A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Weathering the latest global firestorm

31 Mar 2022

Wikus Furstenberg, Rhandzo Mukansi, Yunus January, Aidan Kilian / Interest Rate Team

Economic & bond market review

Eastern European conflict adds complexity to an already muddy global backdrop

At the time of writing, markets were still on tenterhooks and digesting the ongoing impact of the escalation of the terrible Russia-Ukraine full-scale military conflict, with spill-overs materialising in all financial markets. While the direct effects on global growth are likely to be limited, as both countries only represent around 2% of global GDP, the indirect impact matters more for now. That said, investors and policy makers alike are already concerned about the longer-term effects should the conflict escalate or be prolonged. The immediate indirect effect had been evident in commodity market turmoil and the tightening of global financial conditions. During March, commodity markets (specifically energy, food, and metals) have experienced the biggest price adjustments since the 1973 oil crisis. For instance, the price of brent crude oil increased from $95 per barrel to $127 per barrel two weeks into the conflict - fed by concerns about supply - before it dipped back to lower levels. The upward price changes for coal and grain products were even more dramatic. From a global monetary policy management perspective, the conflict adds another level of complexity, with the risk of higher inflation and weaker economic growth (stagflation) to be considered by both monetary and fiscal authorities. This comes at a time when many central banks are already grappling with stubbornly high levels of inflation - one of the legacies of the COVID pandemic. 

Figure 1: Commodity price changes (Jan 2020 = 100)

Source: Bloomberg, Futuregrowth

Elevated inflation and pipeline price pressure forced the hand of central banks

Rising uncertainty about stagflation aside, many prominent central banks stuck to their telegraphed intention to tighten monetary policy in response to the stubbornly high rates of inflation. In the case of the US Federal Reserve (the Fed), which finally joined a growing number of hawkish central banks, the 25 basis points (bps) increase at the March policy meeting was the first since 2018 and a direct response to heightened inflation concerns. Most concerning is the fact that the global economy faces another significant broad-based supply shock (and thus upward price pressure) to add to the supply-side constraints caused by the COVID pandemic. In fact, the resurgence of COVID cases and regional lockdowns of important ports and manufacturing hubs in parts of North Asia raised another red flag. The one prominent exception is the European Central Bank (ECB), which, despite cautious communication about high and rising inflation, opted to remain on hold while it is more concerned about the impact of the conflict on real economic activity in the region. Locally, the South African Reserve Bank (SARB) raised the repo rate by another 25bps to 4.25% at the March Monetary Policy Committee Meeting, the third consecutive repo rate increase. More telling, though, is the fact that two of the five committee members voted for a 50bps hike at the recent meeting, signaling a more hawkish pivot compared to the previous two meetings. Unlike previous crisis periods, relative rand strength did not contribute directly to the decision. Instead, the policy response was completely focused on broader macro-economic fundamentals, specifically an acceleration in the rate of inflation and the expected narrowing of the negative output gap. This required a pre-emptive response from the central bank to manage possible lasting second round effects from the latest energy and food price fallout.

Figure 2: Global risk aversion leads to a sizeable volatility spike in the SA bond market

Source: IRESS, Futuregrowth

De-risking drags global bond market yields higher

Global bond markets did not escape the wrath of opportunistic speculators and panicky investors. Rising inflation concerns (from an already high base), increasingly more hawkish central bank messaging and action, the sudden and sharp ratings downgrade of Russian government bonds and the inability to exit Russian financial markets forced broad-based de-risking across advanced and emerging bond markets. While the pace of net outflows in both developed and emerging bond markets slowed towards quarter end, the broad de-risking trend remains, in light of rising inflation fears and the accompanying policy response. The selloff in bonds has resulted in the amount of negative yielding securities falling to $3 trillion globally, the lowest since 2015 - a slump of almost 85% since the 2020 peak. In the US, the yield of the 10-year US Treasury bond jumped from 1.5% at the end of December 2021 to around 2.30% at the end of March 2022. This yield movement from such a low base caused a significant capital drawdown of around 10% over this period. In the case of South Africa, foreign investor net selling on the back of general global risk-off sentiment initially led to a significant increase in bond yields before the country’s relatively favourable position allowed for differentiation and the return of some sanity.  

