Nedbank CIB Senior Research Analyst, Reezwana Sumad joins CNBC Africa for more.
Senior Research Analyst Reezwana Sumad from Nedbank CIB writes the following. Our economic growth estimates continue to suggest higher growth for South Africa over the next three years, despite a more confrontational US. She continues to say we are reluctant to change these forecasts just yet, given there has been a lot of noise but little concrete development. She joins us for more. Reezwana, thank you so much for your time. Before we talk about the quarter that was and also expectations going forward, take me through your expectations coming into 2025 and what has changed for you and the team? I think the biggest change this year has been the risk around our growth forecast. We haven't changed. As you mentioned, we haven't changed our growth forecast. We're still seeing growth for this year at 1.6%, which is more than a doubling of growth achieved last year. I think certainly the risks around these forecasts have changed. Predominantly, the risk from the US. Trade policy changes in the US, uncertainty in the US, financial market volatility emanating from some of these decisions in the US. But I think the most pertinent question that's often less reported on is the US's influence in investments in South Africa. The US is the biggest foreign investor in South Africa. Definitely, that does risk a lot of market turbulence, but definitely some downside risk to our growth forecast. We do think that even though our growth forecasts haven't changed, we are seeing probably some downside risk to these estimates. Whereas last year, we would have had a more balanced growth risk assessment for South Africa. We'll get to the three main channels in which South Africa has links to the US in a short bit. In your note, as you talk about this noise that's out there and very little concrete development, how are you separating noise from signal? We basically have to go on the data that we have, which is the data in terms of trade data with the US. We have to look at the data in terms of trade, in terms of our AGOA exposure, and then we have to look at investment flows and portfolio flows and stock, and then any other type of financial and market-related data. We have to use this to form scenarios. Effectively, we have to have a few scenarios to determine what will be the actual impact to economic growth if each of these levers are negatively impacted by actions from the US. Effectively, the uncertainty just raises or brings forth more scenarios that we have to look at from a macro perspective, because we really do think that we cannot base the current environment and projections on what has happened historically from an economic perspective. It is a new environment that South Africa and the globe is operating in, that we'll have to look at different scenarios to tease out the uncertainty and what impact that would have on the economy. Let's get into those channels that you alluded to. I think we've written quite a lot about US foreign aid, which is the one channel that you talk of. And then, yes, there is the trade aspect. But what you did mention is quite significant, is the FDI and the portfolio flows. Take me through how big that exposure is in terms of SA to the US. Yeah, and I mentioned upfront, we get a lot of media coverage on AGOA and trade. And just to put into perspective, if you look at South Africa's AGOA exposure, that amounts to about 1% of GDP. It is quite significant. But when you look at investment channels from the US to South Africa, so portfolio investment, and this is the Reserve Bank data, portfolio investment stock from the US amounts to about 1.7 trillion rands. You add foreign direct investment, you add other investments from the US, that all amounts to about 2 trillion rands. Now, as a percentage of GDP, that makes up about 30% of South Africa GDP. So really, AGOA and trade is very important. But that really is, you know, such a small size relative to flows. And yes, we're talking about hot money, sorry, investment flows in the stock market, in the bond market, and then other actual investments or businesses, factories and other investments in the country. And one can argue that it might not be directly impacted by sort of, you know, trade response from the US. But certainly, it is definitely a big risk. And as I mentioned upfront, the US is the biggest foreign investor, from a portfolio flows perspective, and the biggest foreign investor in our bond market, our biggest foreign investor in our equity market. So there's definitely risks from an investment perspective that really is much larger than the AGOA or the trade exposure that South Africa has to the US. I want to go to the US for a bit, because I'm sure you would have seen over the past couple of weeks, we've seen a lot of the economists downgrade or at least dial back their growth expectations when it comes to the US and on concerns that some of these, you know, tariff fears could weigh on growth. What's your base case for US growth for the second half of the year? Yeah, so we've got growth for the US at 2%, but definitely still downside risks attached to that growth forecast for the US. I think that there's a material risk that the US economy experiences a recession, even just a technical or shallow recession, I think that is definitely a possibility. So around the middle of the year, or into the third quarter of this year, the US economy could experience a recession. But over and above that, I think our biggest concern from a US perspective is the stagflationary impact on the economy. And we know that developed market