South Africa ETF (EZA)  is up 2.25%.

Teneo Intelligence reports that South Africa Pres. Jacob Zuma announced the appointment of Lesetja Kganyago as governor of the South African Reserve effective from Nov. 9, when the term of the current governor, Gill Marcus, expires. Expect a confidence boost and a slightly more hawkish monetary policy direction, writes Teneo's Anne Fruhauf:

"Kganyago, the SARB's highly-regarded current deputy governor and former director-general of the Treasury … may place slightly greater emphasis on price stability than his predecessor in the SARB's battle to balance inflation-targeting with supporting economic growth. The next monetary policy committee meeting on November 19 and 20 will be chaired by the incoming governor and speculation is increasing that the committee will come under immediate pressure to hike the benchmark rate (left unchanged at 5.75% at the MPC's September meeting). A key question will be how Kganyago manages the MPC. If he retains Marcus' inclusive, vote-driven style of decision-making, rate setting by the 7-member MPC is unlikely to change significantly even if Kganyago himself is somewhat more of an inflation hawk. Even under a slightly more hawkish leadership, the SARB will face tough dilemmas to balance its tightening cycle with weak growth. On the one ha nd, growth remains anemic, which may be confirmed yet again by the release of mining and manufacturing data for August on 9 October. On the other hand, inflation drivers such as currency weakness, wage demands and electricity prices all seem to have taken a recent turn for the worse and will complicate the SARB's medium-term inflation outlook …

In terms of the currency, the MPC's expectations of growing economic momentum in the U.S. and the prospect of a normalization of policy rates by the Fed are increasingly expected to add downward pressure on the rand (which some economists now project to reach 12 ZAR [South African Rand] to the U.S.dollar in the second half of 2015), posing clear downside risks for the MPC's inflation outlook. …Public sector unions – representing 1.3 million workers – have demanded pay hikes of 15%. … While fuel price pressures have eased in recent months, the medium-term outlook for electricity prices is worsening. … Together these factors may give the SARB little room to shield the sputtering economy from rate hikes over the next 12 months."

Bank of America reiterated skepticism on Sasol in September, with a target price of $55, near today's price near $54.10. For more on South Africa's currency and economy, see "Fed Reassures Emerging Markets," and "South Africa Econ Perilously Near Recession."