Summary of macro-economic research views:
- Inflation: Inflation is expected to start declining convincingly in the coming months and may well re-enter the 3%-6% inflation target range by mid-year. By the end of the year, the headline inflation rate is expected to trend back towards the 4.5% target midpoint.
- Repo rate: Following the last 25bp rate hike to take the repo rate to 7.25%, there is scope for one more similar 25bp rate hike, although this is far from guaranteed. The interest rate outlook has stabilised and the repo rate will likely peak at the next meeting. Much depends on what other major central banks do in the next few weeks, however.
- Fiscal Policy: With much of Eskom’s debt rolling on the sovereign’s balance sheet, the debt/GDP ratio for the country is forecast to rise towards the 75% mark. Risks are tilted to the topside, however, with economic growth deteriorating and pressure to increase spending on public wages and social transfers remaining. The positive is that fiscal authorities maintain a strong resolve to right the course to a more sustainable trajectory. Still, the bond market will continue to price in a healthy discount to foreigners.
- GDP Growth: Due to persistent load-shedding, private sector growth forecasts have been revised downwards and are now expected to hover around 0.3%-0.6% for the year, depending on the severity of the load-shedding and the mitigation efforts by government. Risks are tilted to the downside, however, with a recession on the cards in H1.
- Currency: According to ETM’s ZSI, valuations metrics, carry attractiveness and resilience, the balance of forces favours a ZAR recovery back towards 15.0000/$in the next nine months, with fair-value hovering closer to 15.5000/6000 at the moment. That is to say that the environment favours exporters at present.
- Bonds: Bond are well positioned to gain strongly through the year as the interest rate cycle turns, the globe heads into a downturn and inflation reverses as the monetary stimulus that caused it, is withdrawn. Fund managers are exposed more to medium to longer-dated bonds, and expect bonds to outperform equities this year.
It is often useful to find a tool that helps unpack value ranges quantitatively, preventing emotional decision-making when hedging. Traditionally, understanding value has been a somewhat nebulous concept that comes down to a range of factors, including what kind of tolerance a business has for unfavourable currency movements. The indicators that follow attempt to identify different periods that might offer relative value, either for importers or for exporters.
- The ZAR has failed to respond in the manner predicted by the ZSI in recent weeks, in large part due to unanticipated economic shocks in SA (think severe load-shedding and the Eskom crisis, in particular).
- However, as a barometer for hedging activity, it is important to note that the ZSI reflects reluctance by the professional market to hedge against significant ZAR weakness from current levels, and continues to point to a ZAR recovery.
- The ZAR remains extremely undervalued against the USD on a risk-adjusted basis as it trades around the 75th percentile of the historical value range.
- Such a stretched undervaluation explains why the professional market is reluctant to hedge against significant further weakness from current levels, even though SA’s idiosyncratic risks are keeping the ZAR from recovering back towards fair value around R16.7500/$.
- Portfolio inflows declined slightly through February, especially into bonds. Uncertainty concerning the global monetary tightening outlook has certainly taken a toll, while SA also continues to face numerous idiosyncratic headwinds, mostly related to Eskom and load-shedding.
- However, SA’s risks are being compensated for by the high yields on offer, which continue to attract foreign capital to some degree. Should promised reforms materialise, portfolio inflows would increase significantly.
- Portfolio inflows declined slightly through February, especially into bonds. Uncertainty concerning the global monetary tightening outlook has certainly taken a toll, while SA also continues to face numerous idiosyncratic headwinds, mostly related to Eskom and load-shedding.
- However, SA’s risks are being compensated for by the high yields on offer, which continue to attract foreign capital to some degree. Should promised reforms materialise, portfolio inflows would increase significantly.
- While SA’s terms of trade remain elevated relative to recent historical norms, this needs to be considered against the backdrop of persistent load-shedding and SA’s logistical bottlenecks that are preventing the country from taking full advantage.
- Accordingly, growth in exports has persistently lagged that of imports in recent months, resulting in a narrower trade surplus into the end of last year and ultimately a deficit as of February.
- From a carry trade perspective, the ZAR remains amongst the most attractive currencies in the world, scoring well above the EM and DM averages. This is largely a function of its undervaluation on a PPP-adjusted basis and the high real yields on offer in SA.
- Accordingly, the ZAR may continue to attract foreign interest, which, at the margin, will assist in helping it retain some resilience against shifts in sentiment.
- ETM’s inflation risk index has dipped firmly back into deflationary territory recently, pointing to a continued moderation of price pressures in SA through the months ahead.
- This provides a clear indication that the pressure on the SARB to continue hiking rates will ease going forward. Accordingly, interest rates will likely top out very soon, with a pivot to a rate-cut cycle also on the cards into 2024.
- In an environment of tightening global financing conditions, SA’s fiscal risks continue to undermine the ZAR’s overall resilience.
- Declining trade fundamentals are also beginning to take a more significant toll, but, for the most part, remain supportive.
- On the monetary front, the SARB’s efforts to curb inflation have supported the ZAR’s resilience, although it generally remains vulnerable to external shocks.
- Following a spectacular 2022, the USD remains unsustainably overvalued even though it has retreated off of its most extreme highs.
- The balance of risks thus remains asymmetrically skewed against the USD, with its current degree of overvaluation seldom sustained for very long when looking back over history.
- The likely catalysts for USD correction are: 1) the growing expectation that the US economy will reverse in the near future, and 2) a financial system that is coming under increased strain. This may force the Fed to lead other central banks in reducing interest rates.
- At the moment the Fed is cautious of ending its rate-hike cycle since a tight US labour market remains an inflationary risk. Unemployment data tend to lag the economy, however, with a loosening of the labour market imminent.