ZAR: CPI and budget in the limelight today – TDS

Analysts at TDS suggest that while inflation is published today, the market focus will be on the FY2018/19 Budget Presentation by FinMin Gigaba for South Africa.

Key Quotes

“After Ramaphosa has been appointed Head of State in replacement of Zuma, there are growing expectations that the budget will exhibit a path of fiscal consolidation and declining debt-to-GDP levels over the forecasting horizon. According to the MTBPS from October 2017, the consolidated budget deficit has expanded to 4.3% of GDP from a target of 3.1% in the Feb'17 Budget presentation. This is also expected to hover at around 3.9% for the following three FYs.”

“The level of gross debt is also expected to expand to 60.8% of GDP by 2021/22, from an estimated 54.2% at the end of the current FY - this is a 9ppt deterioration compared to the February budget. Under the confirmation of these targets, we expect SA to suffer a downgrade to junk by Moody's. Hence, we expect the budget to rectify the trajectories of both the deficit and government debt, so that the former remains closer to 3% in the following years, and the latter does not exceed 57% of GDP and starts declining over the forecasting horizon. Under these revised targets, we expect Moody's to retain SA's ratings.”

“January CPI inflation is expected by the consensus to fall to 4.4% Y/Y from a prior 4.7%. Core inflation is expected to remain unchanged at 4.2% Y/Y. So headline inflation is expected to fall below the mid-point of the 3-6% target range, and the strong rand is likely to exert further downwards pressure on inflation in the coming month. The SARB is currently forecasting that headline inflation will average 4.4% in Q1 of this year before moving up to 5.0% in Q4. We think that the SARB will feel comfortable in cutting its policy rate by 25bps at the March MPC meeting and then again in May.”