Executive Summary

  • The IMF reduced its global growth forecasts yet again in July, with growth of 3.2% expected in 2019, and 3.5% forecast for 2020 (both down 10bps since April). The most significant downward revisions to the growth outlook were seen in the EM space: Russia, Brazil, Mexico, and SA saw a cumulative 290bps reduction in their growth forecasts for 2019. More concerning, however, is the fact that the IMF cut its estimate for global trade growth in 2019, now expecting trade growth of 2.5%, from 3.4% previously forecast. The main reason for the slump in trade activity, apart from the ongoing trade war between the US and China, is that consumer confidence has been hampered.
  • While high-frequency economic data shows some improvement in SA growth in Q2, the trend remains concerning. The economy is significantly weaker than expected. Given the constrained fiscus, we cannot expect public-sector employment to rise indefinitely; therefore, there needs to be a structural shift in the economy to enable private-sector (and formal-sector) employment to recover. The lack of policy certainty, an unstable political backdrop, and weak confidence levels have all hindered any sort of long-term planning by businesses. The economy remains stuck in a quagmire, until the policy (and political) environment improves.
  • In line with our expectations, the SARB unanimously cut the repo rate by 25bps to 6.50%, with prime at 10%. The most significant developments in its statement were a sharp reduction in its growth estimate for 2019 and its measure of potential growth, a wider output gap, and a QPM that still reflects a 10bps reduction in the repo rate in 2020. We believe the bias remains firmly for the SARB’s next move to be another cut of 25bps. This, however, may happen only after several MPC meetings where the repo rate is kept unchanged.
  • July was an eventful month for a few reasons – the SARB reduced the repo rate by 25bps in what the market viewed as a hawkish cut; a Special Appropriation Bill allowing for a R59bn bailout for Eskom was tabled in Parliament, drawing negative opinion pieces from both Fitch and Moody’s; Eskom’s financial results were presented, showing a R20.7bn loss in the last financial year; and local weekly bond issuance was increased by R1.51bn to fund the bailout. Although none of these factors were particularly surprising, the SAGB yield curve bear steepened for most of the month, until the Fed announced its interest rate decision that disappointed expectations for a highly dovish forward guidance. Local front-end yields subsequently rose as markets began to reduce expectations for a SARB rate cut following the neutral Fed commentary.
  • The USDZAR weakened by 2.2% after the Eskom Special Appropriation Bill was tabled, and by a further 3% since the Fed’s interest rate decision. Our core view on the USDZAR remains unchanged – we are neutral in the 14.00-14.50 range, selling into rand strength below 14.00 and buying into rand weakness beyond 14.50.