Summary of macro-economic research views:
- Inflation: Disinflation as a trend remains intact, although the bias to the downside is not as clear-cut as before. Nonetheless, inflation is set to remain between the 3%-6% inflation target band and closer to the 4.5% mark.
- Repo rate: The SARB kept the repo rate unchanged at 8.25% for a second consecutive meeting in September. The decision entrenched the view that South Africa’s rate-hike cycle has ended, barring any major inflationary shocks or sharp ZAR selloffs. Still, the SARB’s tone at the meeting was decidedly hawkish, suggesting that rate cuts remain a long way off.
- Fiscal Policy: The MTBPS suggested that National Treasury is committed to expenditure cuts and fiscal consolidation, but it remains to be seen whether hard-hitting reforms will be implemented in the years ahead to reverse course away from a fiscal crisis. Fiscal dynamics thus remain concerning, with SA’s debt/GDP ratio forecast to rise above 77%.
- GDP Growth: GDP growth may have surprised to the topside in Q2, but there are strong headwinds in the form of high interest rates, load shedding, and structural constraints that will weigh on any future performance. There remains a high chance of recessionary conditions in the next 2-3 quarters, especially if a global slowdown gathers momentum.
- Currency: Although fiscal distress remains acute, the market enjoyed the efforts made in the MTBPS, which turned out better than expected. The trade account is back in a more handsome surplus, and SA’s terms of trade have improved slightly. Bonds still reflect a high degree of fiscal risk, and portfolio flows are being undermined by poor financial market sentiment, but that might all change if a virtuous cycle emerges where the bond market attracts inflows that boost the ZAR and lowers inflation, such that bond market inflows are again boosted. Moreover, the global business and monetary cycles are turning, meaning there is added potential for a ZAR recovery on the back of a USD correction.
- Bonds: Bond yields may be elevated and attractive, but they need to compensate foreign investors for the risk they accept when exposing their portfolios towards SA assets. However, bond market investors are starting to consider the turn in the cycle and capital gains that could be extracted over and above the yields available on SA bonds.