Analysts Eye South Africa Rate, Even If No Change Seen: Street Wrap

JOHANNESBURG (Capital Markets in Africa) – South Africa’s Reserve Bank faces a tricky interest-rate decision on Thursday.

The nation’s economy unexpectedly fell into recession in the first quarter. Combating the slump with looser monetary policy may fan inflation, which slowed to within the central bank’s 3 percent to 6 percent target in April for the first time in eight months. It would also be problematic for international investors, given that the rand already has one of the worst risk-adjusted carry rates among major emerging currencies.

The central bank’s decision comes as regulators led by the U.S. Federal Reserve prepare to roll back easy credit policies, squeezing the interest-rate differentials with emerging markets. Canada raised rates this month for the first time since 2010, becoming the first Group of Seven country to join the U.S. in doing so, while the European Central Bank and the Bank of England have hinted at the need to tighten.

All but two of the 23 estimates compiled by Bloomberg as of Monday are for the Pretoria-based regulator to hold the repurchase rate at 7 percent. Those going against consensus include Credit Suisse Group AG, which forecasts a cut of 25 basis points, and Johannesburg-based Meganomics, which predicts a 50 basis-point reduction. None predict an increase.

M&G LTD (Claudia Calich, emerging-markets money manager in London)

• “The market’s not expecting a move from the SARB and I don’t disagree with that. Clearly, if they were to cut, it would raise some question marks in the short term” about their independence
• “There are a lot of structural issues causing this low growth. A few rate cuts won’t change the structural issues. And there’s no need whatsoever to hike”
• “The rand is still relatively volatile. Volatility has declined since” former Finance Minister Pravin Gordhan was fired in March, but “it’s still one of the highest out there”
• Her firm is overweight long-dated rand bonds

JPMORGAN CHASE & CO. (Luis Oganes and Jonny Goulden, analysts in London)

• “The SARB’s balancing act is becoming increasingly complex as heightened market uncertainty due to concerns around the SARB’s mandate, little visible progress on structural reforms, and stagnant economic growth momentum increase risks of further ratings downgrades”
• “Any near-term policy easing in response to a benign inflation outlook and a widened output gap might need to be undone within less than a year”
• “We stick to our forecast of two 25 basis-point rate cuts in November and March”
• JPMorgan is underweight the rand and recommends shorting it against the dollar, euro and Turkish lira
• “The political climate in South Africa is likely to remain excessively noisy till the end of the year, tail risks of local bond ratings downgrades are growing, and investors until now have been too sanguine on the outlook for local markets”

GOLDMAN SACHS GROUP INC. (Kevin Daly and Clemens Grafe, economists in London and Moscow)

• Daly and Grafe see the SARB lowering the repo rate by 100 basis points in the next year, but with the first cut only coming in September
• The central bank will have more room for easing as inflation will probably dip to 3.7 percent by the end of 2017, helped by the rand’s continued resilience

HSBC HOLDINGS PLC (analysts including David Faulkner in Johannesburg and Radoslaw Bodys in London)

• “Expectations are building that the SARB will lower the policy rate. The market is currently pricing almost 50 basis points of policy easing over the next 12 months. We disagree, and think that the medium-term inflation trajectory, elevated inflation expectations, a widening current-account deficit, deteriorating fiscal metrics, the implementation of a national minimum wage in mid-2018, and risks of further credit rating downgrades narrow the scope for policy easing”
• The SARB will keep the repo rate at 7 percent through to the end of 2018
• HSBC forecasts the rand weakening to 14 per dollar from 13.2 by the end of the year and recommends selling the currency and buying Russia’s ruble

AVIVA INVESTORS GLOBAL SERVICES LTD. (Liam Spillane, head of emerging market debt in London)

• “We have benefited across our portfolios from overweight South African debt strategy in recent months. Looking forward from here, I think I would be more cautious toward that particular market whether you do that from an economic or monetary policy perspective or indeed political perspective”
• “Our view of the monetary policy is quite benign even though inflation has obviously been coming down, but as a broader market view, I think South Africa warrants some caution looking ahead when compared to some of the other emerging markets”

Source: Bloomberg Business News