Calm before the storm in South Africa

 ·24 May 2024

This week has been a relatively quiet week on the economic front in South Africa as investors and analysts look toward the national elections next week Wednesday (29 May), which will be quickly followed by the South African Reserve Bank’s next policy move.

According to the Bureau for Economic Research, while several key data were published this week, nothing really shifted the dial for markets.

Consumer inflation numbers came in with a downward surprise in headline CPI (see domestic section) that decelerated for a second consecutive month, largely due to a softer price increase in food and non-alcoholic beverages.

While welcome, this is unlikely to shift the SARB’s hawkish views on inflation and thus there should be no change in interest rates.

“Locally, the focus will be squarely on Wednesday’s elections. The last few days of campaigning will be crucial for all parties and could tilt the polls away from or in favour of the current ruling party,” the BER said.

Official results are not expected before the weekend, but any unrest or protests could unsettle local financial assets.

Banking group RMB issued an internal memo warning operations of increased risk of social unrest. While the group clarified that this is not a baseline expectation or forecast, it does point to heightened anxiety of what may lie ahead – particularly from wildcard parties.

A more positive (business-friendly) result would be a coalition between the ANC and opposition DA (which carries its own risks), while a negative (anti-business) results would be a coalition between the ANC and the EFF or a new party like MKP.

Surveys from Bloomberg and Bank of America showed that investors are expecting an improvement in South Africa’s financial markets following the election. Markets anticipate a ‘neutral’ (business as usual) government formation following the vote, with an ANC-led coalition with a smaller party.

After the election, the SARB’s Monetary Policy Committee is set to meet on Thursday (30 May) and is widely expected to keep the interest rate unchanged.

“As always, the tone of the statement will be closely monitored. The SARB has emphasised upside risks to inflation and inflation expectations in recent meetings and a slightly softer touch on these issues could firm up expectations of (potential cuts) later this year,” the BER said.

“Indeed, while the US Fed has adopted a more hawkish stance, a lower oil price and stronger rand provide positive news for local inflation.”

The US Fed released minutes from their last meeting (late April/early May) on Wednesday.

According to the BER, the minutes showed that the members remain aware of inflation risks and pressures.

“The progress of disinflation stalled in the first three months of the year as inflation remained high, and the Fed agreed that keeping rates at their current levels was required until there was evidence that inflation was coming down to desired levels.”

Given that the SARB typically tracks the Fed, hopes for rate cuts any time soon are shrinking.

Read: Half of South African households are now on social grants – and government wants more

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