Currency: The start of the monetary easing cycle in the US and ongoing favourable sentiment domestically, fueled by the formation of the GNU, saw the ZAR strengthen by almost 4% against the USD in September. The ZAR is now one of the top-performing emerging market currencies against the USD this year. Much-needed reforms could see the virtuous cycle of the ZAR, currently underway, continue.
Inflation: Headline CPI slowed to +4.4% y/y in August, below the SARB’s preferred +4.5% y/y target midpoint. Core inflation is currently 4.1%. Falling fuel inflation, a stronger ZAR, the absence of load-shedding, and base effects linked to food could see headline CPI declining to between 3% to 3.5% in coming months. The possibility of higher oil prices due to Middle Eastern conflicts remains a risk.
Repo rate: Following the Fed’s 50 basis point cut in interest rates in September, the SARB cut interest rates for the first time in four years. Interest rates were reduced by 25bp to 8.00%. The SARB’s tone was more dovish than expected, with the bank’s forecasts seeing 100bp of rate cuts as the repo rate stabilises slightly above 7.0% in 2025. Nonetheless, with inflation expected to decline, ETM expects a 50bp cut at the next meeting in November.
Government Finances: The budget deficit narrowed to -R19.4bn in August from -R79.9bn in July. More broadly, the year-to-date budget deficit of -R151.6bn is notably lower than the -R237.2bn deficit recorded in the same period last year. Following the +R80.0bn GFECRA payout to the National Treasury in July, an additional +R20.0bn was paid in August, providing some breathing room via a lower total borrowing requirement over the medium term. However, in the longer term, the government still needs to implement austerity measures to rein in the budget deficit.
GDP Growth: The SA economy expanded marginally in Q2, as year-on-year GDP growth came in at 0.3% y/y in Q2, lower than an already disappointing 0.5% y/y in Q1. Interest rates remained high, and confidence weak in the run-up to the general election at the end of May even though there was no load-shedding. The Q3 GDP print may improve as confidence has increased following the formation of a more centrist GNU.
Offshore conditions: The long-awaited start of the US Fed monetary easing cycle and expectations of a soft landing in US economy growth are supporting global financial sentiment. However, developments in the Middle East are currently weighing on risk appetite as the Israeli-Hamas-Hezbollah war escalates.
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