Figure 3: Amount of negative yielding global debt decreased sharply

Source: Bloomberg, Futuregrowth

The fallout from the eastern European conflict is not all bad news for SA

While near-term inflationary pressures will intensify due to the spike in oil and grain prices, the external account impact is more than offset by the sharp increase in coal, iron ore, and precious metal prices. The resultant jump in SA’s export price index thus far is expected to more than offset the negative impact of higher oil prices on the country’s terms of trade. This, in combination with SA’s negligible direct trade and commercial links with Russia, it’s geographical distance from the conflict, and an already relatively strong current account base, enabled the rand to weather the fallout from the eastern European firestorm very well. Moreover, higher export earnings may limit the downward pressure on economic activity.

Figure 4: SA’s term of trade were boosted as the Ukraine conflict intensified

Source: Bloomberg, IRESS, Futuregrowth

Recent global events overshadowed a reasonable national budget outcome

The tabling of the 2022/23 national budget took a back seat to the disturbing developments in eastern Europe, but the South African government managed to stick to its consolidation plans. In fact, the Minister of Finance managed to strike a delicate balance across debt containment, bolstering public infrastructure expenditure, and securing the social welfare net. The positive outcome of the 2021/22 budget (and the forthcoming fiscal projections) reflects a concerted effort to accelerate the pace of fiscal consolidation. In the short term, it is worth noting that the most recent boost to South Africa’s main commodity exports due to the Russia-Ukraine conflict could potentially filter down to stronger-than-expected corporate tax revenue receipts, which, in turn, will assist with efforts to consolidate fiscal finances. 

On another positive note, the South African Constitutional Court ruled unanimously in favour of the government in its decision not to implement the third year of the 2018 public sector wage deal. A ruling in favour of organised labour would have had a significant negative impact on fiscal consolidation efforts. Even so, we remain concerned about the underlying tenuous fiscal situation, mainly as a result of the country’s sub-par economic growth path and sustained current expenditure pressures, which, in turn, give rise to significant execution risk in the years ahead.

Figure 5: The level of outstanding government debt is expected to stabilise, albeit still at elevated levels

Source: National Treasury, Futuregrowth

Local inflation eased back a little before a widely expected acceleration

The year-on-year rate of change of the headline Consumer Price Inflation index in February had been reported at 5.7%, a tad lower than the 5.9% recorded in December, which in turn had been the highest reading in just over four years. Overall, the transport category remains primarily responsible for the strong pickup in inflation, which was recorded as 3.5% in February. This helps explain the variance between headline and core inflation. Although inflationary pressures persist in the form of supply-side-induced price increases, underlying demand-driven inflation continues to remain soft, in light of the sky-high unemployment rate and as a consequence a constrained consumer.

The SA bond market managed to eke out cash-beating returns despite the troubled global backdrop

While the South African bond market had to deal with lower global risk appetite (mainly in response to the developments described above) it nonetheless still managed to deliver cash-beating returns in the first three months of the year. The FTSE JSE All Bond Index (ALBI) rendered a return of 2.80%, with bonds in the 12+ year maturity band once again outperforming shorter-dated bonds by more than 150 basis points. This was in excess of the cash return of 0.95%. Despite sustained upside inflation pressure and strong technical demand for ultra-long-dated instruments, inflation-linked bond yields drifted slightly higher. As a result, the FTSE JSE Government Inflation-linked Bond Index (IGOV) rendered a relatively weak return of 0.21%.

Figure 6: Bond market index returns (periods ending 31 March 2022)

Source: IRESS, Futuregrowth


The spike in commodity prices in response to the military conflict in Ukraine raised already elevated global inflation concerns to even higher levels. In turn, this added urgency to the earlier shift towards monetary policy tightening by the majority of global central banks. The step-up in inflation concerns and monetary policy response served as a catalyst for a significant spike in global bond yields. Locally, the bout of global risk aversion led to an increase in bond market volatility and weakness, which subsided towards month-end. In contrast to previous crisis periods, the South African rand managed to hold its own. This is mainly ascribed to net commodity price movements which benefitted the country’s terms of trade. Limited direct trade and investment links to Russia and South Africa’s geographical location away from the flash point also assisted. The fallout from the eastern European conflict overshadowed the outcome of the latest South African national budget, which turned out to be mildly positive from an investment perspective as fiscal consolidation retained prominence.

Key economic indicators and forecasts (annual averages)


    2018 2019 2020 2021 2022 2023
Gobal GDP   3.2% 2.6% -3.6% 5.8% 3.6% 3.0%
SA GDP   1.5% 0.1% -6.4% 4.7% 2.3% 2.5%
SA Headline CPI   4.6% 4.1% 3.3% 4.5% 5.9% 4.7%
SA Current Account (% of GDP)   -3.0% -2.6% 2.0% 3.7% 2.2% 1.0%

Source: Old Mutual Investment Group