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The Valuator | The Acorn Brief - July 2021

The Valuator | The Acorn Brief – July 2021

Volume 19 Issue6 – July2021

The man who is swimming against the stream knows the strength of it – Woodrow Wilson.

COMMENT AND OUTLOOK–Yet Another Zuma Crisis

It is hard to believe that more than 3 years after his removal as President of South Africa, Jacob Zuma has once again created a crisis for the country. As if the damage caused during his time as country head was not enough, he has now caused what could be a constitutional crisis for South Africa. The Zondo Commission applied to the Constitutional Court to have him found in contempt as a result of his failure to adhere to several summonses issued to him to appear before the Commission. The Constitutional Court finally ruled on the application and in a scathing majority judgement found the former president in contempt and sentenced him to 15 months’ imprisonment. Former President Zuma then reverted to his usual tactics of delay and defiance including making an application to the High court to rescind the Constitutional Court ruling in respect of the finding against him. That in itself is bizarre as the Constitutional Court is the final arbiter in matters put before it. He is asking a lower court to overturn the finding of the Constitutional Court, which the lower court does not have the authority to do. He is doing it on the basis of challenging the constitutionality of the imprisonment ruling, which, if the lower court agrees, is effectively undermining the whole constitutional structure of the country. It will also take a long time to deal with this in a judicial process and that is part of his strategy. He swore twice to uphold the Constitution when inaugurated as President of the country, but that is lost on him. It is critical that this unfortunate situation is resolved as quickly as possible and that the integrity of the Constitutional State that South Africa is, is protected. This is going to be a key factor is determining whether the ANC as a party and the government that represents it, are in fact on a path of renewal and rebuilding of the capacity of the State.

At the same time as this crisis, the Covid pandemic has brought about a stricter level 4 lockdown as the third wave of Covid infections and deaths have spiked significantly higher. The alcohol and hospitality industries are once again bearing the brunt of the lockdown impact as alcohol sales are banned and restaurants closed other than for takeaway meals. This also affects the country’s finances as the tax lost through these closures, particularly on alcohol sales, is significant. The rollout of vaccines across the country is picking up but it is still at a pace that is too slow to bring about a significant reduction in the spread of the Covid virus. The stricter lockdown measures will stifle what was the beginnings of a stronger economic recovery. Fortunately, the mining and agricultural sectors are performing strongly, and this is helping South Africa to maintain a very healthy trade surplus. The trade surplus in May was R55billion and this was the second month in a row with a trade surplus over R50 billion. This is also resulting in a significant current account surplus and this is helping to keep the Rand relatively stable. It is above R14 to the USD again but remains in a relatively narrow trading range. Some of the Rand weakness in the latter half of June was attributable to the US Federal Reserve indicating that it may start raising US interest rates by 2023 which is still a long way off but sooner than2024, as had been originally suggested. This change in approach has been brought about by an increase in US inflation to well above the target rate of 2%. Concerns about US inflation remain as economic activity continues to improve. In SA, the inflation rate has also picked up and for May came in at 5.2%, which, while quite a bit higher than April, is still within the target range of 3% to 6%. Quite a bit of the increase is attributable to the very low base effect in May 2020 with rising fuel and food costs being the main contributors to the increase. It is anticipated that the SA inflation rate will stabilize. Oil prices continued to rise and are now quite steady at the USD 75 per barrel level which is significantly higher than a year ago. Economic growth in SA in the first quarter at 4.6% was quite a bit higher than had been forecast and hopefully this positive trend will continue. Markets around the world were generally slightly higher or flat during June but the JSE had its first negative month since the end of last year as resources pulled back from the significant gains they have made in the past year. The JSE was down 2.5% in June but has made considerable gains for the year to date.

An economic recovery is vital for the country to sort out its finances and infrastructure bottlenecks do not help. Eskom and Transnet remain constraints on growth prospects. There was further load shedding by Eskom during June. A major development was the announcement that the limit on private power production without a license has been increased to 100mw which was well above the 10mw limit proposed by the Minister of Energy. This also signals a political shift in the way Eskom will operate going forward. Further renewable energy options a real so being brought forward. Transnet and rail freight is a vital cog for the mining sector, and it is performing well below the required capacity to meet the demand for bulk mining freight. Here too, there is a political shift as long overdue private sector participation is on the cards and hopefully soon.

Twinoaks Investment Management (Pty) Ltd (Twinoaks) is anFSB approved Discretionary Financial Service Provider –No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks.