Morning Brief – Winter is coming

Charles Porter
Tue 25 Apr 2023

Winter is coming

Here in the UK, we have seen the IMF consistently downgrade growth expectations. Whilst the IMF has been pessimistic specifically on UK growth, routinely placing the UK at the bottom of the pack, global growth forecasts have also been downgraded as interest rates have risen. Still, the condemnation of UK growth looks positively sanguine when compared to the IMF’s assessment of growth in South Africa. Largely prompted by ongoing disruption caused by the failure of state utility provider Eskom, growth for 2023 has been downgraded from 1.2% to 0.1%. In an environment where inflation continues to trend above the SARB’s forecasted 4.5% inflation rate, the picture of the South African economy is one of significant contraction in real terms. 

Inflation shows little sign of slowing with a rate of 7.1% recorded in March, 0.1% higher than the February figure. The source of inflation is widespread but more severe within several core sectors, including food where the micro-inflation rate is 14%. This picture of inflation means that it has been challenging but necessary for the SARB to raise rates further. Prioritising the need to tame the price level over the risk of cutting off credit to vulnerable consumers, the SARB delivered a 50 basis point hike last month, above expectations. However, as we have discussed before, interest rate adjustment can do very little to support a failing state owned utility provider other than prevent a run on the currency that may prompt a mood of crisis. Do not forget that South Africa is now approaching its winter meaning that the pressure on the energy provider will only increase leaving more room for Eskom to undermine economic activity.

Despite further rate rises expected in South Africa and a soft Dollar environment, the market is still positioned for a further fall in the Rand. A look at the options market reveals risk reversals indicating a move higher in Rand-termed crosses. Despite the Rand having already weakened significantly so far this year, further weakness remains plausible particularly if inflation persists and interest rate expectations remain stable. 

Discussion and Analysis by Charles Porter

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