1、1 20/03/19 Jeffrey Schultz,Senior economist|BNP Paribas South Africa branch|South Africa Cautious but steady hand for the SARB KEY MESSAGES South Africas benign core inflation and materialising downside risks to its growth outlook warrant a cautious yet steady approach to policy rates,we think.Recen
2、t ZAR weakness and higher global oil prices are likely to push CPI inflation back above the central banks target mid-point in Q2,though the structural underpins to soft core inflation remain.We expect the SARB to downgrade its GDP forecasts next week and raise its 2019 CPI forecast,while unanimously
3、 deciding to keep policy rates steady.In our view,the central banks quarterly projection model might seek to prompt some ZAR stability by implying more rate hikes into its medium-term trajectory.Benign CPI trend,as expected:In recent months,South African CPI inflation has panned out largely as we ex
4、pected and the latest readings continue to highlight the relatively benign nature of price pressures in the economy.Headline CPI inflation in February was 4.1%y/y and core inflation 4.4%.Our core-core inflation index for the month was 0.1pp below the official core measure,highlighting economic slack
5、(for more on the index,which tracks the components of the CPI basket that are more sensitive to the output gap,see South African inflation:Beyond the core,dated 6 June 2018).For this year as a whole,we continue to expect headline inflation to hover close to the mid-point of the SARBs 36%target range
6、,owing to a combination of structural factors(lower unit labour costs and crimped corporate profitability),alongside what we still deem to be a constructive outlook for emerging-market currencies(as discussed in South African inflation:Going nowhere slowly,1 March 2019).Our forecasts for average CPI
7、 inflation are just 4.3%in 2019 and 5.0%in 2020 well below consensus.Our core CPI forecasts continue to show underlying inflation firmly anchored close to 4.5%throughout 2019 and to average below 5.0%in 2020.Small CPI bump up in Q2:Headline inflation is likely to pick up slightly in Q2,mainly on the
8、 basis of domestic fuel prices,which we expect to climb by 67%between now and the end of the quarter owing to slightly higher international oil prices and ZAR weakness.Downside risks to GDP:Since last week,rolling and more severe electricity supply cuts have been implemented across the country.This
9、suggests that the downside risks we flagged at the start of the year(see South Africa 2019 outlook:Digging deeper,14 January)are fast materialising for our 2019 GDP forecast of 1.4%.However,we remain comfortable with our view that the South African Reserve Bank Monetary Policy Committee will keep th
10、e policy rate at 6.75%at its 2628 March meeting and indeed throughout 2019.Rates to remain on hold:Our expectation of on-hold rates reflects our assessment that the economy is set to run a negative output gap for the foreseeable future,CPI inflation is struggling to climb much beyond 5.0%over 201920
11、 and Fig.1:BNPP inflation forecasts(%y/y)We still believe that our 2y payer position offers a decent risk reward profile from the current levels(see South Africa Rates:Pay 2y ZAR IRS,14 January).With materialising downside risks to growth and elevated real rates also continue to pose fiscal challeng
12、es,we like buying protection in South Africa vs selling protection in Turkey(see Long South Africa CDS vs sell protection in Turkey,22 February).Sources:Stats SA,BNP Paribas South Africa forecasts FOCUS|CEEMEA20 March 2019 EM ECONOMICS|EM STRATEGY Please refer to important information at the end of
13、this reportTRADE IDEAS 2 Jeffrey Schultz,Senior economist|BNP Paribas South Africa branch|20/03/19 SARB All about signalling the sovereign credit rating is under pressure.Our base case is for Moodys to put the rating on negative outlook at its upcoming scheduled review,also next week.In January and
14、February,depressed GDP growth,benign inflation and the prospect of no further tightening by the US Federal Reserve saw markets beginning to price in the chance of modest rate cuts creeping back into SARB thinking.We disagreed and indeed the market has backtracked in recent weeks amid the sell-off in
15、 the ZAR(to levels we deem as overdone;see ZAR Tactically long based on factor model,8 March).Forward rate agreements now price in about 18bp in hikes over the next two years.We think market expectations of hikes will also taper off in the coming months,particularly should USDZAR head back towards o
16、ur fair-value level of 13.75.Downward bias in GDP and CPI forecast evolution:Next Thursdays likely unanimous decision to keep rates unchanged shifts the focus to the SARBs forecasts and quarterly projection model(QPM).We expect the SARB to downgrade its 2019 growth estimate further from 1.7%in conju
