Executive Summary

  • Persistent political uncertainty and ratings downgrades have hurt economic prospects in our opinion – further damaging already weak business and consumer confidence. We forecast that the economy is now set to grow by only 0.7% in 2017 and 1.3% in 2018, compared with our previous forecast of 1.1% and 1.5% respectively. The International Monetary Fund (IMF) left its growth forecast for South Africa unchanged at 0.8% for 2017 and 1.6% for 2018.
  • Global monetary policy will likely remain asynchronous – the Fed is expected to continue raising interest rates gradually, while the ECB has continued to stress loose monetary policy and continued QE until year-end (and beyond if necessary). The BoE has taken a middle-of-the-road approach, stating that it will be tolerant of inflation breaches in order to avoid hampering growth. We anticipate no change to monetary policies in the respective regions this year, with the ECB possibly signalling tapering towards year-end.
  • We believe the SARB is mindful of the above mentioned risks and will probably be loath to initiate rate cuts this year, even though inflation is expected to remain below 6% for an extended period of time. Thereafter, when the political picture is clearer and event risks have subsided, we may see two rate cuts in early 2018, especially if low inflation does materialise.
  • The outlook for the rand remains highly uncertain. Global factors will play a key role in our opinion, with any move back to a ‘risk-off’ environment or lower commodity prices possibly hurting the rand. We also expect further weakness and volatility as the markets grapple with continued political turmoil, the change in leadership at National Treasury and the ratings downgrades to junk status. The rand could be hurt by signs of fiscal slippage and governance lapses, which could lead to ratings changes on rand-denominated debt as well. A downgrade to junk by both Moody’s and S&P Global would lead to rand-debt dropping out of key indices such as Citi’s World Bond Market Index, and forced sales of local debt by foreign investors.