SA Market Drivers - 25 October 2024

Inflation cools further, making a November rate cut a near certainty

South Africa's inflation rate eased to 3.8% in September, down from 4.4% in August, aligning with economists’ forecasts. This marks the first time inflation has fallen below 4% since early 2021 and is the second consecutive month it has remained under the 4.5% midpoint target set by the Reserve Bank. With inflation cooling, there’s optimism for a potential 25 basis point rate cut at the Monetary Policy Committee's meeting on 21 November, which would reduce the prime rate to 7.75%. Cheaper fuel was a major contributor to the decline, with petrol and diesel prices at their lowest since 2023, driven by weaker global demand. Transport costs entered deflationary territory for the first time in 13 months, falling from 2.8% in August to -1.1% in September. Additionally, softer inflation rates were recorded for items like hot beverages, meat, and bread, though products such as tomatoes, eggs, and coffee still show high annual increases.

IMF boosts SA's growth forecast

The IMF has raised its growth forecast for South Africa, now expecting 1.1% in 2023 and 1.5% in 2025. This upgrade reflects improvements in power supply and optimism around the new government. The IMF has advised South Africa to remain data-driven with monetary policy, considering rate cuts only after inflation is sustainably lower. For the final quarter of 2024, the growth estimate has also been raised to 1.7%, a positive shift from previous, more cautious projections. Globally, inflation is expected to ease to 4.3% by 2025, though overall growth remains "stable yet underwhelming" amid risks from trade protectionism, regional conflicts, and supply chain disruptions. The IMF upgraded U.S. growth to 2.8% but lowered projections for Germany and China, warning of potential global impacts from China’s real estate sector struggles. Sub-Saharan Africa’s growth outlook for 2023 is 3.6%, with Kenya, Senegal, and Ivory Coast leading the region’s expansion.

X-energy gets R5.3bn Amazon backing for small nuclear development

X-energy, aiming to build South Africa's first privately funded small modular reactor (SMR), has secured a $300 million investment from Amazon to power data centers with clean energy. Amazon plans to help develop 4,500MW of SMR capacity, potentially scaling reactor production like airplane engines. For South Africa, X-energy’s SMRs are promising, leveraging the country's skilled nuclear workforce and established regulatory framework. With a completed feasibility study, X-energy now seeks government collaboration on a development plan. Minister of Electricity Kgosientsho Ramokgopa is visiting X-energy’s US facility to explore opportunities, supporting South Africa's science-driven nuclear expansion goals.

SA makes significant strides toward greylisting exit, but hurdles remain

South Africa is making strong progress toward exiting the Financial Action Task Force (FATF) grey list, having addressed 16 of 22 action items in its plan. During the October 2024 FATF Plenary in Paris, nine items were upgraded, with eight marked as "largely addressed" and one as "partly addressed," reflecting improvements in anti-money laundering, counter-terrorism financing, and enforcement measures. However, six key issues remain, including the need for stronger investigations and prosecutions for complex financial crimes and ensuring accurate beneficial ownership records for companies and trusts. National Treasury, working with an interdepartmental committee, has urged companies to meet the beneficial ownership registration deadline of November 2024. If all outstanding items are resolved by February 2025, an on-site assessment could allow South Africa to exit the grey list by June; otherwise, the timeline may extend to October 2025. Exiting the grey list would greatly enhance South Africa’s global financial standing, restoring investor confidence and easing transaction processes by removing heightened compliance requirements. This change would make South Africa more attractive for foreign investment and trade, reduce transaction costs, and strengthen economic growth by affirming its commitment to financial integrity and alignment with international standards.

Insights and analysis by Cameron Hewson, CFA

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