Tertia Jacobs

Tertia Jacobs

Tertia Jacobs

Treasury Economist

SA Macro and Fixed Income dynamics for 2022

    The interplay between political and economic reforms, against a backdrop of a constrained electricity system, will be the key domestic dynamics shaping the economy’s performance in 2022.

    The economy is forecast to grow by 1.9% in 2022 compared to an estimated 4.7% and -6.4% in 2021 and 2020, respectively. This is marginally higher than the five-year average growth rate of 1.2% (preceding the Covid-19 pandemic). A growth rate of this magnitude implies that real output could remain ~0.5ppt below pre-Covid 19 levels.

    Political projections for 2022 are dominated by the impact of the Zondo commission reports, the ANC national policy conference and also the National Conference, the new municipal governments, COVID-19 pandemic evolution, and related government policy decisions.

    2022 will be another year characterised by high levels of load shedding. This comes after more than 80 days of load shedding, varying between Stages 1 to 4, were experienced in 2021.

    The current account development in 2022, in the global context of a gradual withdrawal in global liquidity and high market volatility, will be significant for the rand outlook. Net trade is forecast to make a smaller contribution to real GDP as the terms of trade roll over and imports rise. 

    The rand starts the year (currently trading at R15.40/$) at a level that is fairly valued in real terms when 2016 is used as a starting point, but 10% undervalued with 2002 as a starting point. We forecast the rand to average R15.40/$ in 2022 (2021 average: R14.79/$) against Bloomberg consensus forecasts at R15.90/$. Our forecast trading range for the rand is R15.00/$ to R16.20/$.

    Headline and core CPI inflation trajectories are expected to converge in 2022. Headline CPI inflation is forecast to average 4.9% in 2022 compared to 4.4% in 2021. The peak is expected as early as 1Q 22, averaging 5.5% and moderating to 4.4% in 4Q 2022 (with a low of 4.2% at the end of 2022). Base effects arising from the steep increases in the fuel price explain the majority of this trajectory. Core CPI inflation is forecast to average 3.8% and reach 4.0% by end-2022. Risks to the forecasts are Brent spot at above $85/bbl and a steeper than expected increase in electricity tariffs.

    We expect the Reserve Bank to raise the repo rate by a total of 100bps in 2022 (repo rate at 4.75%) and 75bps in 2023 (repo rate at 5.50%). An important dynamic to monitor is the SARB’s neutral policy rate, projected by the QPM to reach 6.75% in 2024. The FRA curve has priced in 150bps of policy rate hikes in 2022 and 125bps in 2023, totalling 275bps. We assess this as a high case scenario.

    The sovereign rating is not viewed as a likely event risk.

    The fiscal position has improved in the near term but the medium-term trajectory remains uncertain due to a lacklustre growth outlook and mounting spending pressures.

    FIC returns in 2021: ILBs yielded a sterling return of 15.5%, the ALBI yielded a return of 8.4% and cash a return below inflation. Curve positioning was important to outperform the ALBI. The 12+ year segment yielded a high return of 12.6% compared with a more modest return of 6.9% in the 7-12 year segment. The return in the 1-3 year segment was 4.2% and over 3-7 years, 4.2%. 

Key drivers of SAGBs in 2022 are likely to be external, with the focus on (1) the pace and quantum of Fed rate hikes, (2) the terminal (end-of-hiking-cycle) Fed funds rate and how it will compare to the neutral rate, (3) a moderation in global headline inflation from 2Q 22 and where it could settle, and (4) Chinese growth. In South Africa, the underlying growth momentum, the direction of core CPI inflation, merchandise trade balance, and ANC politics will feed into the long-term fiscal expectations.