Local and global turning points could usher in new status quo

This week will be remembered for two reasons, one global and the other domestic.

The global reason will be SA hosting a successful 15th Brics summit at a time of significant geopolitical changes, major decisions made that are likely to mark the beginning of a shift from a unipolar world led by the US to a multipolar world with emerging markets commanding a fair share of influence.

The domestic reason, more short term in nature and specific to SA but no less important for markets, is the slump in domestic headline and core inflation to 4.7%, only 20 basis points higher than the SA Reserve Bank’s midpoint target.    

Let’s begin on the global stage. Geopolitics has disrupted markets for some time, going back to the Trump trade taxes on China if we consider a more recent anchor point. Since then there has been an obvious race to influence how the global architecture shapes up in future.

On the one end, advanced economies led by the US appear to favour the existing architecture with marginal changes to include a few more emerging markets — in the overflow area, not at the main table. On the other end, emerging markets led by the Brics countries have been pushing for a reconfiguration of the global architecture, including reform of the IMF, World Bank, World Trade Organisation and UN Security Council.  

The 15th Brics summit concluded this week with an announcement, termed the Johannesburg II Declaration, of six new members. Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates (UAE) will become full members from January 1 2024. The two African countries — Egypt and Ethiopia — have large markets from a population perspective.

The UAE, Saudi Arabia and Iran represent the Middle East and are major oil producers and a deep source of capital. Argentina bolsters the representation of South America in addition to Brazil. This is potentially the most consequential outcome for geopolitics, though there were many other important resolutions that will also be important.  

Economically, the “Brics Plus” (Brics+) countries accounted for 35% of 2022 global GDP based on purchasing power parity dollars, five percentage points higher than the Group of Seven (G7) countries (Canada, France, Germany, Italy, Japan, the UK and US), which account for 30%. This is projected to rise to 37% by 2026, while the G7 is projected to moderate to 29% of the global economy. As the other resolutions — including deepening people-to-people movement, technology, trade and investments — play out this will shift global geopolitics in future towards a more representative world order.  

Along with this membership expansion the other important announcement was that the New Development Bank will increase its local currency borrowings to 30% from less than 20% currently. Some will see this as de-dollarising, but it is merely countries financing themselves in local currency, which reduces currency risk.   

The second and key local development was inflation slumping to 4.7% in July, far better than the market expectation of 4.9%. This suggests that the Reserve Bank will have succeeded in bringing inflation under control if it stays contained in the coming months. Political parties celebrated the fall in inflation on their social media accounts but stopped short of praising the Bank for a job well done.     

One implication of this development is that consumers’ incomes will buy a little more going forward than they would if inflation had stayed high. Given the strain from higher interest rates, this can only be welcomed. The second implication is that the Bank has ample room to pause interest rate hikes, which is our expectation.

This will mean no further rise in the cost of debt, and potentially — depending on what the US Federal Reserve does — interest rate cuts can come sooner than our expectation of the second half of 2024, which would provide further relief for consumers.