FIC Market update | Many rabbits in the hat

South Africa: A call to urgency

ICIB’s January 2023 edition covers the key dynamics in the South African economy. We detail our base case scenario for growth, inflation, monetary policy, the rand and fiscal policy. Professor Dirk Kotze shares his thoughts on the political landscape and ICIB’s energy specialist, Dieter Matzner, discusses the electricity crisis and what to expect. 

Key takeaways:

  • The South African economy has entered a slowdown in 2023 on the back of aggressive global monetary tightening, exaggerated by the domestic electricity crisis and logistics constraints.  Potential growth has declined to less than 0.5% as the frequency of load shedding has increased to more than 50% per day (from 47% per day in 3Q 22). There are few growth drivers in the economy, besides more urgency on the government’s side to enact structural reforms to address supply-side constraints. 
  • The key political issues that need to be dealt with urgently will be the cabinet reshuffle, of which the economic portfolios will be critical. The constitutional court ruling on President Ramaphosa’s review of the Independent Panel Phala Phala report to Parliament, and Eskom’s leadership also need to be addressed urgently. The FATF decision to grey list South Africa or not is expected in February. 
  • South Africa’s fixed income markets and rand have started the year on a firm footing, mainly on the back of external developments such as an earlier reopening of the Chinese economy, and a switch in market focus from inflation to growth. Despite what central banks are saying, the market believes there will be rate cuts before year-end, while the real economic data have also shown some resilience. Hence hopes of a soft landing. The fragile domestic fundamentals, however, will feed into the country’s risk premium. 
  • The international backdrop for risk assets could be more supportive of EM such as South Africa. Positive real interest rates, as energy-driven base effects lead to a moderation in headline inflation, better fixed income valuations after the repricing in 2022, the China reopening and a weaker USD, could see demand for EM FI rise as the carry trade becomes more appealing.  
  • The manufacturing sector leads the global growth slowdown, but Investec commodity analysts expect price support from very low stock levels for industrial commodities, as well as continuing supply constraints due to long-term underinvestment in new capacity and China’s reopening. Gold will benefit from a US interest rate cycle peak and a weaker USD. South Africa’s terms of trade are expected to remain relatively stable as the oil price is also likely to rise.  Volatility risk in 2023 remains high if risk scenarios such as a higher oil price, stickier inflation in 2H 23, tighter DM monetary policy for longer, and a deeper global economic slowdown, hit corporate earnings and equity markets harder.  
  • Macro forecasts:  The SA economy is forecast to grow by 1.0% and 1.3% in 2023 and 2024 respectively. Risks to the growth forecasts are to the downside as government’s response to the electricity crisis unfolds. 1H is expected to be more challenging whereas 2H 23 could be more supportive for consumers as real PDI turns positive as inflation recedes to 5.0% and interest rates have peaked.
  • ZAR outlook:  The USDZAR is undervalued in terms of its 13 year real effective exchange rate (REER), but fairly valued over a five-year comparison. The purchasing power parity’s (PPP) first standard deviation at 16.30/$ supports a stronger ZAR. We forecast a trading range of R15.80/$ to R17.40/$ (2022: RR14.50/$ to R18.50/$) and an average of R16.60/$ in 2023 (2022: R16.37/$).   
  • Interest rates: Headwinds facing a swift sustainable return of inflation to the inflation target of 4.5% could prolong the battle against inflation. Higher oil prices, the 18.65% increase in electricity tariffs and additional costs incurred to acquire private power sources, could elevate input costs more. We forecast inflation to average 5.6% in 2023 and an average of 4.9% in 4Q 23. The MPC is expected to deliver a final 25bp rate hike at the January 2023 MPC meeting (repo rate 7.25% and 3m JIBAR at 7.45%), whereafter rates could move sideways for the remainder of 2023. The generic SAGB10 yield is expected to trade in a range of 9.70% to 11.0% with the fair value at 10.0% (currently trading at 10.35%). 

Global risks:

  • This is the year of the polycrisis, where risks are more interdepend and reciprocally damaging than ever (WEF, January 2023). 
  • Energy supply crisis
  • Heightened geopolitical and geoeconomics confrontation with the weaponization of economic policy (WEF, 2023), eg. sanctions, trade wars and investment screening. US-China competition/China-Taiwan/cyber attacks/. 
  • Russia/Ukraine war continues with no permanent ceasefire. 
  • Global stagflation in 2H 23. 
  • Deeper US and Eurozone recession as interest rates rise and stay higher for longer as demand remains strong. 
  • China reopening leads to higher commodity and oil prices and inflation accelerates in 2H 22. 
  • US debt standstill fallout. 

SA-specific risks:

  • Unresolved electricity crisis and load shedding of Stages 6 – 8 becomes permanent. 
  • Inflation accelerates to 6.0% in 4Q 23 and SARB hikes rates further. 
  • Flareup of socio-political tensions, like the July 2021 riots, amid the runup to the 2024 elections. 
  • Water crisis (as in Eastern Cape) and a further deterioration on the rail and port side.

Click here to read the full report.