Commentary on SARB (South African Reserve Bank) and the MPC ahead of the next meeting on Thursday.

SARB TO KEEP HIKING RATES AS PRICE PRESSURES PERSIST

KEY TAKEOUTS:

We expect the South African Reserve Bank to hike its policy rate by another 25bp at its meeting on Thursday, with MPC members less split on the decision than they were for November’s hike.
Rising inflation risks are likely to see the SARB revise up its 4.3% CPI inflation forecast for 2022, closer to our 5.1% projection.
However, some downside risks to growth have materialised. This could limit the spike in the bank’s quarterly projection model implied path for the repo rate.
We continue to expect a cumulative 125bp of rate hikes in 2022, which is more than the Reuters analyst consensus, but much less than the 220bp of hikes priced in by the market.

Full document available here.

Commentary on the World Bank loan to the South African government for its fight against Covid-19 and what this means for South Africa.

WORLD BANK LOAN COMMENTARY

Will the Social Relief of Distress (SRD) grant be continued after the 31 March deadline?

Regardless of the World Bank loan approval this week, it remains a base case view of ours that the Social Relief of Distress (SRD) grant will be extended for at least the FY22/23 fiscal year. This as the country’s revenue collections continue to outstrip expectations by as much as 1pp of GDP (ZAR 60bn) compared with the November mid-term budget estimates the National Treasury had projected, and as promised by the finance minister that any SRD extension would be contingent on further upside revenue performance. Deteriorating socioeconomic conditions, rising joblessness and more acute inequality in the economy suggests that a SRD extension for another year is a likely minimum requirement for the political economy right now, we believe. At a minimum, we expect another year of SRD extension to cost the fiscus ZAR 35bn.

Ahead of the February Budget Speech – what does an additional R11.4bn loan mean on SA’s fiscus?

This loan was already earmarked by the National Treasury and is already part of its FY21/22 hard currency funding plan. Therefore, the loan was already incorporated in the budgetary framework outlined in November’s medium-term budget.

Can SA afford more loans when Covid-19 seems to be on a significant decline in the country?

The strategy by the Treasury to obtain lowest cost funding from multilaterals was an approach taken by the Treasury in response to a significant jump in funding needs (and higher interest costs on local government debt) as a result of the Covid-19 pandemic and the government’s fiscal response to the crisis. With little conditionality attached to these multilateral loans (which are relatively low in maturity in nature we understand) makes sense in light of the funding still being made available by institutions like the IMF and World Bank. Given that 21 cents of every rand of tax revenue generated in the country goes to servicing government debt, taking advantage of low funding costs in the current environment makes a lot of economic sense and was always part of the Treasury’s strategy, we believe.

ENDS