On 18th November the SARB raised the repo rate by 25 bp, from 3.5% to 3.75%. The rate had been flat at 3.5% since July 2020, after rates were dramatically cut once the Covid-19 pandemic hit our economy. (At the end of 2019, the rate was 6.5%). The rationale for the hike was ostensibly a combination of two things: An expected normalization of GDP growth rates towards what was considered the rate of potential growth, and, more importantly, the shift towards a period of upside inflation risks. Of the 5 voting members on the Monetary Policy Committee, the vote was 3-2 in favour of a hike, implying that some members still felt that the economy still required a significant monetary policy stimulus in order to recover. Our view concurred with that minority, although we also agree that a 25bp hike will not significantly alter the inflation trajectory, and neither will it derail any economic recovery. In that sense, then the rate hike should be seen as an initial move in the expectation of an extended hiking cycle.
The SARB however, was at pains to point out though that they will not respond to first round inflation effects, such as a higher oil price or higher food prices. But if that was the case though, we question the timing of moving now? Saying that you will not respond to 1st round inflation effects but you will respond to inflation risks is a bit of a mixed message. Perhaps it would have been better to wait and, at the point that 2nd round inflation effects are seen, to then hike in 50bp increments? Nonetheless, the SARB deemed that the time was right to initiate the move towards a less stimulative monetary policy stance, and this minor rate hike does send an important signal to the market that South Africa’s monetary policy is more rational than Turkey’s has been recently.
This in itself is an important message to global (and local) investors. Having said that, we do not believe that the SARB would be able to hike rates to the extent that their Quarterly Projection Model expects, which is a series of rate hikes in every quarter of 2022, 2023 and 2024, implying a terminal rate over 3% higher than current. In our view SA’s GDP growth rate will remain mired in low single digits, constrained by a number of well-known structural headwinds. Further to this, in order to stabilise South Africa’s fiscal position, the National Treasury will be required to gradually reduce the budget deficit, at the same time as the expected rate hikes are rolling off the conveyor belt. This scenario we believe is unlikely to hold given how precarious our economy is. Added to this we need to factor in a further risk – that of political risk premium.
As was seen in the recent Local Government Election, the ANC has, on an overall basis, been reduced to a governing party without a clear 50% majority. All eyes now turn to the national General Elections in 2024, where there is an increasing possibility of the ANC losing its majority position, pushing SA further into coalition politics, which brings about further policy uncertainty. Added to this is a reminder from the past – in the run-up to the first democratic elections in 1994, the previous National Party, knowing it was losing power, increased our Debt: GDP ratio from 35% in 1990 to peak at 50% in 1994. Will the ANC avoid the temptation to “sweet-pay” the electorate whilst its grip on power ebbs away? Power, and its close cousin, greed, are apt to do strange things to one’s moral compass – that is the lesson from history, and we should not be naïve to necessarily believe it may turn out otherwise.
Where to then for SA? Most recently the new Covid-19 variant discovered in the country has already pushed us back onto the Red List of countries banned from travelling to the UK and likely bans to other countries will soon follow. This will destroy our summer tourist season and the hopes for a general economic recovery in early 2022. The Rand has reacted in typical knee-jerk fashion, losing 3% of its value overnight. So risks abound, and there is little certainty that we have the capacity to mitigate or manage the outcomes in an optimal manner. This almost necessitates a defensive mindset when it comes to investment strategy. For multi-asset funds, a bias towards companies that are nimble enough and resilient enough to rise through a storm, is warranted. In fixed income space, with yields already high, the key is whether the promised fiscal consolidation will materialize – the market is not yet convinced.