Executive Summary

·        The economy ended 2017 in better shape than most expected. Stats SA revised the GDP figures for past three years upwards. It now shows that real GDP grew by a seasonally adjusted annualised 3.1% q-o-q in 4Q17, compared with growth of 2.3% and 2.9% in 3Q17 and 2Q17 respectively and a contraction of 0.5% in 1Q17. This acceleration helped push GDP growth for 2017 as a whole to 1.3% from an upwardly revised 0.6% in 2016. The recent revisions to the GDP figures have bumped up our forecast for 2018 and 2019 to 1.8% (previously 1.6%) and 1.9% (previously 1.8%) respectively. Our forecast for 2020 remains unchanged at 2.4%.

·        March was an eventful month, with Moody’s leaving SA’s sovereign credit rating unchanged at Baa3 and raising the outlook to stable from negative. Furthermore, the SARB reduced the repo rate by 25bps as the risks of a weaker rand has receded following the Moody’s credit rating review (as the threat of a WGBI exclusion has diminished). The local bond market rallied sharply over the past month, with the nominal bond curve flattening by almost 30bps.

·        Similarly, the rand remained strong in March, supported by expectations of a ‘stay of execution’ by Moody’s and a stable socio-political backdrop. The SARB decision to reduce the interest rate in March may slow down the pace of the appreciation in the rand in the near-term (due to lower real yields). Marginal rand weakness is envisaged through the course of the year. However, should the rand surprise to the upside, this will likely pose some downside risks to the inflation profile, particularly that of the SARB’s. We still believe that the current real interest rate is still supportive of persistent foreign capital inflows, which could see the rand being supported further in coming months, although this is not our base case.

·        The SARB’s key focus at the moment seems to be bringing down inflation expectations to 4.5%. Nedbank CIB Markets Research forecasts a further 25bps reduction in the repo rate this year, however, we see this cut coming through in July or September 2018 rather than in May, as the SARB reflects on various data releases (inflation expectations being key) and the trajectory of the rand exchange rate in the interim.