17、nction with next weeks MPC,while revising modestly upwards its 4.8%headline inflation estimate and its assumptions on oil and electricity prices.The evolution of the SARBs estimates on both inflation and growth has had a clear downside bias(see Figures 2 and 3).Inflation(particularly core)has consis
18、tently undershot its estimates over the past 18 months,while its initial growth estimates have also generally disappointed.We think this downside bias will continue on its GDP growth forecasts next week and,later in the year,spread to its CPI and core inflation estimates.QPM might signal more hikes:
19、The SARBs implied medium-term policy rate trajectory has had a mixed response since its more explicit introduction in late 2017.The SARB has consistently stated that the QPM output does not necessarily imply a set path for interest rates and is a“broad policy guide”that can and does change in either
20、 direction between meetings.The QPM is also configured to hit a steady state of inflation at the mid-point of the SARBs 36%target range.Nevertheless,we think that the market will continue to focus on the trends in the QPM policy rate output as an indication of MPC thinking or policy bias.At the Sept
21、ember 2018 MPC,the QPM indicated that 125bp in rate hikes were required over the medium term,but this narrowed steadily to 75bp of hikes at the November MPC(following a 25bp rate hike)and just 25bp of hikes in January(see Figure 4).In light of likely revisions to inflation estimates and assumptions,
22、we would not be surprised if the revised QPM output indicates 5075bp worth of rate hikes again over the medium term.While we do not think that the SARB will or will have to deliver these,we believe the MPC will continue to use the QPM as a tool to signal to the market that the bar for rate cuts rema
23、ins very high and that it will continue to adopt a more hawkish bias to future policy rate moves.Given risks to the currency,such Moodys likely negative outlook change,the SARB will probably hope this will provide some support to the ZAR.Fig.2:SARB headline CPI forecast evolution by MPC meeting Sour
24、ces:SARB,BNP Paribas South Africa Fig.3:SARB GDP growth forecast evolution by MPC meeting Sources:SARB,BNP Paribas South Africa Fig.4:SARB QPM rate hike path vs repo/policy rate Sources:SARB,BNP Paribas South Africa EM ECONOMICS|EM STRATEGY 3 LEGAL NOTICE 20/03/19 This document has been written by o
25、ur Strategist and Economist teams within the BNP Paribas group of companies(collectively“BNPP”);it does not purport to be an exhaustive analysis,and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.This
26、document is non-independent research for the purpose of the UK Financial Conduct Authority rules.For the purposes of the recast Markets in Financial Instruments Directive(2014/65/EU)(MiFID II),non-independent research constitutes a marketing communication.This document is not investment research for
27、 the purposes of MiFID II.It has not been prepared in accordance with legal requirements designed to provide the independence of investment research,and is not subject to any prohibition on dealing ahead of the dissemination of investment research.The content in this document/communication may also
28、contain“Research”as defined under the MiFID II unbundling rules.If the document/communication contains Research,it is intended for those firms who are either in scope of the MiFID II unbundling rules and have signed up to one of the BNPP Global Markets Research packages,or firms that are out of scop
29、e of the MiFID II unbundling rules and therefore not required to pay for Research under MiFID II.Please note that it is your firms responsibility to ensure that you do not view or use the Research content in this document if your firm has not signed up to one of the BNPP Global Markets Research pack
30、ages,except where your firm is out of scope of the MiFID II unbundling rules.STEER is a trade mark of BNPP.MARKETS 360 is a trade mark of BNP Paribas This document constitutes a marketing communication and has been prepared by BNPP for,and is directed at,(a)Professional Clients and Eligible Counterp
31、arties as defined by the recast Markets in Financial Instruments Directive(2014/65/EU)(MiFID II),and(b)where relevant,persons who have professional experience in matters relating to investments falling within Article 19(5)of the Financial Services and Markets Act 2000(Financial Promotion)Order 2005,
32、and at other persons to whom it may lawfully be communicated(together“Relevant Persons”)under the regulations of any relevant jurisdiction.Any investment or investment activity to which this document relates is available only to and will be engaged in only with Relevant Persons.Any person who is not
33、 a Relevant Person should not act or rely on this document or its content.Securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.The information and opinions contained in this document have been obtained from,or are based on,public sources