economies like the US, like the Eurozone, has very rarely experienced periods or bouts of stagflation, where we have low economic growth or recession, and high inflation. And this year, we're probably going to see a US economy that is stagflationary. And the Fed will probably have to sort of respond from a monetary policy perspective to a stagflationary US economy that they are uncomfortable or don't really have much experience operating in. So effectively, even though we're seeing growth at 2% in the US economy, I do think that as with South Africa, the risk to their growth outlook is to the downside. But the bigger risk is if inflation in the US remains sticky. And the US Fed typically responds to a US recession by cutting interest rates. That's because inflation does come down during US recessions. But the question we ask ourselves is, in this type of new and uncertain environment, what is the possibility that a US recession will cure high inflation in the US? And I don't think that the answer is very clear cut in this this year. With that said, and in building on what you've just mentioned, if the Fed is facing a stagflationary environment, and it does obviously pull their mandate into two opposite directions in terms of how they respond, how are you expecting them to respond? And how much faith are you placing in their ability to respond to a stagflationary environment? Yeah, so I think they probably will cut interest rates or the Fed funds rate in the second half of the year. The market is expecting three interest rate cuts of 25 basis points in the second half of the year, and one more cut next year. I think that the Fed probably gets those cuts out of the way. If you look at the Fed's own dot plot itself, the Fed policymakers are also projecting three interest rate cuts by the Fed, despite not having achieved the inflation target this year or next year. So even though then the Fed themselves are not seeing a 2% inflation rate in the US economy this year, or even next year, they are still projecting themselves to cut the Fed funds rate. The big issue is that the Fed policymakers are slowly starting to become less stavish and more hawkish. So we're slowly starting to see one or two policymakers switch and project limited or fewer or no interest rate cuts in their own projections over the next three years. So that is definitely a risk. As US inflation remains stickier for longer, US Fed policymakers probably shift their forecast for Fed interest rate cuts. For now, in our baseline or base case, like with the market, we've got 100 basis points worth of cuts to the Fed funds rate priced in, in our base case assumption for the next 12 months. And that is premised on a very weak US economy. That's typically how the Fed responds. And we obviously have to be nimble enough to adjust that forecast if we see inflation re-accelerate in the US and the Fed remain much more cautious on that front. As we wrap up the conversation, how limited is the window for the South African Reserve Bank to cut? So if you look at local monetary policy or any country's monetary policy, it's effective with a 12-month window. So typically whatever the Saab does now will impact inflation in 12 months time, so four quarters. In the next four quarters, the Saab is seeing inflation increase to closer to four and a half percent, so close to their inflation target. So we do think that the window of opportunity that the Saab has to cut is fairly limited. So effectively, they only really have the next MPC meeting, which is in May, to decide on that last interest rate cut in our view, because after that, their 12-month head projection for South Africa inflation would be at four and a half percent or slightly higher, depending on some of the risk that materializes. So hence, we do think that the May meeting, there is a probability of a cut, and that would be, in our view, the last cut in the current cutting cycle, which would bring total interest rate cuts to 100 basis points, to about 1% of cuts locally. Rizwana, thank you so much for your time this afternoon. That was Rizwana Samad, who is the Senior Research Analyst at Nedbank CIB.
Theme: Navigating Economic Uncertainty Amid US Policy Impacts
Nedbank CIB Senior Research Analyst, Reezwana Sumad, recently shared insights on the economic growth prospects for South Africa in the next three years amid increasing uncertainty in the global landscape, particularly driven by US policies. Despite facing challenges and potential downside risks, South Africa's growth trajectory remains optimistic. Sumad highlighted the significant impact of US investments on the South African economy and the potential repercussions of policy changes in the US. The interview delved into the interconnections between the two economies, focusing on trade, foreign direct investments (FDI), and portfolio flows. Sumad also discussed the potential implications of a stagflationary environment in the US and the Federal Reserve's response to this economic scenario. Additionally, the conversation touched on the limited window for the South African Reserve Bank to implement further interest rate cuts in response to the evolving economic conditions. As we navigate through uncertain times, understanding the intricacies of global economic interdependencies becomes crucial for informed decision-making and strategic planning.
"As with South Africa, the risk to their growth outlook is to the downside. But the bigger risk is if inflation in the US remains sticky."
['Nedbank CIB', 'economic growth', 'US policy', 'South Africa', 'investment', 'global economy', 'Federal Reserve', 'interest rates']