GDP growth: likely low growth for longer
The economy was hit hard by the April 2016 revelation of previously undisclosed loans, which forced the adoption of a tighter monetary policy and fiscal consolidation measures to help restore macroeconomic stability, driving growth in aggregate demand to historical lows.
Despite inflation easing and interest rates declining, we do not expect GDP growth to rebound to the average 7% y/y recorded before 2016. GDP growth will remain low until the next boom in foreign direct investment, which will likely be associated with development of the natural gas projects. GDP will likely grow by 3.5% y/y this year and 3.9% y/y in 2019.
Balance of payments: adjustment is inevitable
While we see the C/A deficit widening, it may still allow for the BM to continue building up FX reserves. With no major investment inflows expected in the near term, the structural imbalances of the BOP still need to be addressed. Nonetheless, by the end of 2018, FX reserves will likely be USD3.8bn, covering 6.1-m of imports.
The collapse in foreign direct investment inflows, the suspension of aid inflows and narrowing external funding options forced government to adopt decisive policy actions to deal with the twin deficits. It deliberately defaulted on the Mozam23 Eurobond, the MAM and Proindicus debt, preserving FX reserves in the short term even as sovereign ratings deteriorated further. But, a number of events, including policy actions, allowed the BOP improvement to gain momentum in 2017, driven by further contraction in the C/A deficit. We estimate the C/A deficit to have narrowed to below USD2.0bn in 2017 from USD4.0bn in 2016 and USD6.0bn in 2015.
FX outlook: appreciation bias with volatility
We expect FX liquidity to be patchy over the next four months, reflecting temporarily supply/demand mismatches given the seasonal nature of most of the export proceeds outside the large projects. Additionally, the central bank may opt to preserve its FX reserves rather than use it as a buffer to cover seasonal mismatches. The BM’s aggressive FX purchases during 2017 dried up liquidity in the market, preventing further appreciation of the metical, which was seen as a prudent approach to ensure currency stability.
Monetary policy: easing bias continues
Even though inflation will likely rise to 11.6% y/y in December 2018, the annual average will probably ease further this year. We still see some upside risks, especially if adverse weather conditions recur. Given that a significant proportion of imported consumer goods is sourced from South Africa, further ZAR strength would likely exert upward pressures on imported prices.
With average inflation likely to be lower than last year, the BM will likely cut rates more aggressively this year. We are pencilling another 600 bps of cuts during the year.
The combination of subdued aggregate demand, tight monetary policy, metical appreciation and improved food supply owing to the good rainy season caused inflation to ease to an unexpected low of 5.7% y/y in December 2017, from 23.7% y/y in December 2016.