Inflation and current account numbers keep rand resilient - economist

Cape Town – The narrowing of South Africa’s current account deficit and better-than-expected inflation figures helped the rand and fixed income markets stay resilient despite recent turbulent events, BNP Paribas economist Jeffrey Schultz said in a company note on Friday. 

“Financial markets seem to have settled down and we believe that a reduction in external account vulnerabilities (driven by better terms of trade) and an improving inflation outlook have contributed to the resilience of the rand and fixed income markets,” he said. 

The rand strengthened this week as Finance Minister Malusi Gigaba went on a trip to the US to meet with investors, following President Jacob Zuma's midnight Cabinet reshuffle on March 31 which saw the firing of former finance minister Pravin Gordhan and his deputy Mcebisi Jonas.

READ: Rand rallies as political, global pressure ease

The move took the rand from a near two-year low of R12.31 to R13.13 at about 15:00 on Friday and triggered credit downgrades to junk status from both Standard & Poor's and Fitch. Moody's, who has South Africa on two notches above junk, has placed the country on downgrade review.

Inflation figures for March in particular have spurred some optimism that South Africa’s inflation outlook could be more benign than expected, Schultz said. 

The rise in the headline consumer price index (CPI) slowed from 6.3% year-on-year in February to 6.1% in March. “This was the lowest inflation rate since September 2016," said Schultz.

Lower inflation forecast for the rest of 2017

BNP Paribas maintains its long-standing “below-consensus” forecast for headline CPI inflation to slow to an average of 5.4% in 2017.

“The persistent weakness in domestic demand has prompted us to revise down our inflation forecasts for 2018,” Schultz said, “and we now see headline inflation averaging 5.1% in 2018 (downward from a previous forecast of 5.6%)."

In the light of the more positive inflation outlook, BNP Paribas believes the South African Reserve Bank (SARB) could take a more dovish stance in its monetary policy decisions later in the year. 

READ: Consumer inflation breather - for now 

South Africa’s continued political uncertainty remains a risk however and will most likely keep the SARB on its toes. “Encouragingly – for now at least – is most ratings agencies will be waiting for the new finance minister (Malusi Gigaba) to deliver on his promise for policy continuity before making any further ratings decisions.” 

Gigaba has since his appointment gone out of his way to ensure stakeholders, including global and domestic investors, that he will not deviate from the policies of his predecessor Gordhan and that he will stick to the spending frameworks set out in the 2017 Budget Review delivered in February. 

Rate cut possible

Schultz believes there’s a case to be made for an interest rate cut by 25 basis points on November 23 this year. “We believe that the bank will feel comfortable in providing some much-needed ‘stimulus’ to the demand side of the economy in an environment where inflation is back towards the mid-point of its target range.”

Scope for further rand strength by the end of 2017 will most likely be limited in an environment where the US Federal Reserve will consider hiking rates for the third time this year, Schultz said.