In just two weeks, the South African growth rate for 2018 will be published. It will likely show a return to the low growth registered in 2016 (+0.6%) despite a sizeable fiscal deficit (-4.2% of GDP in 2018). However, the rising difficulties of key state-owned enterprises will likely imply some cost for public finances that will impact both the fiscal balance and public debt. Along with the structural current account deficit and its low coverage by stable (FDI) inflows, this suggests currency volatility and higher interest rate costs ahead. The Central Bank became hawkish last year, raising its policy interest rate (+25bps to 6.75% in November 2018) despite still low inflation (+4.3% y/y in January). Higher borrowing costs are particularly impactful since corporate debt has increased (debt service represents 87% of FX reserves). Ten-year government bond yields are still at 9.5%, a level far above South African nominal growth (which is at +5% currently), suggesting both higher inflation expectations and a significant currency risk premium.
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Weekly Export Risk Outlook 20 February 2019