Good day

Herewith the latest edition of the Monthly Insights. We trust that this will contribute to a broad overview of the interest rate, currency and financial markets.

Executive Summary

  • Recent statistics suggest that the domestic economy barely grew in the third quarter. At this stage GDP is projected to expand by about 0.2% over the third quarter, which takes our GDP growth forecast for calendar 2016 to a slightly higher 0.3%. Our forecasts for 2017 and 2018 remain unchanged at 1% and 1.5% respectively.
  • The MTBPS offered a sobering compromise. Given that tax revenue is projected to fall substantially short of the 2016 Budget projections, higher taxes and more spending cuts will be required to reduce the budget deficit and contain the rise in public debt to a pace relatively close to the one proposed in February 2016. Treasury hopes to raise an additional R13 billion and R15 billion in 2017/18 and 2018/19 respectively through even higher taxes than those already proposed in the 2016 Budget, while the expenditure ceiling will be reduced by a further R10 billion and R16 billion respectively in 2017/18 and 2018/19.
  • We still expect inflation to peak at about 6.2% around November this year, before ending the year at 6%. Inflation is then forecast to ease to below 6% in early 2017, hovering just within the Reserve Bank’s target range for the rest of the year. The rand remains the key risk to the outlook. Assuming no major changes to South Africa’s sovereign risk ratings later this year, a slightly weaker rand is forecast for 2017, but the impact on inflation will be offset by lower food prices as the drought recedes, subdued domestic demand and base considerations.
  • Global monetary policies are likely to remain loose. We anticipate a further rate cut from the BoE, sometime in 1Q17, when Brexit proceedings begin. The ECB is likely to extend the time-frame of its stimulus programme which was originally expected to end in March 2017. We believe this may be extended towards 2017 year-end as the economy is still struggling with low inflation and growth levels. While the Fed may raise interest rates in December, they are likely to indicate the pace of rate hikes/policy normalisation will be very slow, keeping policy fairly accommodative in the medium-term in order to support the current recovery. Domestically, if our view of no ratings downgrade transpires and assuming an easing of political risks, it is quite conceivable, that we may be at the top, or close to the top of the current hiking cycle.
  • The rand appreciated further in October 2016, even as the US dollar strengthened, on growing market confidence that the US Federal Reserve will raise interest rates in December and despite some temporary jitters over the tough measures contained in the 2016 MTBPS. The rand appreciated by a further 2.4% against the trade-weighted basket of currencies in October 2016, taking the rand’s appreciation for the year to date to a significant 13.2%. Much of this improvement appears to be driven mainly by generally stronger global risk appetites for emerging market assets (specifically bonds and FX) among global investors in response to ultra-low interest rates in many advanced countries. Based on our estimates of purchasing power parity the rand is currently about 6% undervalued.

The possibility of higher US interest rates in the near term may hamper US equity market performances, as the previous low-interest rate environment has been a key driver of financial markets and asset prices in the past. Along with deterioration in US equity indices, SA and EM equity markets have been hampered by foreign investor risk aversion toward equities, especially in the second half of the year, which may persist into year-end.