THEBE MABANGA
AS SOUTH Africa prepares to move to Level 3 of its national Lockdown, its economy is likely to shrink by 10.3% in 2020 while there is room for a 100 basis point interest rate cut, according to a research note released by Merril Lynch Bank of America on Wednesday.
Merril Lynch BofA says its analysis points to a 10.3% contraction in 2020 and a recovery to 4.8% in 2021.
This is revised from a 5.3% contraction this year followed by a recovery of 3.2% next year.
If correct, the latest forecast means that at the start of 2022, economic activity would still be below 2019 levels.
“The economy is gradually reopening under capacity constraints. Moreover, the global growth fallout is expected to be worse than we previously estimated, weighing on exports,” the bank said in a development that is likely to be a blow to South Africa’s recovery hopes.
BofA then says that there is room for 50 basis point cut in each of the next two scheduled meetings of the Monetary Policy Committee (MPC) meetings in July and September.
This is because they expect consumer inflation, or CPI, to fall to 2,5% and recover to 3% this year, the lower end of the Reserve Bank’s inflation target band of 3% to 6%.
CPI for March stands at 4.1% but is expected to plunge due to the lockdown in April.
Following its most recent meeting, the MPC said that its internal policy guide, the Quarterly Projection Model, pointed to two cuts of 25 basis points each over the next two quarters which would leave the repo rate at 3.75% by year end.
BofA sees adequate fiscal funding over the next two years, although this will mean a widening fiscal deficit and rising debt.
“We see fiscal deficits nearing 12% this year and public debt-to-GDP breaching 80% by 2021,” the bank said.
The latter was expected to only happen in 2022.
This should be funded by issuing of about R2 billion worth of bonds per week and about $5billion, or almost R100 billion, from an institution like the International Monetary Fund should adequately finance the deficit.
Lastly, the bank expects a recovery to be underpinned by a rebound in commodity prices. “We expect a recovery in [Platinum Group Metals] and copper and are bullish [on] gold,” the note said.
