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

  • Economic activity recovered by much more than the markets expected in 2Q17. Real GDP expanded by a seasonally adjusted annualised 2.5% qoq, after shrinking by 0.7% and 0.3% in 1Q17 and 4Q16 respectively. In the first half of the year the economy managed growth of 1.1% yoy. The statistics available so far for the third quarter suggest that the economy yet again ran out of steam. In July output and sales in most industries either grew at a slower pace or declined further compared with the same month a year ago. The only exception was new vehicle sales, which improved in July and August 2017, growing by 6.3% and 5.9% yoy respectively. We tweak our growth forecast for 2017 slightly up to 0.7% (from 0.6%) and slightly down for 2018 to 1.2% (from 1.3%), but leave it unchanged for 2019 at 1.9%.
  • The rand weakened significantly in September, depreciating by 1.8% against the trade-weighted basket of currencies, bringing the depreciation for the year to date to 4.2%. The weaker trend was mostly driven by shifts in investors’ perceptions of the major currencies, given rising expectations that most key central banks will gradually start to normalise monetary policies after more than a decade of extraordinarily stimulatory measures. July’s disappointing set of economic statistics and renewed jitters ahead of the upcoming sovereign risk rating updates probably also weighed on the rand.
  • The outlook for the rand remains highly uncertain. Global factors should play a key role, with a permanent move back to a ‘risk-off’ environment or lower commodity prices possibly hurting the rand. We also expect further volatility as the markets grapple with domestic developments and the threat of possible downgrades to the country’s rand-denominated debt ratings. A downgrade to junk by both Moody’s and S&P Global would lead to rand debt falling out of key indices such as Citi’s World Bond Market Index, and force sales of local debt by certain foreign investors.
  • The interest rate outlook for the remainder of this year is clouded by the possibility of renewed rand volatility as the next round of sovereign rating updates approaches amid severe financial and management crises at many SOEs, worsening government finances and heightened political uncertainty ahead of ANC’s elective conference. These factors may well convince the MPC to leave interest rates on hold at current levels until early next year. At this stage a longer pause seems slightly more plausible to us. We expect the loosening cycle to resume early next year, anticipating two to three rate cuts of 25bps each by 1H18.