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 come to an end, 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: Fiscal dynamics remain concerning, with SA’s debt/GDP ratio forecast to rise towards the 75% mark. Risks have escalated, given the weak GDP growth outlook relative to National Treasury’s assumptions and the rapid deterioration of government finance figures. The 1 November MTBPS will provide fresh insights into SA’s fiscal outlook.
- 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: The greater the degree of fiscal distress, the higher the probability that the ZAR will struggle to make back lost ground. The current account is no longer in surplus, terms of trade are not what they were, bonds reflect a high degree of fiscal risk, and portfolio flows are being undermined by poor financial market sentiment. Any recovery is increasingly contingent on a USD correction.
- Bonds: Bond yields may be elevated and attractive, but they need to be to compensate foreign investors for the risk they accept when exposing their portfolios towards SA assets. Bond yields will likely remain elevated in the lead-up to the MTBPS taking place on 1 November.