While inflation should remain contained, the SARB has little room of maneuver
South African inflation came out higher in January: 4.5% yoy compared to 4% in December but is in the middle of the inflation target (3-6%) of the South African Central Bank (SARB). This acceleration in inflation is mainly explained by a sharp rise in transport prices linked to base effects of fuel prices (+ 13.7% in January against 2.4% the previous month).
Core inflation (3.7% in January) is relatively stable, due in particular to inflation in services at its lowest since 2008 reflecting the weakness of activity in South Africa. The country's growth should not exceed 0.5% yoy in 2019 and most analysts forecast it to be less than 1% in 2020, as far as we are concerned we forecast 0.8% yoy.
Based on following assumptions for 2020: i) a price of Brent at 61 USD per barrel, ii) ZAR at 15, iii) food inflation at 6%, electricity at 12%, metals at 19% and iv) a very slight improvement in the output gap, we anticipate a rebound in inflation in February, followed by a deceleration up to June. In the second half of the year, we expect a further acceleration with year-end inflation at 4.8% yoy and an annual average at 4.5%.
Despite a slight rebound, inflation is expected to remain below the upper band of the SARB target this year. In such a context, theoretically the SARB, which lowered its rates by 25 bp in January to 6.25% should be able to continue its easing cycle. However, other factors limit its room for maneuver, foremost among which are the pressures on the currency.
Since the start of the year, the rand has depreciated by more than 5% against the US dollar. The deterioration in public finances (IMF forecasts a public deficit at 6.2% of GDP in 2019 and 6.7% in 2020) induced by the support given to Eskom (a highly indebted public electricity company), the risk that Moody's in March will lower the sovereign rating in the speculative category, the increase in worries about global growth are all elements that weigh on the exchange rate and on the SARB.
The budget announcement next week (February 26) will therefore be a major event for investors. But we don’t expect much about it as South Africa needs fiscal consolidation that would be difficult to implement in a low growth environment. Then, we stick to our views expressed in our email of January 29: “we don’t expect much more easing in the coming months max 25bp in H1”.