EDITORIAL: Cause for comfort amid uncertainty

As the new year begins, global economic conditions remain mixed and the outlook uncertain — that was the opening sentence of the Reserve Bank's monetary policy committee’s (MPC’s) statement at its first meeting this year.

As it goes into its last meeting of the year this week, the global outlook looks even more uncertain and conditions hardly less mixed. Inflation has come down globally and the interest rate cycle has started to turn, but the risks to inflation and to global financial and geopolitical conditions are mounting after the outcome of the US election and the ascent to power of US president-elect Donald Trump.

Back in SA, the election outcome and the inauguration of the government of national unity (GNU) have lowered the risk of adverse economic outcomes and raised the chances of a turnaround in SA’s weak growth performance and its public finances.

Inflation is well under control, the committee has implemented its first interest rate cut and where in January the Reserve Bank saw headline inflation easing to 5% this year, 4.6% next year and 4.5% in 2026, it is clear the outcome will be much better than that. Official inflation figures due out on Wednesday are expected to show inflation has come down to the 3% bottom end of the Bank’s target range — or even below that. And it’s widely expected to average below the 4.5% midpoint of the target range over the next couple of years, compared with 6% last year.

A stronger rand and moderating global fuel and food prices have helped. But there is a shutout for the Bank from ratings agency S&P Global, which in its update on SA on Friday credited the Bank’s proactive monetary policy response for slowing consumer price increases.

S&P’s decision to up its outlook on SA from stable to positive was unexpected, but welcome. It could well help to support investor sentiment and contain borrowing costs at a time when global uncertainty and the “Trump trade” have put a big dent in the post-GNU rally in the rand. S&P opted for the outlook upgrade — which raises the probability of an upgrade in the rating itself — even though its growth forecast is modest and its view on SA’s public finances sceptical.

The detail of S&P’s report on Friday spells out reasons for optimism. But it also captures how mixed and uncertain SA’s outlook is. It sounds warnings that SA’s new government would do well to heed. Those include the risk of pushback from MK and EFF, as well as the risk that SA’s foreign policy stances could put investor sentiment at risk from geopolitical tensions.

S&P has historically been the most pessimistic of the big three ratings agencies and the first to downgrade on negative news, though unlike the other two it has a “split” rating, with SA’s foreign currency rating at three notches below investment grade, while the local currency is only two notches below. That reflects the strength it sees in SA’s domestic capital markets and financial sector and it has highlighted those again this time, including the role of the Bank.

But its outlook change was driven primarily by the prospect of improved growth in coming years, as well as its view that the government is serious about fiscal consolidation. It sees growth averaging 1.4% in the next three years, which it points out is still not great in the context of SA’s population growth and unemployment rates. However, “planned acceleration of economic reforms by the new government of national unity and a pickup in private investment could bolster prospects more than we expect”.

It also does not really buy the deficit and debt forecasts in last month’s medium-term budget — indeed it still projects the public debt ratio will rise to 80% in fiscal 2027, in contrast to the Treasury’s view that it will stabilise at 75% in fiscal 2026. But it now sees a less steep debt path. It also, importantly, is no longer factoring in the likelihood of a big Transnet debt relief programme such as the one government gave Eskom. And it is giving the government the benefit of the doubt: “We see higher fiscal policy predictability regarding efforts towards achieve primary surpluses and fiscal consolidation”.

In a tough and uncertain global environment, SA has the tools to change its own medium-term fortunes. In the short term, the picture is uncertain and volatile and the MPC will have the task of trying to make sense of it all.

We can reliably expect another 25 basis point cut given the improved inflation outlook. But expect a narrative of uncertainty and caution about next steps.