Dec 2024

Currency: Following Trump’s victory, the market was firmly focused on his likely protectionist trade policies, which have contributed towards USD strength and weakness in emerging market currencies. Markets were then dealt a reality check following comments by US Fed Chair Jerome Powell that although interest rates would continue to decline, significant cuts may not be imminent over the next few months. Finally, the so-called “Trump trade,” which drove the USD stronger, has lost some momentum providing some relief to emerging market currencies such as the ZAR. While the ZAR continues to benefit from improved resilience following the GNU, economic reforms will have to be forthcoming to maintain the relatively favourable economic sentiment.

Inflation: Headline inflation slowed to a 4-year low of +2.8% y/y in October from +3.8% y/y in September. This was a function of fuel deflation (-19.1% y/y in October) and a further decline in food prices (2.8% y/y in October) given the passthrough effect from lower fuel prices onto food. Core CPI, which excludes volatile food and energy prices, declined to +3.9% y/y in October, down from +4.1% y/y in September. The October print will likely turn out to be a low point with CPI expected to increase in the final month of the year mainly as falling fuel inflation loses momentum.

Repo rate: The repo rate was cut by 25 basis points to 7.75% in November despite recent inflation numbers coming in below the lower band of the SARB’s 3% to 6% inflation target. The Bank views the decline in inflation as unsustainable, with SARB Governor Lesetja Kganyago highlighting factors that have led the SARB to hold a more cautious stance such as anticipated electricity tariff hikes and global inflation risks driven by geopolitical dynamics. Consequently, the bank’s interest rate projections were revised upwards. For the end of 2025, their model expects the policy rate to end at 7.40%, up from 7.17% predicted at the last meeting. Consequently, there could be two to three reductions by mid-2025 but limited easing afterwards.

Government Finances: The budget deficit expanded substantially to -R46.1bn in October (R-4.4bn in September) in line with seasonal trends. The year-to-date main budget deficit of -R302.1bn is broadly in line with the deficit of -R292.9bn recorded in the corresponding period last year, but risks remain. For one, the +R100bn GFECRA support has now all been used, but only R8bn of the budgeted R64bn Eskom support has been allocated. The GFECRA funds provide some breathing room via a lower total borrowing requirement, which has been worsening precipitously. Fiscal reform is urgently needed to rein in debt levels which would improve the ZAR’s resilience.

GDP Growth: The Q3 GDP number disappointed with a contraction of -0.3% q/q. Y/y growth was a meagre 0.3% in Q2, in line with the Q2 growth rate. Economic activity in the agriculture, forestry and fishing industry declined sharply by -28.8% q/q, due to drought conditions across Southern Africa. The GNU needs to implement reforms urgently to lift SA to a higher growth path. While a stronger ZAR, falling inflation, the absence of load-shedding and rate cuts are expected to drive some expansion, any growth will continue to be constrained by structural issues.

Offshore conditions: November was a volatile month for global financial markets. President-elect Trump’s win and the strong performance of his Republican Party ignited the “Trump Trade” as investors adjusted to the possibility of tax cuts, trade wars, higher inflation expectations, and slower interest rate cuts from the Fed. Beyond the US elections, geopolitical tensions escalated, with the war between Russia and Ukraine intensifying while the Middle East conflict persists. In Europe, France’s political woes and Germany’s economic struggles have come back to the fore, while in Asia, China’s economic rebound still appears to be lacking any sort of positive momentum.

Read article