South Africa macro tracker: Economic ICU [Deep Dive]

Jeffrey Schultz, Senior Economist at BNP Paribas South Africa Branch

• We maintain our forecast for an 8.5% contraction in GDP growth in 2020, but warn that the risks to a much slower economic recovery into 2021 are growing.
• We see demand and tourism related sectors bearing the brunt of the economic pain for most of this year.
• Scope for large downside growth and inflation surprises in the next 12m means rates are still likely to head lower, while the SARB will be slow in reversing these.
• Collapsing demand and supportive terms of trade should see a large improvement in the current account in 2020, lessening immediate external financing risks.
• Debt sustainability problems are rising, with fast-tracked reforms and a higher medium-term growth trajectory now the only way for South Africa ultimately to avoid broader IMF support, in our view.

MARKET VIEW
• Our below-consensus forecasts on growth and inflation mean that we continue to see opportunities in ZAR rates.
• Although the swap market has priced in policy rates almost as low as 3.25%, close to our year-end estimate of 3%, it is looking for a quick unwind of these cuts, creating a steep FRA curve after 6−9 months.
• Accordingly, we like the risk-reward for FRA flatteners and favour receiving 21 x 24 FRA against 6 x 9 FRA with a strong carry of almost 9bp per month, aiming for a lower terminal policy rate. (For more, see South Africa: Take profit on 2y receivers and reshape, dated 19 May)

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