Inflation: Headline inflation in South Africa remains contained and has continued to surprise to the downside. It supports further rate cuts, although recent ZAR weakness and an uncertain external environment have warranted a more cautious SARB after the January 25bp rate cut. Breakeven rates show that inflation expectations are currently in line with 2021 lows.
Repo rate: The SARB cut interest rates by 25bp, bringing the repo rate down to 7.50% in January. However, previous rate cuts were by unanimous vote. This time, the vote was split, with four members favouring the cut while two voted for a hold. The reduction in the repo rate takes the policy stance to a more neutral level, removing some restrictiveness. Currently, the market has adopted the SARB’s cautious stance, with FRAs pricing in roughly one more 25bp cut by the end of the year. Of course, this could shift quickly depending on US economic data and what policies the US implements over the coming months.
Government Finances: South Africa’s budget balance shifted to a surplus of +R21.4bn in December, up from -R4.5bn in November and -R46.1bn in October. This is largely a seasonal occurrence, but the improvement was nonetheless welcome. With the February budget looming, SA’s fiscal situation remains a concern, and this week’s SONA provided little detail to suggest that any major structural shifts are coming to address this.
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, which aligns 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. The GNU needs to implement reforms urgently to tackle SA’s structural constraints. However, a stronger ZAR, falling inflation, the absence of load-shedding, and rate cuts will support 2025 GDP growth.
Currency: The ZAR has returned to levels closer to risk-adjusted fair value. However, this does not mean that further appreciation is not possible. A re-assessment of SA’s risk profile is taking place and could improve further after the Feb budget. Furthermore, the USD remains expensive, and any deterioration in the US economy’s performance over the coming months could significantly weaken the greenback.
Offshore conditions: The US economy has remained resilient, with the labour market defying the odds of a slowdown. As a result, the Fed has turned cautious after keeping rates unchanged in January and US bond yields have remained elevated to emphasise US exceptionalism. In Europe, economic growth is slowing, with the likes of Germany and France under pressure and expected to post growth in 2025 of less than 1%. China, meanwhile, has seen growth accelerate due to stimulus measures taking effect, with more likely to come this year. However, the spectre of a global trade war continues to hang over the markets, even if the risk has receded after Trump walked back his initial implementation of tariffs on Mexico and Canada.
