One theme stood out when Absa’s staff of economists hosted a webinar in regards to the prospects for the South African economy for the subsequent yr or so: each one of many presenters talked about that there are such a lot of uncertainties that forecasting the nation’s prospects over the subsequent few months will likely be extraordinarily troublesome.
The economists listed the same old challenges going through SA and the monetary wellbeing of its residents, and even added the opportunity of a number of sudden occasions which may render their forecast moot.
“There [is] no respite from multiple challenges facing the SA economy,” mentioned Absa economist Peter Worthington.
“An already-weak progress outlook has been additional dampened by varied headwinds and ongoing structural constraints.
“While GDP figures were higher than expected in the first quarter of 2022, intensified electricity shortages and a less supportive global economy led us to cut our growth estimate for 2023,” he added, noting that he expects electrical energy disruptions to proceed for the remainder of the yr and in 2023.
Read: South Africa’s progress could beat forecast
In their South Africa Q3 22 Quarterly Perspectives report, the economists be aware that SA’s first quarter progress of 1.9% (quarter on quarter) was virtually double what they anticipated.
“However, after a flood-ravaged April, activity data for May were quite subdued, with both manufacturing and mining output data so far suggesting that these sectors may subtract from growth in the second quarter,” states the report.
Of significance is that earnings for commodity exports decreased from earlier excessive ranges resulting from decrease demand, decrease costs and transport constraints, in addition to constraints at ports.
Eskom
In line with basic consensus, Absa additionally flags unreliable electrical energy provide as the most important menace going through the SA economy.
“The electricity plan that President [Cyril] Ramaphosa announced earlier this week will begin alleviating load shedding only from the middle of 2024,” mentioned Worthington.
Read: At final: CR throws the kitchen sink at load shedding
He added that Eskom’s critical debt drawback just isn’t going away; the utility remains to be in bother.
To repair Eskom’s steadiness sheet, he expects that a few of the utility’s debt is likely to be moved “onto Treasury’s balance sheet”. This has a constructive in that it’s going to price Treasury much less general, as direct transfers to Eskom is likely to be decrease in future.
Absa’s mounted earnings strategist Mike Keenan mentioned load shedding has had a big effect on the alternate fee due to its impression on sentiment and investor confidence.
While he makes a compelling case that the rand is definitely weaker than it needs to be (in contrast with the currencies of different growing economies reliant on commodity exports), he mentioned detrimental sentiment concerning the results of load shedding is pushing the rand even decrease.
“The rand lost five cents against the dollar every day of Stage 6 load shedding. It does not sound like much, but it accumulates over time,” mentioned Keenan, warning of the inflationary results of a weak foreign money.
Inflation
The economists spent a variety of time speaking about inflation – most likely the primary matter across the monetary world.
“Inflation has recently surprised to the upside,” mentioned Absa economist Miyelani Maluleke, including that worth pressures are broadening past gasoline and meals.
“We now see CPI [Consumer Price Index] inflation peaking at 7.9% in October this yr and remaining above the higher 6% band of the goal vary till mid-2023 and the 4.5% midpoint till 2024.
“Our relatively bullish oil price assumption leaves some downside risk to our CPI forecast, but like the Sarb [South African Reserve Bank], we see the balance of inflation risks lying to the upside,” he mentioned.
Read: Inflation and the unlawfulness of cadre deployment
In addition to the same old dialogue about how inflation has elevated around the globe and the next enhance in rates of interest to interrupt inflationary pressures, the staff warned in regards to the danger of SA transferring too slowly to scale back inflation.
“If the US Federal Reserve is profitable in decreasing inflation within the US whereas SA struggles, the inflation differential will trigger the rand to say no steadily.
“In this case we see the rand remaining above R16 to the dollar,” mentioned Keenan, regardless of his perception that the rand is oversold by way of buying energy parity.
He additionally warned that the rand may come underneath stress if demand for commodities declines, as it would have a detrimental impact on the steadiness of funds.
According to the report: “The rand appears fundamentally undervalued, but recovery is likely to be slow. We believe weaker terms of trade and ongoing structural constraints on exports will erode the current account surplus, returning it to a deficit in 2023, earlier than Absa’s prior forecast.”
As a outcome, Absa forecasts steeper rate of interest hikes.
“We now see more aggressive monetary tightening. The Sarb’s recent decision to hike the repo rate by 75 basis points reveals a sharply more hawkish stance. In contrast to our previous forecast, we now see the repo rate rising beyond the neutral level for some time, as the Sarb tries to reverse rising inflation expectations,” mentioned Maluleke.
Read: Sarb pronounces sharper 75bp repo fee hike
“The Sarb could take the repo rate up to 7.5% fairly swiftly over the next few meetings, before easing gradually from mid-2023, when inflation should begin to fall again,” he added.
Many futures
Worthington threw a number of wild playing cards out too. “Nobody can predict the precise end result of the upcoming ANC elective convention. A couple of months in the past, it seemed like Ramaphosa had sturdy backing, however no one is aware of the dynamics taking part in out on the ground.
“Only final weekend, the important thing province of KwaZulu-Natal elected a management faction that’s against Ramaphosa.
“The upcoming general election creates more uncertainty. An uncertain political situation is not positive for effective and stable government,” he mentioned.
He added the opportunity of one other bout of social unrest to the listing of unknowns to cope with.
The Absa report concludes that issues can simply develop into worse than at present anticipated.
“As we’ve argued earlier than, making a weak economy perform higher usually requires a variety of troublesome coverage modifications and a giant dose of luck to all cohere collectively. For SA particularly, we see some upside danger to our baseline forecast within the risk that the federal government swiftly implements its putative anti-corruption and structural reform agendas. However, the obstacles to this are vital – particularly a weak forms and an ideologically and factionally conflicted political management.
“We believe that downside risks to our baseline forecast dominate the upside. We see a big downside risk to our baseline forecast if another violent social unrest erupts, given the backdrop of surging inflation, rising unemployment and the increasingly desperate factional battle for control within the ANC,” warns the report.
All forecasts at a look
Source: Absa South Africa Q3 22 Quarterly Perspectives report
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