2016 began in the grip of fear which took hold in the latter part of 2015, with interest rates significantly higher as a result.

The consensus view in the market, expressed by economists and in the Forward Rate Agreement (FRA) market, was that the South African Reserve Bank (SARB) would have little choice but to raise the repo rate at the January 2016 Monetary Policy Committee (MPC) meeting. Much debate however, was whether a 25 or 50 basis point hike would be more appropriate given the fragile growth outlook for South Africa over the medium-term. The January Monetary Policy Committee (MPC) meeting arrived with the SARB hiking the repo rate by 50 basis points, to 6.75%. The market, as reflected in the reaction of the Rand/Dollar exchange rate and government bond yields, viewed this decision by the SARB as positive and as an indication of credible policy action. The SARB highlighted that the depreciated real exchange rate and higher expected food price inflation as a result of the drought, had placed significant upward pressure on the trajectory of headline inflation over the medium term, a key driver in their decision to hike the repo rate by 50 basis points.

The Budget Speech was delivered in February, as the market laid down expectations of how Minister Pravin Gordhan would steady the fiscal path for South Africa. This was viewed as one of the tougher budget speeches to deliver, with South Africa’s investment grade credit rating fragile to say the least. The buildup to the speech was surprisingly positive as the market became more confident that the Minister would not disappoint. In addition, business leaders in SA began to speak more positively and the market came off asset class lows experienced in December 2015. The budget largely delivered on expectations, as the Minister re-emphasised that fiscal consolidation and the debt burden was a priority for National Treasury in light of slowing growth prospects over the medium- term.
Below are a few positive takeouts from the budget that could go a long way to appeasing the credit rating agencies:

-A budget deficit of 2.4% by 2018/2019, improved from the October 2015 figure of 3%.
-A debt to GDP ratio of 46.2% by 2018/2019, improved from the October 2015 figure of 49.4%.
-Emphasis on improving the performance and efficiency of key SOE’s such as Eskom and Transnet.
-Increased funding for tertiary education.
-Increased control over government tender processes and,
-A halt in government employee vacancies, easing wage inflationary pressures.
National Treasury opted not to raise VAT in order to raise its required revenue targets, viewed as something of a surprise to the market. This is likely to ease the pressures on the consumer. Overall, the budget was considered satisfactory and possibly able to allay fears of a credit rating downgrade to sub-investment grade status. The implementation of these policies will be telling as the year runs its course.

Amidst significant upward pressure on inflation from food prices, the SARB committed to their mandate of inflation targeting by further hiking the repo rate at the March 2016 MPC meeting, by 25 basis points to 7%. The SARB’s forecasts show headline inflation averaging above 6% for 2016 and 2017, falling below the target by the fourth quarter of 2017.

Money Market rates reflect this view on inflation and therefore remain attractive with a steep Negotiable Certificate of Deposit (NCD) curve. One year NCD’s are trading at attractive yields of close to and above 8.5%. We remain cautious in ensuring a margin of safety as the South Africa inflation profile remains, as always, susceptible to external shocks.