South African economy likely to rebound next year, SARB to hike interest rate by 25 bps in January 2017

Supply side shocks in South Africa such as shortages of electricity, labor disruptions and the drought have waned; however, weak domestic demand is expected to keep the economic recovery subdued, said Barclays in a research note.

“We project GDP growth of just 0.4 percent this year and look for a tepid rebound of only 1.1 percent in 2017”, added Barclays.

Given that global environment seems highly unsupportive, the medium-term growth potential of South Africa is also expected to stay low without structural reforms to rebound domestic competitiveness and raise business sentiment.

In the meantime, the headline inflation of the nation is expected to peak 6.7 percent this month and then ease back to the target range in the second quarter of next year. The South African Reserve Bank is expected to hike its key interest rate again by 25 basis points in January before it foregoes additional tightening, stated Barclays.

The FY 16-17 consolidated budget deficit was revised higher by 0.2 percentage points to 3.4 percent of the GDP. South Africa’s political tensions are expected to stay high, weakening the reform agenda, according to Barclays.

“With little progress on structural reforms, we think negative ratings actions remain more likely than not at year-end”, noted Barclays.