Sovereign Africa Ratings

As the global economy continues to be characterised by weak growth and rising inflation, the end to the interest rate hike cycle, particularly in South Africa, does not appear to be on the horizon. Locally, inflation continues to trend at record high levels with the 7.6% consumer price inflation print in October 2022, up from 7.5% in the prior month of September, being among the indicator releases that set the stage for the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) meeting in November 2022. There was a unanimous decision to increase the repurchase rate, although two out of the five voting committee members opted for a moderated 50bps hike.

The revised repo rate of 7.00% is 325bps higher than it was at the start of the 2022 calendar year, and it is now above the level that prevailed prior to the start of the COVID pandemic. Nevertheless, the outlook for headline inflation is still notably higher than the upper limit of the SARB’s target range of 3% to 6%, with the SARB’s forecast of headline inflation for the year at 6.7% which is expected to moderate to 5.4% for 2023.

The corrective effects of the interest rate hike will naturally be expected to take some time to materialise, more so given the global supply chain disruptions and the upside pressure on key commodity prices such as food and energy on account of the ongoing war in the European region. This is expected to fuel significant levels of volatility in key economic indicators, especially in emerging markets, resulting in a high degree of uncertainty in terms of the outlook of the data points that will guide future monetary policy decisions.

Although the SARB has not been the only institution that has promulgated an interest rate hike cycle – earlier in the month, both the Federal Reserve and Bank of England also increased their benchmark rates by 75bps – structural constraints in the local market continue to play a significant part in the effectiveness of this monetary policy tightening. Chief among these is the challenge of consistent electricity supply, which will undoubtedly have a negative impact on South Africa’s production capability and will likely weigh down on investor confidence.

The SARB also revised their growth forecast of the South African economy down to 1.8% for the year (previously 1.9%). This revision was made against the backdrop of the riots, looting and destruction of infrastructure due to the civil unrest midway through 2021, followed by the flash floods that swept across parts of the country in early 2022 and, more recently, the onset of consistent load shedding which is expected to continue to increase and is projected to potentially shrink GDP growth for 2023 by 60bps. As a result, the growth forecasts for 2023 and 2024 have also been revised down to 1.1% and 1.4% (previously 1.4% and 1.7% respectively).

For the ordinary South African, the interest rate decision will see disposable income shrink further, given the elevated levels of consumer debt together with the risk attached to the forecast for average salaries. As a result, local businesses will have to contend with the potential shift in demand while navigating the effects of inflationary pressure on their cost base, although some respite for operations that rely mainly on exporting their goods and services will have come from the weaker currency prevailing for most of this calendar year.

Although the MPC decision in November is not expected to directly impact the assessment of South Africa’s sovereign rating by SAR in the short term, it goes without question that the effectiveness of this ongoing monetary policy tightening in taming inflation and its impact on GDP growth will have an influence on the scoring of the Economic Performance pillar in the medium term. Despite the elevated level of benchmark interest rates that are currently being observed relative to pre-pandemic rates, it remains to be seen whether inflation will begin trending down to the target level (3% - 6%) in the absence of additional rate hikes, subject to the SARB’s view on the terminal rate for the current cycle which remains uncertain post the last review meeting.

Given the uncertainty that geopolitical risks in other parts of the world continue to introduce in respect of local economic performance, it may require more than just the intervention of the MPC to improve South Africa’s economic performance assessment. Nevertheless, given the prevailing low economic growth rate, a pursuit of contractionary fiscal policy to slow down inflation would not bode well for growth prospects.