Summary of macro-economic research views:

 

  • Inflation: Although the latest CPI print reflected peristent price risks, the broader disinflation trend is expected to remain intact. Barring any exogenous shocks, headline inflation likely to approach the 4.5% midpoint of the SARB’s target range by mid-2024. In turn, this will allow the SARB to consider cutting rates in H2 if the ZAR can remain somewhat stable.

 

  • Repo rate: The SARB kept the repo rate unchanged at 8.25% for a fourth consecutive meeting in January. The decision entrenched the view that South Africa’s rate-hike cycle had ended. Looking ahead, interest rates will likely decline by 50bp through 2024, with the first rate cut expected in September.

 

  • Government Finances: In its February budget, National Treasury merely kicked the can down the road, without any signs of a long-term turn-around strategy for SA’s fiscus. The use of the contingency reserves allowed Minister Godongwana to present an improved debt-to-GDP outlook, but this was dishonest as it relied on overly optimistic GDP growth estimates and failed to account for the debt of ailing SOEs that will eventually need to be taken onto the government’s balance sheet. In the absence of hard-hitting reforms, SA remains on an unsustainable fiscal trajectory.

 

  • GDP Growth: The South African economy avoided a technical recession at the back end of last year, with GDP growing 0.1% q/q in Q4. It is not growing fast enough to keep pace with population growth, meaning average living standards are deteriorating. There is also no obvious reason to expect that GDP growth will pick up meaningfully, especially since global growth is expected to slow.

 

  • Currency: Despite its recent advance, the ZAR continues to trade at a discount as investors position for the many risks and challenges that SA faces. Against the USD, EUR, and GBP, the balance of probabilities still favours exporters taking out forward currency as the probability of beating the prevailing spot rates in 12 months’ time is high.

 

  • Offshore conditions: Global growth is expected to slow through as the year progresses. The US economy remains more resilient than most, but is also expected to come under increased pressure through the coming quarters. The Fed and other major central banks are thus set to cut rates this year, but their cycles will likely start toward the middle of the year, later than what the market previously predicted.
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