SA expected to cut rates in July

• Bank of America warns of major fiscal risks to the country • Transnet bailout looks inevitable

Bank of America (BofA) has pencilled in a cut in interest rates by the SA Reserve Bank in the second half of the year as domestic inflation moderates on the back of lower international oil prices and a more dovish global environment.

The Bank, however, warns of a weaker fiscal outlook for SA, with the expectation of a Transnet bailout.

Senior economist Tatonga Rusike said BofA anticipates that July will mark the start of the Bank’s interest rate cutting cycle with a total of 75 basis points (bps) slashed in 2024 and a further 50bps cut in 2025, resulting in a terminal rate of 7%.

“Why? The global environment is becoming more dovish [moving towards cutting rates], and our US economists have brought forward the timing of the Fed’s first cut to March from June,” Rusike said.

While the market is pricing in about 94bps of Bank cuts in 2024 from as early as May, with cumulative cuts to 2025 amounting to 112bps, “we argue that there are domestic setbacks that could constrain earlier and more substantial cuts”.

Setbacks facing the SA economy include risks and uncertainties such as the return of load-shedding, bottlenecks in Transnet’s sprawling logistics infrastructure, and policy uncertainty ahead of the elections.

Headline inflation is another major challenge, shooting above the top of the Bank’s 3%-6% inflation target range in May 2022, peaking at 7.8% in July 2022 and remained outside the upper end of the target for 13 months.

It fell to 4.7% in July 2023, close to the Bank’s midpoint mark of 4.5%, but this was shortlived. It reached 5.9% in October, then fell to 5.5% in November.

Rusike said BofA expects headline inflation to continue trending down moderately, reaching 5.3% in December and 5.1% in January 2024.

“The bad news is that the cutting cycle is likely to be shallow – a cumulative 125bps over two years to 2025 compared with 475bps of hikes from November 2021 to May 2023,” Rusike said.

“The Fed is likely to cut about 100bps in 2024, starting in March. In our view, this earlier move would give the Reserve Bank room to cut 75bps in 2024, compared with our previous baseline of 50bps. Our view is supported by the fact that domestic inflation seems to be gradually moderating.”

BofA also warns of a weak fiscal outlook for the next two years, citing as major risks Eskom support, possible new allocations to Transnet and the government making the social relief of distress (SRD) grant permanent.

“Direct budget financing looks inevitable, either below or above the line. We think that overall exposures to Transnet will not exceed 1% of GDP despite its total debt being about R130bn, or close to 2% of GDP.”

“Government does not want Transnet to default and, like Eskom, it is too big to fail.”

The SRD grant, which costs up to 0.5% of GDP, was extended for another year, with a decision to be made after the 2024 elections. BofA believes the SRD grant, introduced in 2020 at the onset of the Covid-19 pandemic to cover unemployed adults, is likely to become permanent.

“So, we keep the grant in our estimates throughout the forecast horizon,” Rusike said.

“The mechanics of withdrawing it have proved difficult given structurally high unem

ployment and a looming election in May 2024. Discussions and technical work have focused on how to make the social grant permanent.”

More positively, according to BofA, SA’s fiscal path may improve when Eskom’s financial support of R254bn falls off in the year ending March 2026.

In terms of the 2024 general election, Rusike said the outcome is unlikely to produce an outright winner. The bank’s baseline view is the status quo is maintained, with the ANC governing in coalition.

He said the status quo is not necessarily bad. It means a slow pace of economic reforms, and Eskom and Transnet will remain the key focus of reforms.

The bank remains concerned with SA’s relations with the US. Strain over Russia peaked in May 2023 when the US brought allegations of arming and/or supporting Russia, while at the same time SA’s position in the African Growth & Opportunity Act came under threat.

In addition, SA has taken Israel to the International Court of Justice over allegations of genocide during the conflict with Hamas, which governs Gaza. BofA said this action could further strain SA’s relations with the US and, to some extent, the EU.