Summary of macro-economic research views:
  • Inflation: Inflation has stalled, and the latest bout of ZAR weakness will elevate the inflationary pressures going forward. Although inflation is expected to subside below 7% and towards the upper limit of the 3-6% inflation target range in the months ahead, the trajectory will be a little shallower.
  • Repo rate: The past week’s events have dealt SA financial markets a massive blow. Expectations for repo have changed and are now pricing in much higher interest rates compared to a month ago. As the FRA rates stand, the market anticipates at least a 50bp hike at the next meeting, with a further 50-75bp worth of hikes thereafter.
  • Fiscal Policy: With much of Eskom’s debt rolling onto the sovereign’s balance sheet, the debt/GDP ratio for the country is forecast to rise towards the 75% mark. Risks have escalated, given the weak GDP growth outlook and the disappointing tax revenues generated recently. This adds to the risk consideration of investing in SA.
  • GDP Growth: GDP growth forecasts will need to be revised downwards, and given the events of the past week, GDP could contract by as much as 1.0% in 2023. The degree of contraction will depend on the extent of the ZAR’s sell-off and the impact this ultimately has on inflation.
  • Currency: At present, sentiment and emotion are driving the ZAR, which has responded to a perfect storm of bad news. While blowing out, the ZAR remains super sensitive to news flow, and given the circumstances, that might still result in a USD-ZAR spiking further before recovering. Fair value a year from now remains closer to 17.00/dlr.
  • Bonds: Bonds have suffered a terrible May so far, but yields have risen to levels of obvious value, especially for “inflation-plus” investment mandates. While it is difficult to buy into an asset whose price is falling, bonds will likely generate very strong returns over the next two years.
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