The Macro Chart Book
The absence of rate cuts from the SARB can be attributed to the bank's concerns about the ramifications of a downgrade to non-investment grade from Moody's, which will put significant pressure on the rand. Only time will tell how this will unfold. Meanwhile, the Monetary Policy Committee's fight to push down inflation expectations is aggravating the already escalated fiscal risks that South Africa is facing. Looking at the actual inflation figures, inflation is expected to remain subdued. The trend of high demand for corporate credit continues, despite rising risks.
The recent Medium Term Budget Policy Statement indicated the poor state of South Africa’s budget deficits, with a potential debt trap looming. Tough decisions surrounding Eskom and labour are more critical than ever. Transnet’s woes also continue, with another qualified audit and flat financial performance. Despite consensus expectations of a status quo, local inflation declined. Internationally, the rate-cutting cycle initiated by the Fed looks likely to be extended, as markets adjust to the view of a mid-cycle adjustment.
Despite some expectations of a rate cut, the SARB decided to leave the repo rate unchanged at its September meeting. We believe this might have been a missed opportunity for a rate cut, given the monetary stimulus instigated by other central banks. In the US, repo rates in the short-term funding market showed dramatic spikes, and uncertainty around monetary policy transmission remains.
Technical factors have driven US treasuries lower, while lower South African inflation and a peak in the total risk premium signals potential bond market gains for South African investors. On the credit side, Eskom remains a worry.
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