Citi has raised its forecast for SA’s GDP growth to 1.2% this year and to 2% next year, citing the positive effect of the two-pot retirement reform, lower inflation and expected interest rate cuts boosting consumer spending after a few years of high inflation and elevated debt.
The US multinational projects that inflation will average 4.1% in the fourth quarter. It expects a 75 basis point rate cut at the monetary policy committee’s next three meetings — September, November and January — saying this would help to boost household consumption.
“We expect the two-pot retirement reform [effective September 1 2024] to boost GDP growth to 2.0% by 2025. We see upside for SA equities, given the expected positive impact on consumption, namely for consumer stocks, while the impact on banks is likely to be more nuanced, given our expectation that the reform will lead to repayment of high-yielding unsecured consumer debt, with some negative impact on net interest income, countered by better transaction fee income and likely improvements in asset quality.”
Citi is more bullish than the IMF, which last month kept SA’s GDP growth estimates unchanged at 0.9% this year and 1.2% next year. Standard Bank said last week it expected GDP growth of 1.1% this year, improving to 1.8% in 2025. It expected GDP growth across its portfolio of sub-Saharan African nations, excluding SA, to exceed 4% in the short term and nearly 5% in the medium term.
Government finances
Bank of America said last month that SA’s economy could grow about 2% in the medium term if Eskom kept up its momentum — and the lights on. It expected government finances to improve due to a better GDP outlook after progress in ridding SA of load-shedding.
The SA Reserve Bank at its July monetary policy meeting said that in the medium term it expected “somewhat faster growth, supported by a more reliable electricity supply and improving logistics, among other factors”.
Citi expects R38bn (post-tax) to be added to household income from the two-pot retirement reform, more than the R31.5bn post-tax household boost the Reserve Bank expects.
In a working paper published two weeks ago, the Bank indicated that its more probable scenario involved moderate pension withdrawals, projecting that household spending would boost real consumption by 0.3 in 2024 and 0.7 in 2025.
Household consumption in SA has been under pressure from high living costs. The Bank in July kept the repo rate unchanged at a 15-year high for a seventh consecutive meeting.
The prime lending rate went up 475 basis points (bps) since November 2021 to 11.75%, or a 200 bps increase from just before the Covid-19 crisis.
Rising credit costs were a double-edged sword for banks, some reporting record profits over the past two years, giving back billions of rand to shareholders in the process.
But banks had to tighten their lending criteria as bad debt started to spike as consumers struggled to keep up with loan repayments.
The Prudential Authority’s latest annual report notes that inflation and interest rates had an adverse effect on household disposable income and small businesses, weighing on asset quality indicators in 2023 on the back of subdued loan growth.
The banking sector saw impaired advances rise to R295bn up to December 2023 or year-on-year growth of 21.6%. Citi said it expected South Africans to pay down debt when two-pot withdrawals filtered through. That would boost earnings of SA banks, whose outlook it had also upgraded.
“We estimate that half of the withdrawn funds will be allocated to reducing debt, leading to household debt-to-income improving by 70 bps with related positive impacts on asset quality and impairment largely offsetting negative implications for bank net interest income from debt repayment of high-margin unsecured consumer loans,” it said. FirstRand and Nedbank were its preferred buy-rated picks with their higher proportion of SA earnings.
Citi also expected the windfall from two-pot payouts to be a boon to retailers.
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