https://www.polity.org.za
Deepening Democracy through Access to Information
Home / News / South African News RSS ← Back
Close

Email this article

separate emails by commas, maximum limit of 4 addresses

Sponsored by

Close

Article Enquiry

VAT hike tests SARB's hawkish stance

Close

Embed Video

1

VAT hike tests SARB's hawkish stance

VAT hike tests SARB's hawkish stance
Photo by Bloomberg

9th March 2018

By: Reuters

SAVE THIS ARTICLE      EMAIL THIS ARTICLE

Font size: -+

After the first VAT hike since apartheid, South African consumers are calling for an interest rate cut but the South African Reserve Bank (SARB) has numerous reasons to resist this pressure, chief amongst them a desire to sustain an inflation-busting rally in the rand.

Since market-friendly Cyril Ramaphosa took over from Jacob Zuma as president last month, South African bond yields have fallen and the currency has soared on expectations he will reinvigorate the economy after years of stagnation and mismanagement.

Advertisement

Despite the rally, domestic yields remain more than 4% higher than those on comparable US debt, making South Africa's "carry trade", as the differential is known, one of the most attractive emerging market debt plays after Russia.

But the need to raise VAT for the first time in more than two decades to plug a hole in the national finances may bring that rally to a halt.

Advertisement

South Africa's powerful trade union movement and consumer groups have been vocal critics of the rise in VAT from 14% to 15%, and are demanding a rate cut to ease the pain.

Forward rate agreements this week were pricing in a nearly 80% chance of a 25 basis points rate cut to 6.5% in the benchmark lending rate.

That would bring South Africa's carry trade differential closer to Indonesia's 3.2%.

Forecasting a cut, Bank of America Merrill Lynch is recommending investors sell South African debt and the rand, which it thinks is overvalued.

"Due to the recent rally we think risk/reward is to the downside," BAML senior economist Ferhan Salman said, recommending a shift into Turkish bonds, which he believes are on an upswing.

BAML, which has a history of going against prevailing market sentiment on South Africa, sees the rand at 13.50 to the dollar by year-end from 11.92 on Friday.

Conversely, if the SARB holds fire at its March 28 policy meeting, as it has on the last three occasions, analysts predict another surge in the currency.

Headline inflation slowed to 4.4% in January, the lowest in three years and in the middle of the SARB's 3% to 6% target range, but the bank sees price growth at 5% in the final quarter.

The VAT increase is also likely to push that forecast up.

Another factor weighing against a cut is the likelihood of higher rates in the United States this year, a rate trajectory that also eats into South Africa's relative attractiveness to sovereign debt funds.

"Should the SARB reduce interest rates, the rand's carry-trade appeal would wane against on relative EM basis," said Nedbank technical strategist Mehul Daya.

"SARB policies do not target the rand. However, policy makers are aware of the importance and influence of the carry-trade," Daya said.

EMAIL THIS ARTICLE      SAVE THIS ARTICLE

To subscribe email subscriptions@creamermedia.co.za or click here
To advertise email advertising@creamermedia.co.za or click here

Comment Guidelines

About

Polity.org.za is a product of Creamer Media.
www.creamermedia.co.za

Other Creamer Media Products include:
Engineering News
Mining Weekly
Research Channel Africa

Read more

Subscriptions

We offer a variety of subscriptions to our Magazine, Website, PDF Reports and our photo library.

Subscriptions are available via the Creamer Media Store.

View store

Advertise

Advertising on Polity.org.za is an effective way to build and consolidate a company's profile among clients and prospective clients. Email advertising@creamermedia.co.za

View options
Free daily email newsletter Register Now