Executive Summary

·   SA’s real economy has presented mixed signals in the high-frequency prints we have seen thus far for Q3. Mining production is likely to represent a key drag on Q3 real GDP growth, while manufacturing production surged by 1.9% in the three months to August and likely contributed positively to GDP growth in Q3. Retail sales expanded by 0.5% in the three months to August, with a positive September print likely to signal a positive contribution from household final consumption expenditure (HFCE) to GDE. The Nedbank Group Economic Unit projects a GDP growth rate of 0.6% (lowered from a peak of 1.8%) for 2018 and 1.6% for 2019. Significant downside risks to the medium-term growth forecast remain. However, the announcement of R290bn of investment pledges following President Ramaphosa’s Investment Conference in October 2018 does suggest some upside over the long run, if these investments are indeed realised.

·   SA’s CPI remained unchanged at 4.9% y/y in September, worse than consensus of 4.8%. Core inflation also remained muted at 4.2%. We expect a gradual uptick in CPI, and for it to peak at 5.8% in September 2019. The main reasons for a weaker CPI trajectory in 2019 are a weaker rand exchange rate and higher food and electricity prices due to the RCA clawback announced by the NERSA. While multi-year price determination (MYPD) tariffs are still outstanding, we assume this will be a flat electricity tariff increase of 8%. Anything below this may ease headline inflation by at least 10bps.

·   While we do not expect CPI inflation to breach the 6% upper target over the medium term, we expect the SARB to raise its inflation estimates by at least 10bps due to the NERSA’s RCA implementation ruling, taking its CPI estimates to (at least) 5.8% for 2019 and 5.5% for 2020. With CPI gradually creeping up and the rand still vulnerable to EM and global shocks, the SARB faces the stagflation dilemma of rising inflation and falling growth. We believe the SARB will raise interest rates by 25bps at its policy meeting this month. The MPC has admitted to mulling over interest rate hikes, although not as aggressively as their Turkish or Argentinian counterparts. This likely implies that the local MPC is indeed considering entering a hiking cycle soon.

·   The USDZAR weakened by a further 4% in October and by 19% YTD, after strengthening by as much as 4% in September. Risk sentiment deteriorated, but this was exacerbated by local factors as opposed to any new global developments. Nedbank CIB continues to forecast a USDZAR exchange rate range of R14.00-R15.00 by year-end. While we do not rule out the possibility of a break out of this range, we do believe that if the EURUSD continues to weaken, this would reduce upside risks to the rand, i.e., the rand would continue to weaken.