Executive Summary

·        SA GDP growth is expected to rebound, albeit marginally, in 2Q18, mainly as a result of the low base effect afforded by the deep 1Q18 contraction. The Nedbank Group Economic Unit forecasts 2Q18 growth at 0.2% quarter-on-quarter, before recovering modestly in the following two quarters.

·        A burning issue at the moment is the pace of fiscal consolidation, as we head closer to the MTBPS next month. We believe that revenue is likely to post a small disappointment, led by PIT and CIT, while expenditures will be massaged to fit into the expenditure ceiling. Therefore, we do forecast a 10bps slippage in the consolidated deficit (as a percentage of GDP, currently 3.6% forecast for 2018/19). This assumes that VAT refunds remain sluggish. However, if the pace of VAT refunds normalises, we could potentially see a substantially bigger slippage in the deficit (40bps). Any disappointment in the growth trajectory will likely adversely impact revenue collection and further worsen SA’s fiscal metrics.

·        SA CPI, for the first time since January 2018, rose in-line with market consensus, at 5.1% year-on-year in July, from 4.6% in June. Previous prints surprised to the downside. While we still remain dovish on inflation relative to the SARB, we remain cognisant of the upside risks to inflation, given the recent weakness in the rand exchange rate and petrol price increases affecting transport inflation. Nonetheless, we maintain an inflation forecast of 4.6% in 2018, rising to 5.3% in 2019 and 5.2% in 2020 as a result of the pass-through of a weaker rand exchange rate.

·        Recent public appearances by MPC members on the sidelines of the Jackson Hole symposium reflect the SARB’s measured approach to monetary policy. The SARB has indicated that it will not panic over the recent rand weakness. It is likely to assess the impact on inflation and revert with a measured monetary policy response, if any. We believe that the SARB, in-line with its recent communication, will likely keep interest rates unchanged at its meeting this month. However, since the upside risks that it has been warning about since the start of the year have materialised, we are likely to see an upward revision of its inflation estimates, with breaches of its 6% upper target in 1Q19 and 2Q19. However, we believe that it is going to take more than just a temporary breach to compel the SARB to hike at its meeting this month. However, the risk of a hike in November 2018 has risen.

·        The USDZAR weakened by almost 13% in August, the biggest monthly decline since September 2011. The rand is a high beta currency, prone to the severe side-effects of EM woes. EM vulnerabilities have not eased. In fact, it has intensified, which could imply that the rand is likely to remain on the back foot over the near-term, in-line with EM peers. Any interim pull-back is likely to face rand support close to R14.07/USD. A break above R15.00/USD could occur if we see Argentina or Turkey officially default on its debt obligations, trade tensions between the US and China escalates sharply, or if SA resolves to change its Constitution with a view to weaken property rights.