Executive Summary

  • Despite the recent uptick in the international Brent price, it is still 2% lower than it was a year ago. Global growth is easing, and demand-pull inflation is receding, dampening the global inflation trajectory. Furthermore, global commodity prices remain low because of the slowdown in key consumer, China. All these factors have worked together to reduce the underlying inflationary pressures in DMs.
  • High-frequency data prints started off the year on a negative footing, with business confidence declining, manufacturing production contracting sharply in January, the SARB’s leading index edging lower, vehicle sales slumping, and the PMI remaining below 50 index points. The outlook for SA’s growth in 2019 has deteriorated on the back of severe electricity outages. While it previously expected marginal growth in 1Q19, the Nedbank Group Economic Unit has now reduced its forecast to reflect a contraction in the quarter. Furthermore, it has revised its full-year growth estimate to 0.9% from 1.3% previously. The outlook for 2019 remains subdued; while we expect a mild recovery, there are significant downside risks to this outlook.
  • While we still expect a gradual uptick in headline CPI in the coming months, to average 4.9% this year, there are a few upside risks to inflation on the horizon that one needs to consider: global risk sentiment and a volatile rand exchange rate; the possibility of an El Niño event inducing a drought in the latter part of the year; increasing global oil prices; and local administered inflation remaining elevated. Overall, we believe inflation is likely to remain contained below 6% for the foreseeable future in the absence of a severe drought.
  • In line with our expectations, the MPC unanimously kept the repo rate unchanged at 6.75%. The SARB’s risks to the inflation outlook are now seen as balanced, relative to upside risks highlighted previously. From last week’s MPC statement, we believe the SARB is likely to be on hold for some time. That said, although we believe the SARB will keep its policy stance unchanged for more than 12 months, we argue that should the SARB eventually move, the bias has shifted to this move being a cut rather than a hike.
  • The USDZAR weakened by a further 3.6% in March, after sliding -5.7% in February. The rand has now effectively given back all the gains made in January and is 1.3% weaker for the YTD. A few reasons for the fall were local factors in the form of electricity supply constraints that led to continued blackouts and reduced local confidence levels, concerns of a worsening credit outlook by Moody’s and a sharply weaker growth outlook and a decline in the Turkish lira and EM FX contagion. Our core view on the rand has not changed since the start of the year – we maintain a fair-value range for the USDZAR of R14.00-R14.50/USD as our strategic view. Any breakout above or below this range is unlikely to be sustained, in our view.