Bank of America (BofA) has pencilled in a cut in interest rates by the SA Reserve Bank in the second half of the year as domestic inflation moderates on the back of lower international oil prices and a more dovish global environment.
The bank, however, warns of a weaker fiscal outlook for the SA economy, expecting a Transnet bailout as well as policy uncertainty that may result from the governing party’s declining support.
BofA senior economist Tatonga Rusike said they anticipate that July will mark the start of the Reserve Bank’s interest rate cutting cycle with a total of 75 basis points (bps) slashed in 2024 and a further 50 bps cut in 2025 resulting in a terminal rate of 7%.
“Why? The global environment is becoming more dovish [moving towards cutting rates], and our US economists have brought forward the timing of the Fed’s first cut to March from June,” Rusike said.
He said while the market (forward-rate agreement) is pricing about 94 bps of the Reserve Bank cuts in 2024 as early as May with cumulative cuts to 2025 amounting to 112 bps, “we argue that there are domestic setbacks that could constrain earlier and more substantial cuts”.
Domestic setbacks facing the SA economy include risks and uncertainties such as the return of load-shedding, bottlenecks at Transnet’s sprawling logistics infrastructure and policy uncertainty ahead of the 2024 national and provincial elections.
Headline inflation was another major challenge, shooting above the top of the Bank’s 3%-6% inflation target range in May 2022 as a result of surging food and fuel costs, peaking at 7.8% in July 2022 and remained outside the upper end of the target for 13 months.
It fell to 4.7% in July 2023, close to the Bank’s midpoint mark of 4.5%. This was short-lived. SA’s headline inflation reached 5.9% in October, but fell to 5.5% in November.
Rusike said BofA expects headline inflation to continue trending down moderately, reaching 5.3% in December and 5.1% in January 2024.
“The bad news is that the cutting cycle is likely to be shallow — a cumulative 125 bps over two years to 2025 compared with 475 bps of hikes from November 2021 to May 2023,” Rusike said.
“The Fed is likely to cut about 100 bps in 2024 starting in March. In our view, this earlier move would give the Reserve Bank room to cut 75 bps in 2024, compared with our previous baseline of 50 bps. Our view is supported by the fact that domestic inflation seems to be gradually moderating.”
BofA also warns of a weak fiscal outlook over the next two years citing Eskom support, possible new allocations to Transnet as well as making permanent the Social Relief of Distress (SRD) grant as major risks.
“Direct budget financing looks inevitable, either below or above the line. We think that overall exposures to Transnet will not exceed 1% of GDP despite its total debt being about R130bn or close to 2% of GDP,” he said.
“Government does not want Transnet to default and that like Eskom, it is too big to fail.”
He added the SRD grant that cost up to 0.5% of GDP was extended for another year to make a decision after 2024 elections. BofA believes the SRD grant, introduced in 2020 at the onset of the Covid-19 pandemic to cover unemployed adults, is likely to become permanent.
“So, we keep the grant in our estimates throughout the forecast horizon,” Rusike said. “The mechanics of withdrawing it have proved difficult given structurally high unemployment and a looming election in May 2024. Discussions and technical work have focused on how to make the social grant permanent.”
Eskom
More positively, according to BofA, SA’s fiscal path may improve in 2026 when Eskom’s three-year financial support of R254bn falls off in the year ending March 2026.
In terms of the May general election, Rusike said the outcome is unlikely to produce an outright winner. The bank’s baseline view is the status quo is maintained, with the ANC governing in coalition with a small party or outright majority.
He said the status quo is not necessarily bad as it is known and means a slow pace of economic reforms and that Eskom and Transnet will remain the key focus of reforms.
The bank remains concerned with SA’s relations with the US.
Strain on US-SA relations over Russia peaked in May 2023 when the US brought allegations of arming/supporting Russia that also saw SA’s position in the African Growth and Opportunity Act (Agoa) come under threat. Relations are once again under strain with SA taking Israel to the International Court of Justice on allegations of genocide in Palestine during the conflict with Hamas, a grouping that governs Gaza in the State of Palestine.
BofA said this action could further strain SA’s relations with the US and, to some extent, the EU.
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