34、 believed to be reliable,but there is no guarantee of the accuracy,completeness or fitness for any particular purpose of such information and such information may not have been independently verified by BNPP or by any person.None of BNPP,any of its subsidiary undertakings or affiliates or its member
35、s,directors,officers,agents or employees accepts any responsibility or liability whatsoever or makes any representation or warranty,express or implied,as to the accuracy and completeness of the information or any opinions based thereon and contained in this document and it should not be relied upon
36、as such.This document does not constitute or form any part of any offer to sell or issue and is not a solicitation of any offer to purchase any financial instrument,nor shall it or any part of it nor the fact of its distribution form the basis of,or be relied on,in connection with any contract or in
37、vestment decision.To the extent that any transaction is subsequently entered into between the recipient and BNPP,such transaction will be entered into upon such terms as may be agreed by the parties in the relevant documentation.Information and opinions contained in this document are published for t
38、he information of recipients,but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient,are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein.In providing this d
39、ocument,BNPP does not offer investment,financial,legal,tax or any other type of advice to,nor has any fiduciary duties towards,recipients.Any reference to past performance is not indicative of future performance,which may be better or worse than prior results.Any hypothetical,past performance simula
40、tions are the result of estimates made by BNPP,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNPP,and should not be used as guidance,in any way,of future performance.To the fullest extent permitted by law,no BNPP group company accepts any liability
41、 whatsoever(including in negligence)for any direct or consequential loss arising from any use of or reliance on material contained in this document even where advised of the possibility of such losses.All estimates and opinions included in this document are made as of the date of this document.Unles
42、s otherwise indicated in this document there is no intention to update this document.BNPP may make a market in,or may,as principal or agent,buy or sell securities of any issuer or person mentioned in this document or derivatives thereon.Prices,yields and other similar information included in this do
43、cument are included for information purposes however numerous factors will affect market pricing at any particular time,such information may be subject to rapid change and there is no certainty that transactions could be executed at any specified price.BNPP may have a financial interest in any issue
44、r or person mentioned in this document,including a long or short position in their securities and/or options,futures or other derivative instruments based thereon,or vice versa.BNPP,including its officers and employees may serve or have served as an officer,director or in an advisory capacity for an
45、y person mentioned in this document.BNPP may,from time to time,solicit,perform or have performed investment banking,underwriting or other services(including acting as adviser,manager,underwriter or lender)within the last 12 months for any person referred to in this document.BNPP may be a party to an
46、 agreement with any person relating to the production of this document.BNPP may to the extent permitted by law,have acted upon or used the information contained herein,or the analysis on which it was based,before the document was published.BNPP may receive or intend to seek compensation for investme
47、nt banking services in the next three months from or in relation to any person mentioned in this document.Any person mentioned in this document may have been provided with relevant sections of this document prior to its publication in order to verify its factual accuracy.This document is for informa
48、tion purposes only and there is no assurance that a transaction(s)will be entered into on such indicative terms.Any indicative price(s)contained herein have been prepared in good faith in accordance with BNPPs own internal models and calculation methods and/or are based on or use available price sou
49、rces where considered relevant.Indicative price(s)based on different models or assumptions may yield different results.Numerous factors may affect the price(s),which may or may not be taken into account.Therefore,these indicative price(s)may vary significantly from indicative price(s)obtained from o
50、ther sources or market participants.BNPP expressly disclaims any responsibility for the accuracy or completeness of its own internal models or calculation methods,the accuracy or reliability of any price sources used,any errors or omissions in computing or disseminating these indicative price(s),and
