Currency: Much of the bad news that was baked into the rand through the early stages of this year has now been priced out. The ZAR was trading deeply in undervalued territory at levels closer to R19.4000/$ in mid-April, but has recovered recently. Still, there is scope for it to appreciate further, especially if evidence of political stability and meaningful economic reforms emerges. Risk-adjusted fair value is just north of R17.0000/$, with the 12-month-ahead fair value at R18.6200/$.
Inflation: Headline inflation remained at 5.2% y/y in May, remaining near the top of the SARB’s target range. Positively, food inflation slowed further as the impact of the Avian flu dissipated. The effects of the drought in the northwestern part of the country have not yet impacted food prices materially. On the whole, the trend in pipeline pressures is to the downside and will allow the SARB to cut rates in the coming months.
Repo rate: The SARB kept the repo rate unchanged at 8.25% for a 6th consecutive meeting in May. Its accompanying forward guidance was cautious and non-committal, leading the market to push out expectations of eventual rate cuts in SA at the time. Since then, a ZAR-positive election outcome and SARB forward guidance have shifted expectations to favour rate cuts in the coming months, one before the end of the year and another in January.
Government Finances: South Africa recorded a R12.8bn budget deficit in May, although this was notably narrower than April’s shortfall. Even more positively, recent data confirmed that South Africa managed to achieve a primary budget surplus for the first time in 15 years in the 12 months through March. This suggests that the budget deficit has improved significantly compared to its historic levels. However, there is still an urgent need for major fiscal reforms in SA.
GDP Growth: Real GDP for Q1 2024 decreased by -0.1% q/q, following an increase of +0.3% q/q growth recorded in Q4 2023. Q1’s outcome broadly missed the consensus forecast of +0.1% q/q growth. This poor outcome highlights the effects of the many structural headwinds this economy faces. When adjusting for inflation, South Africa’s economy is only slightly larger than in 2018, implying that economic growth has stagnated and is not keeping up with population growth.
Offshore conditions: There are early signs that the US economy is starting to run into headwinds. Although the labour market data remains resilient, some other data point to a slowdown in momentum. This suggests that the Fed will cut rates through the coming months, with other major central banks such as the ECB, SNB, and BoC already in monetary easing cycles. On the political front, 14 years of Conservative rule in the UK has come to an end with Labour taking over, while France is set for a shift in the opposite direction with the right-wing Rassemblement National (RN) expected to win Sunday’s elections.
Read report