South Africa Macro Monitor

Recovery under way, but no strong boost from World Cup

The recovery of the South African economy is well under way and continued in Q1 10, when GDP growth moved back into positive territory. Data showed that the economy grew 1.6% y/y in the first quarter of 2010. Looking ahead we expect the South African economy to grow at an average rate of 2.5% y/y in 2010E and 3.5% y/y in 2011E. The recovery is partly driven by rising private consumption. Although we expect private consumption to continue to grow, the effect on consumption of South Africa hosting the World Cup is expected to be limited. At the last World Cup finals in Germany, we saw only a marginal effect on German retail sales and we expect to see more or less the same effect on South African retail sales in June and July. We therefore forecast private consumption to expand by 2.5% y/y this year and 3.5% y/y next year.

Investment is bottoming out and we expect it to start growing in the coming quarters. Any World Cup effect on investment should have shown up in data already, as work on World Cup venues and infrastructure projects have been completed. Looking ahead we expect investment to decline by 1.7% y/y in 2010E and grow by 3.5% y/y in 2011E. Exports are recovering as the economic outlook for South Africa’s trade partners improves. The growth outlook is particularly robust for China, one of South Africa’s main export markets. We expect the World Cup finals to have a temporary effect on exports, as tourism should pick up sharply in June and  July as people discover the beauty of the country, but it is not possible to predict the magnitude of this effect. Nonetheless,

Exports are set to decline by 1.0% y/y in 2010 and another 0.4% y/y in 2011. Imports
have also recovered recently as domestic demand has picked up. Given the positive outlook
for domestic demand, we expect South African imports to continue to improve, with projected import growth of 0.4% y/y in 2010E and 1.0% y/y in 2011E. The table below shows our updated macro forecast for the South African economy, taking into account the latest data releases, including Q1 GDP growth.

SARB to stay on hold

In line with expectations, the South African Reserve Bank (SARB), left interest rates on hold at its policy meeting in mid-May. One of the main reasons for leaving rates unchanged was the uncertainty related to Europe. The outlook for South African inflation looks rather neutral. Inflation has declined significantly since it peaked at double-digit levels in 2008. Going forward we expect inflation to remain around the current level and we therefore forecast South African inflation at 4.9% y/y in both 2010E and 2011E. Hence, we currently see no room for further monetary easing and we expect South African policy rates to remain unchanged for a prolonged period of time.

World Cup unlikely to help the rand

We have updated our forecast on the South African rand. The rand is currently trading at levels that we consider somewhat overvalued relative to our ‘fair value’ assessment, so the short- and long-term outlook for the rand is bearish. We now forecast USD/ZAR at 8.20, 8.30 and 8.55 in three-, six- and 12-months, respectively. We do not expect the World Cup to have any long-lasting positive impact on the rand, although we could see some short-term World Cup rand buying.