Capricorn Asset Management - Economic Update May 2024

The current macroeconomic and investment landscape can be typified by a sense of relief, albeit primarily therein that things have not worsened. The following factors contribute to this developing sense of relief:

• The ongoing military conflicts have not escalated into nuclear exchanges even though the humanitarian tragedies remain shocking.
• The USA economy is doing well with real growth of about 3% and inflation of more or less 3%.
• China is muddling through its crises without serious contagion to the rest of the world.
• Europe appears to be improving gradually, while the European Central Bank (ECB) is on the brink of lowering interest rates.
• African leaders are showing a sense of resolve to improve things on the continent.
• Prompted by ongoing polls, analysts and commentators are becoming more hopeful that the upcoming SA elections will not result in economic disaster.
• The Namibian economy is on the right track, being pulled along by several encouraging projects and plans in the mining and energy domains.
• Stock markets are making new highs.
• Copper and gold prices are up, and oil is down.

The outlook is for positive growth in most key economies, although for Developed Markets (DM’s) at +1.7% it’s not all that great, with the exception of the USA (+2.7%). Emerging Markets (EM’s) at +4.2% are showing better growth prospects, including BRICS with Brazil (+2.2%), Russia (+3.2%) India (+6.8%) and China (+4.2%), but barely positive growth in the RSA. The International Monetary Fund (IMF), World Bank and the Organisation for Economic Co-operation and Development (OECD) have all sounded off on global growth expectations of 2.5% to 3.5%. “Goldilocks” is alive and well in the USA. However, it bears repeating that forward looking indicators are troubling, such as the composite leading indicator and the inverted yield curve. There are pockets of the economy that are flashing red, such as the commercial real estate market, which bears a close watch. Yet, the labour market remains tight with strong wages growth and very low unemployment.

The Namibian economy is set to grow at a robust rate of 4% plus for several years, including in 2024. There seems to be two phases facing the economy:

1. A period of “influx” of capital, human and otherwise, which could take three to five years, perhaps until the end of the decade, followed by
2. A serious “boom” period when the megaprojects start to produce green hydrogen, oil and gas. This will put the economy on a totally different footing with numerous possible impacts, ranging from growth, inflation, income and fiscal-, monetary- and exchange rate policy. SA continues to flirt with a contraction in economic activity, but the leading indicator is signaling a possible bottom. The World Economic Outlook (WEO) of the IMF continues to indicate below average growth in Botswana for several years due to a not-so-rosy global diamond market.

DM inflation is expected to reach 2%, on average, starting in 2025. In our view, USA inflation will drift down to 2% only by the middle of next year. USA inflation measures have, generally, become stuck somewhat with Consumer Price Inflation (CPI) at 3.5% yoy, the Personal Consumption Expenditure (PCE) deflator at 2.5% yoy and Producer Price Index (PPI) at 2.1% yoy. Chinese inflation is expected to behave much like that of the DM’s over the next several years. In fact, currently, China is flirting with deflation with PPI at -2.8% yoy and CPI at 0.1% yoy. European, UK and German inflation down-trends have cemented the view that the European Central Bank (ECB) will likely lower rates in June.

Inflation in Namibia ticked up to 4.8% in April from 4.5% in March, mainly due to a fuel price hike of about 5% in the month. We anticipate that inflation will remain at or just below 5% for several months, before drifting down to below 4.0% by year-end 2024, followed by a gradual uptrend to 5% by year-end 2025. In SA, inflation registered at 5.2% in April in line with our expectations. It should remain around 5%+ for the next several months, after which it should resume its downward trend to around 4% by year-end. In Botswana, inflation reached 2.9% in March. We anticipate a rising trend to mid-2024, but it should also be below 4% by year-end. Risks to inflation remain OPEC (oil), El Nino (food), Russia/Middle East (oil and food) and souring EM sentiment (currency). Recent weakness in oil, combined with currency strength augurs well for CPI.

Copper continues to give a positive signal on global demand – it is up 19% ytd and 23% yoy. Oil in NAD terms is now up “only” 7% ytd, having fallen by 6% in the first two weeks of May. Therefore, the “catch up” adjustments in fuel prices that we foresee, should not be as severe as previously feared. Nevertheless, energy remains a dark horse and a volatility driver in the inflation picture, although oil and gas are still significantly lower than their eyewatering peaks of 2022. Global and domestic grains (maize and wheat) prices have spiked recently, seemingly succumbing to El Nino fears. These trends bear watching, because, if maintained, it will show up in food inflation down the line. The spike in the gold price can largely be attributed to buying out of China, both by retail investors and the central bank, the PBoC.

The ZAR (NAD) currency is fairly firm so far this year, depreciating by “only” 2.5% ytd versus the USD. We anticipate that it ought to remain firm from here, perhaps continuing post-elections. Our targets are for USDZAR at 19.00 and 19.20, and EURZAR at 20.70 and 21.90 at ye 2023 and 2024, respectively. The USD is behaving much like we anticipated at the outset of the year, benefiting from safe haven demand, economic outperformance, capital inflows, and favourable anticipated interest rate differentials, appreciating by 3.4% versus the euro ytd.

It is difficult to see a catalyst for credit demand growth in Namibia while interest rates remain as high as they are. Mortgages (of firms and households) constitute 50% of the “book”. Therefore, total Private Sector Credit (PSCE) is likely to grow only if and when the property market swings up. Credit demand in SA and Namibia remains weak, with PSCE at 5.2% and 2.0% yoy, respectively, while in Botswana it is relatively strong at 12% yoy. Money supply growth rates are running at 6.8%, 10.3%, and 8.6%, for the three geographies, respectively.

In many spheres, economic growth is crucial, not least of which for fiscal health, amply demonstrated by the “daylight” between the fiscal trajectories of SA and Namibia being played out, finding expression in discounts of some bond yields compared to SA benchmarks. In SA, a negative fiscal spiral is looming, some would even say a shortterm debt trap. The interest bill, Eskom, Transnet, local authorities and now the NHI, are problematic, aside from immense pressure to increased social spending. Debt-to-GDP ratios are diverging. For Namibia, Botswana and SA, by next year, these ratios are expected to be 57%, 19% and 75%, respectively. Regardless, creditworthiness needs to be higher on the agenda of the MoF, in our view. Globally, the lack of fiscal manoeuvrability and high indebtedness remain a big concern.

As we said previously, the South African Reserve Bank (SARB) does not necessarily have to wait for the Fed before it acts and the Bank of Namibia (BoN) does not necessarily have to wait for the SARB, but they probably will. We anticipate the earliest cut by the Fed in July. If so, the SARB will hold in May and July and cut in September. The SARB Governor’s aim for the early introduction of the new, lower, midpoint inflation target of 3.5% is complicating matters. Nevertheless, BoN is likely to cut in October. Along with higher for longer, one could term the outlook “later and shallower”.

Elections and wars still hold sway this year with global leaders taking pot-shots (real and imagined) at each other for (political) gain, which could be seen with Biden’s latest tariff hikes on Chinese goods. Nevertheless, it is still likely that conventional economic policy responses will assist the global economy to navigate through the worst of it.