Summary of macro-economic research views:
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Inflation: Inflation continues to trend lower. The May inflation picture will print around 6.5% or below, and in the two following months, inflation could drop back below the upper limit of the 3-6% inflation target range. That will ease pressure on the SARB and re-establish SA’s positive real yields.
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Repo rate: The SARB opted to lift rates by 50bp at the last meeting to take the repo rate up to 8.25%. As things stand, investors are anticipating that the SARB will hike another two more times of 25bp each. Much of that will depend on the ZAR consolidating its real gains or appreciating further.
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Fiscal Policy: With much of Eskom’s debt rolling onto the sovereign’s balance sheet, the debt/GDP ratio for the country is forecast to rise towards the 75% mark. Risks have escalated, given the weak GDP growth outlook and the assumptions of much higher growth.
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GDP Growth: GDP growth forecasts will need to be revised downwards, and given the events of the past week, GDP could contract by as much as 0.4% in 2023. The degree of contraction will depend on the extent of the load shedding and the degree of volatility in the ZAR. At the moment, both have improved, but that is not guaranteed to last.
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Currency: As tumultuous and difficult as May was, June has been the opposite and more than unwound the depreciation recorded in May. While portfolio outflows have hindered the performance of the ZAR, those portfolio flows appear to have reversed in the ZAR’s favour as foreign investors see value in SA’s high yields and the ZAR’s undervaluation.
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Bonds: Bonds had an awful May and lost tremendous ground. However, the appreciation of the ZAR through June has played an enormous role in bolstering the appeal of SA bonds, that have unwound at least half the losses sustained through May. With inflation set to decline, the real yield bonds will offer are set to increase substantially.