· Economic outlook – 2018 bears a bit more optimism, with GDP growth likely rising close to potential
· The low in the current business cycle may have passed in 1Q17 when SA experienced a technical recession for the first time since 2009. However, despite a gradual recovery expected, the potential growth rate of 1.2% (SARB) remains too low and uncompetitive (with peers growing in excess of 5% annually). Nedbank forecasts annual real GDP growth at 1.2% in 2018 and 1.7% in 2019, from an expected 0.9% in 2017.
· Fixed income and credit ratings – Inflation risks have subsided which could open the door for further monetary policy easing
· We believe the bias for inflation will come in lower than the SARB’s recent estimate, seeing as upside risks have subsided. While the inflation profile is still most sensitive to fluctuations in the rand exchange rate, we contextualise this by stress-testing our inflation forecast to get an idea of the upside risks presented by the rand. We have found that a movement in the rand exchange rate of between R0.50-R0.60/$ in either direction (above or below our baseline), changes the inflation profile by between 10 and 20bps. We believe this is negligible with only a significant (and sustained) depreciation of the rand exchange rate likely to have a lasting impact on inflation.
· On the ratings front, should the February budget maintain MTBPS estimates, this, in our view, could be construed as marginally positive (as no further deterioration is envisaged in the near term), which could differ a potential downgrade by Moody’s. Nonetheless, the medium to longer term fiscal trajectory will remain dire if there are no meaningful structural reform, SOE reform or expenditure restraint put in place, or if growth remains below potential.
· Currency outlook – The rand will likely remain anchored through 2018
· The rand is expected to remain in a subdued trading range this year, possibly ending the year close to R13.42/$. Any form of positive outcome from the February budget speech, an upside surprise in growth and confidence, or an aversion of further credit rating downgrades could keep the rand relatively upbeat in the near-term. Local political developments will also impact the rand substantially over the medium term. Possible levels we would be watching for on the USDZAR cross over the next six to 12 months are R11.70/$ and R11.30/$ on the downside, and R12.55/$ and R13.20/$ on a weaker end.
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