Compiled by Richard Favis, RBC Capital Markets
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The South African Reserve Bank's decision to leave rates at a 24 - year low last week may have been different if they had been aware of South Africa's fourth-quarter GDP numbers released this week.
Statistics South Africa's latest Q4 GDP data showed the economy ended 2004 on a strong note, but the rate of growth slowed from a strong 5.7% recorded in Q3 to 4.0% q/q seasonally adjusted. As expected strong domestic spending was the main driver behind the Q4 figure.
Full year 2004 real GDP growth stood at 3.7%y/y in 2004 up from 2.8% in 2003. The current momentum in growth is likely to continue in 2005, however the strong rand will continue to hamper export growth.
On the back of this, some market analysts are hoping that the reserve bank will lower rates when the MPC next meets again in April. However, others point out that strong domestic spending, supported by subdued inflation and relatively low interest rates, should help sustain growth and hence they do not expect any easing of rates for the remainder of the year.
The release of the GDP numbers had little impact on the bond market, which focused on the rand's rally to below the R6.00 level to the US dollar.
The benchmark R153, traded as low as 7.506% before losing ground on the back of weaker US treasuries. South African and US bonds tend to move with a historic correlation of approximately 0.9. The R153 is trading at 7.660% from its previous day's close of 7.592%,.
Next Wednesday, February 23, finance minister Trevor Manuel presents the 2005/2006 budget. The strong economy and higher than expected revenue collection will give the minister the opportunity to increase spending.
The deficit will be significantly lower in both rand terms and as a percentage of GDP due to the upwardly revised GDP numbers.
The increased government spending will result in a higher public sector-borrowing requirement, estimated at around R68.2bn for 2005/2006 (4.6% of GDP). Most of this funding will be raised in the local bond market, where the government plans to raise a net R39bn, and R10bn is expected from foreign loans.
Analysts expect some further relaxation of exchange controls, including increasing individual's offshore allowances.
Consumer inflation data will be released shortly before the budget statement on Wednesday. CPIX which the government targets, is expected lower at 3.7%y/y for January, from December's 4.3%y/y. Month-on-month the figure is expected to rise to 0.5%m/m.