(26 OCTOBER 2018)DAILY MARKET BRIEF 2:Rand under pressure as growth outlook lowered

The appointment of Tito Mboweni, former SARB Governor two weeks ago was a welcome message for investors. However key challenges remain. Although his rapid role taking, Tito Mboweni struggled convincing investors during the mini budget meeting on Wednesday as the outlook appeared gloomy.

Indeed, despite an easing in consumer and producer prices (CPI and PPI m/m +0.50%), largely driven by a weaker rand and oil prices, the South African economy is expected to grow at a pace of 0.70%, primarily due to a recession phase in H1. Additionally, South African budget is expected to outreach prior 3.6% budget deficit by 0.40% in 2018 and current South African debt estimated at 50% of GDP will be growing by 10% in the coming 6 years.

Accordingly, mounting worries relating to the sovereign-rating downgrade is expected to push the ZAR downward, which ultimately should accelerate inflation. In this scenario, the SARB, which is having its next MPC between the 20-22. November 2018 will have to raise its key rate in order to provide a positive view to credit rating agencies, in order to avoid a junk status.

USD/ZAR is expected to strengthen, approaching the 14.70 range.

By Vincent Mivelaz