South Africa is back in a rate cut season

The SARB decided to lower the repo rate by 25bps last week. Readers will recall that in November 2016 I predicted a recession and the commencement of the rate cut cycle in 2017 (in fact I said we were already in a recession back in November). This analysis is reproduced in this blog post.

Herewith a reminder of the three key concluding paragraphs of this analysis:

In my view, the economy is heading into recession in 2017. It’s not a consensus view at this point as a Bloomberg poll of 24 economists sees growth at 1.1% in 2017 and 1.8% in 2018. National Treasury itself pencils growth of 1.3% in 2017, another optimistic growth forecast that’s likely to be missed (again). NT has been perma-bullish on growth in the past six years (see graph below; deleted for this blog post). This means the economy would be going into a recession in a historically wide fiscal deficit position, while recessions typically see the fiscal surplus/deficit drop by around 4 percentage points.

After pricing a steep rate hike cycle at end-2015 (nearly 200bps of hikes were priced in before end-2016), the market is priced for a 50% chance of another 50bps rate hike before end-2017. There are obviously clear ZAR risks introduced by the politics that could drive a final flurry of hikes from SARB. With the economy going into recession, a weaker USD that leads to ZAR strength, and a weak retail environment that contains price inflation, the SARB is likely to turn less hawkish. Moreover, we continue to expect that the central bank theme of 2017 will be one of policy CONvergence where the Fed joins the loosening party again. This feeds into our bearish tactical USD view that feeds into a lower USD-ZAR and lower SA inflation expectations. If this cocktail is served to the SARB governor, Mr Kganyago, we reckon it’s likely to eventually lead to the commencement of a rate cutting cycle.

The last time I predicted a major directional trend shift call to policy rates was in mid-2013 by calling an end of the cutting cycle and spoke about the clear risks that a short-term rate hiking cycle would commence (consensus disagreed—see this interview—back in the days when USD-ZAR was steady at 9, and the policy rate 200bps lower than today). The call was 6 months early but bonds reacted to this view early. With respect to my panellists in that interview I believe what they were missing at the time was to correctly account for the global macro dynamics that would drive the hiking cycle that I elaborate on in Part 2 of the interview. Right now, as I’ve argued consistently in recent months, I foresee global macro relief coming from a more dovish Fed and weaker USD, and recovery in emerging markets (eg. look at the pick-up of leading indicators across the board in Brazil, Russia, Turkey and China at the moment). Coupled with flat inflation in SA and an economy going into recession, the 10yr bond yield could drop from 8.9% currently to 7.5% before turning back into its long-term uptrend. I wouldn’t chase this short-term rally, though, as it is likely to be short-lived once governments of developed economies (and SA) abandon austerity policies and embrace helicopter money in earnest (curve steepeners and higher inflation expectations). Other EM’s not following developmental state ideologies that allow their private sectors to drive growth are likely outperform SA on the growth front (eg. Brazil and India).

In the last four rate cut cycles (late 1980s / mid-late 1990s / early 2000s / late 2000s) the SARB reduced the repo rate on average by 6.75 percentage points. Starting off at 7% in 2017, people might be shocked at how low rates end up going through this cycle, with the one caveat being that the SARB hiked the repo rate less than prior hiking cycles (1.25pp in last two years vs average of 5.1pp before) which means the cutting cycle might be shallower than usual.

As I’ve been arguing for nearly a year now, we’re in rate cut season. It’s a mug’s game trying to predict SARB moves on MPC day. They often don’t know themselves what they should or should not be doing. More important is that one calls the big swings of interest rates–early, even before the SARB and the market knows it’s about to happen–and ride that trend. In the next two years I’ll keep betting on rate cuts, unless a major external economic or internal political shock derails the trend.

Cabinet approves NHI white paper

After the Gauteng health department previously denied allegations that untrained staff conducted post-mortems, the national health department has now “picked up” that untrained staff such as drivers and cleaners have been conducting post-mortems for the Gauteng health department since 2006, reports News24.

Just a day after this news the cabinet approved the department of health’s latest white paper on National Health Insurance, paving the way for it to be published as a policy document in the government gazette (Businesslive).

The NHI aims to nationalise a far larger piece of the healthcare / medical aid industry in South Africa. As I mentioned on this Renegade Report podcast, private healthcare and medical aid schemes have been a critical part to sustaining low, middle and high income lifestyles in South Africa.

The national treasury under Pravin Gordhan looked closely at financing options for the NHI and has only knocked the idea on financing constraints – not grounds of efficiency and economic theory. The health department has argued that private medical aid scheme contributions be made prohibitively expensive to force people into the state’s NHI scheme. It’s interesting to note the public protector’s recent recommendation that the SARB should “promote the wellbeing of citizens”. Would funding the NHI promote the wellbeing of citizens, at least in the short-term?

Let’s see if this socialist agenda is followed through to the next iteration of the NHI, because if it does, SA runs a major human capital flight risk going forward.

I haven’t written much on Bitcoin on this blog, but…

…that’s because my blog was inactive during the time I turned more bullish on the rate of adoption and long-term potential of this new currency. A few tweets from my timeline.

Following the 200% rally since the start of the year I’ve done a lot of research on this financial and monetary technology and I’m even more optimistic than I was in late 2015 and 2016 of its long-term prospects. I’m not giving investment advice that you should go out and put your life savings into it today, but open an account at Luno, deposit a tiny amount (as little as R10 is possible), get a family member or friend to download a bitcoin wallet like breadwallet, and see how easy it is to send value (i.e. money) directly to each other over the internet. You’ll see what I’m excited about. Read this book as an intro. Get acquainted with the internet of money, it is truly revolutionary.

Public Protector suggests constitution change so SARB can focus on growth

South Africa is already on a slippery macro slope, and the Public Protector’s recommendation that the constitution be amended so the SARB promotes growth and the well-being of citizens suggests there may be an even steeper slope ahead. Far easier than a change of the constitution is to change the mandate of the SARB, and this suggestion is probably putting a kite up in the sky to test the wind. Back in the days when I still had guest contributors on this blog, my friend Russell Lamberti actually outlined a century of SARB mission creep, in The Reserve Bank’s record. I will write more about this in my upcoming SA political economy note.

My SA recession prediction from November 2016

The political economy analysis below I published on November 3, 2016. It only went out to a few people and clients on email, and wasn’t published on my employer’s letterhead. It was my personal view that some folks requested. Now that the economy is officially in recession, some 8 months later (and according to Bloomberg only 1 in 24 had anticipated this recession as late as two weeks ago), I am publishing my analysis here. In the future I will publish my thoughts on SA macro on this blog as these views are personal and not what I’m paid to write about at work (I’m paid to write about frontier markets). I will however charge a small fee to gain access to pay for this site’s maintenance and for the time taken to publish during my spare time, after-hours. The next instalment will be out in the next few weeks in which I update my thoughts on SA political economy and how I see the way forward. My view on the politics has evolved slightly since November, as the situation has evolved (it looks like something between scenario 2 and 3 presented below is playing out).

I hope you enjoy this article. I’ve taken all graphs out the article as they were drawn using my employer’s resources. The thoughts are however entirely mine (and didn’t win me any popularity contests).

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