Executive Summary

  • The ongoing trade war between the US and China continues to be flagged as a key downside risk to global growth, with the IMF revising its global growth forecast to a post-recession low of 3.2% for 2019. The World Bank is more bearish, with a global growth estimate of 2.6% for 2019 and a marginal pick-up to 2.7% in 2020 and 2.8% in 2021.
  • Both the SACCI and BER Business Confidence Indices plummeted to multi-decade lows in August and 3Q, respectively, with executives extremely downbeat about prevailing business conditions. We believe there are real downside risks to the growth outlook, following such a subdued confidence barometer. Business confidence is usually a precursor to gross fixed capital formation growth. The fact that we are in 3Q already, with confidence levels deteriorating further, tells us that investment growth will likely remain weak, or continue to contract in 1Q20. This is in stark contrast to Moody’s, which believes growth will likely rebound strongly from 2H19, underpinning its ratings view.
  • On the positive side, inflation will likely remain subdued over the medium term, while further repo rate cuts could materialise (our view of -25bps in November or early 2020), which could lower financing costs further. However, in the current environment of policy uncertainty, political instability and rising socio-economic discontent, businesses are loath to kick-start investment even though financing costs have come down – political and socio-economic risks remain far too great a hurdle to ignore in favour of lower financing costs.
  • Given the recent downside surprise in PPI and CPI still below the SARB’s 4.5% target rate, we believe the SARB could reduce the repo rate by a further 25bps in November 2019 (or early 2020) should SA avert a Moody’s downgrade and the Fed shows any further signs of dovishness. Any further downside inflation surprises would also be supportive of the repo rate projection in the SARB’s QPM. Any prospects of reducing expenditure at the MTBPS will likely appease credit rating agencies in the near term. The medium-term impact would depend on whether or not these expenditure cuts actually materialise. In our opinion, the MTBPS has become a critical rating downgrade event at both Fitch and Moody’s. Without any sort of meaningful ‘plan’ to reduce expenditure or reignite growth, we believe there is a high likelihood that Moody’s will change its outlook to “Negative”.
  • Global event risks remain the key drivers of risk sentiment, with the US-China trade negotiations being the key driver. Further uncertainty over Brexit negotiations, geopolitical tensions between the US and Iran, and global central banks’ monetary policy responses are all likely to remain key risks to EM FX. For SA, specifically, the MTBPS in October will remain on our radar as a key policy event, while a Moody’s sovereign credit rating review is scheduled for 1 November. Our fundamental core view on the USDZAR, therefore, remains unchanged – we are neutral in the 14.00-15.00 range, selling into ZAR strength below 14.00 and buying into ZAR weakness beyond 15.00.