Executive Summary

• High-frequency data-prints since the start of the year reflect some easing in economic conditions (this is usually the case in the first quarter). The PMI reported a sharp decline in manufacturing activity in March 2018, after having remained above the 50-point level in the previous two months. This as business activity and new sales orders slumped. Over the medium-term, growth is expected to improve in 2018 as a whole. In April, we saw the IMF raise its forecast for SA growth to 1.5% in 2018, and 1.7% in 2019 (previously 0.9%). We have also seen the World Bank raise its estimates to 1.4% in 2018, 1.8% in 2019, and 1.9% in 2020. The SARB’s most recent estimates are 1.7%, 1.5%, and 2% respectively for the next three years. Nedbank Group forecasts GDP to grow at 1.8%, 1.9%, and 2.4% respectively until 2020. There are some downside risks to growth in our opinion. The World Bank has indicated that low investment growth, weak integration into global supply chains, high inequality, and low potential growth are some of the key challenges SA needs to tackle in order to break away from the low and uncompetitive growth trajectory.

• SA CPI fell to 3.8% yoy in March, from 4% prior, better than market consensus of 4.1%. Core inflation remained unchanged at 4.1% yoy. The decline in inflation below 4% did not come as much of a surprise to us, particularly as we expected downside risks over the horizon – the lower print would imply a lower base (relative to consensus) particularly when evaluating the impact of the VAT hike in April. As such, where we had previously forecast the April print to be 4.73% yoy, we now drop it to 4.66%, and our average inflation forecast for the year remains unchanged at 4.7% (due to the higher oil price recently). We continue to believe that there are still downside risks to our forecasts should the rand remain below R13.00/$ until year-end. As a result, we expect a further 25bps reduction to the repo rate to materialise either at the July or September MPC meeting.

• The rand has lost significant ground in April, weakening by 4.8% over the month and essentially wiping out all the gains that we had seen for the YTD. The USDZAR is currently 0.22% weaker for the YTD. On a trade-weighted basis, the rand is still overvalued relative to its long-term average, despite weakening by 2.3% for the YTD.

• Long-term seasonality trends suggest that the rand will likely remain under pressure in May, and then recover in the following months. The SARB MPC decision later in the month, followed by credit ratings reviews, is likely to lend some volatility to the local FX markets. We remain of the opinion that the rand could weaken marginally into year-end, but if the SARB remains hawkish for longer then it would be supportive of real rates and would keep the rand relatively stable.