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. Please feel free to address any questions or comment on the contents to the undersigned.

Executive Summary

  • The latest statistics suggest that South Africa is likely to avoid a technical recession – SA’s first quarter GDP forecast remains unchanged at annualised growth of around 1% qoq. The economic outlook remains uncertain, given the likely negative impact (on investment, business and consumer confidence) of persistent political turmoil, weak government finances, decay at state-owned enterprises, overwhelming evidence of widespread corruption and the recent ratings downgrades. Our growth forecasts remain unchanged at 0.7% for 2017, 1.3% for 2018 and 1.9% for 2019. The Reserve Bank revised its growth forecast for 2017, 2018 and 2019 downwards to 1%, 1.5% and 1.7% respectively from 1.2%, 1.7% and 2% previously.
  • In our view, the highly unsettled political landscape and the downside risks to the country’s sovereign risk ratings and the rand will probably keep interest rates unchanged at current levels for the rest of this year. The Governor indicated that interest rate cuts later in 2017 may still be on the cards if the rand holds up and inflation continues to recede.
  • We expect inflation to moderate to around 5.2% by the end of the year, before slowly drifting up off the lower base to 5.9% by the end of 2018 and 6% by the end of 2019. Inflation is expected to remain sticky near the top of the inflation range, averaging 5.6% this year and next year, and 6% in 2019.

We believe that the rand remains vulnerable to an onset of volatility. Global factors will likely play a key role, with any move back to a ‘risk-off’ environment or lower commodity prices possibly hurting the rand. Current resistance levels are at R12.85/$ (mean) and R12.27/$ (2017 low). Support is expected to be maintained at the key psychological level of R14/$, barring further credit ratings downgrades. An imminent Moody’s downgrade is expected, but we believe this will likely take the form of a one notch downgrade with a Negative outlook. S&P and Fitch are expected to provide the reviews in early June 2017. Through a tumultuous calendar, foreign investors are likely to keep supporting the local bond market unless a worse-case credit rating event occurs (in which both Moody’s and S&P provides downward revisions that take the local currency rating to sub-investment grade).