Compiled by Nigel Rendell,
Senior emerging markets strategist,
RBC Capital Markets
Tel: + 44 20 7029 7408
Over the past week there has been further evidence that the South African economy is slowing. The impact of the 400bp of monetary tightening seen over the past 18 months or so is beginning to have an impact on domestic activity.
Naamsa vehicle sales were down 9.4% y/y in January. This was the 10th consecutive month to register an annual decline and mirrors the weakness in the general retail front, where sales have slowed to just 0.2% y/y in the latest month.
The manufacturing sector is also having a tougher time. Concerns about global growth prospects are hitting business confidence with the Sacob index at its weakest level since 2003. The Investec purchasing managers’ index (released at the start of the February) has dropped to 52.1, recording its lowest reading for more than four years.
Doubtless, these are all factors that featured prominently in the SARB’s recent discussions and the January decision to leave interest rates unchanged at 11%. Despite the sell-off in the rand, which is down 12% against the dollar since the start of the year, the central bank fears that any more monetary tightening would simply become too much for the domestic economy to bear.
Indeed, in the current environment of heightened risk aversion it is questionable whether another rate hike would provide any lasting support for the rand.
The financial markets are beginning to adopt the same view. The SARB’s next policy meeting is not until mid-April but the markets have been scaling back interest rate expectations with the forward curve suggesting that official interest rates will remain on hold throughout the coming year.