Emerging Markets Research

EEMEA

20 July 2017

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 7

South Africa Morning Sheet

Although there is more uncertainty about the MPC’s stance than usual, we expect

it to leave rates unchanged. However, we expect the vote split or text of the

statement to turn more dovish

At Eskom’s release of its annual financials yesterday, the market’s focus on

governance issues overshadowed a reasonable set of numbers, in our view

Headline CPI inflation eases in June on lower fuel prices

May retail sales provide a welcome upside surprise

Fitch releases analysis that suggests the government’s Inclusive Growth Action

Plan, released last week, is unlikely to change South Africa’s growth trajectory;

we agree

The SARB MPC is due to announce its decision on rates today at 15:00 SA time. We

note a higher level of uncertainty than usual about the MPC’s likely stance, given the

sharp contraction in Q1 GDP growth and the recent deceleration in core CPI inflation.

Nonetheless, we side with the majority of economists (24 out of 27 polled by Reuters)

in forecasting that the SARB will likely stay on hold at 7%. However, we note that recent

activity indicators (May prints for mining and manufacturing output and for retail sales)

have all been much stronger than expected, offering reassurance that overall GDP

growth in Q2 will be positive; in fact, we see considerable upside risk to our forecast of

0.6% q/q saar. Although they are not usually a focus of the market, today’s wholesale

sales and motor vehicle trade data also may be scrutinized by the MPC for their

messages about consumption demand. Although we expect the MPC to stay on hold,

we would not be at all surprised to see a more divided vote, say 4:2, instead of the 5:1

vote that prevailed at the two previous meetings, and we would be surprised if the

statement does not sound more dovish than previously.

Yesterday Eskom SOC Holdings (Eskom) released its annual financial statements for

the year to March 2017. A focus on governance issues given the reported irregularities

highlighted by external auditors overshadowed the numbers, in our view. Liquid assets

were reported at ZAR32.5bn down from FY 16’s ZAR38.7bn, but debt service cover

(1.37x) and gross debt/EBITDA ratios (10.8x) showed improvement. Management also

confirmed that no covenants on loans have been breached and that Eskom has not

applied for any additional government guarantees (or other bailouts). There was no

further information on what Finance Minister Gigaba meant when he said he was

examining further soft support for Eskom as part of the growth action plan. Questions

during the Q&A focused on the irregularities. Acting CEO, Johnny Dladla, confirmed that

the board is pursuing disciplinary action against former acting CEO Matshela Koko.

Questions were also raised regarding a payment to Trillian, a subcontractor to

consulting firm McKinsey and Co (which has currently been suspended by Eskom).

June CPI headline inflation fell to 5.1% y/y from 5.4% in May. This was in line with

our forecast but a touch above consensus of 5.2%. Core inflation was unchanged at

4.8% y/y, which was also in line with our forecast and marginally higher than the

median consensus forecast of 4.7%. Food price inflation also was unchanged, leaving

Peter Worthington

+27 21 927 6525

peter.worthington@barclays.com

Absa, South Africa

Miyelani Maluleke

+27 11 895 5655

miyelani.maluleke@barclays.com

Absa, South Africa

http://cib.absa.co.za

Barclays | South Africa Morning Sheet

20 July 2017 2

Barclays | South Africa Morning Sheet

20 July 2017 3

all of the easing in headline CPI to come from lower fuel prices. Fuel prices fell 1.8% m/m

during June on lower crude oil prices and a firmer ZAR. Combined with favorable base

effects, this pushed fuel price inflation to just 2.0% y/y (May: 8.0%), subtracting 0.3pp from

headline inflation. Food price inflation was stable at 6.9% y/y, as higher meat price inflation

offset a generalized slowdown across the rest of the food basket. Although June is a high

survey month that includes housing, there were no major surprises across the rest of the

basket, as reflected by the stable core. We have adjusted our near-term Brent crude oil

assumption to reflect the latest consensus, which sees the prices at USD56/bbl by year-end

and at USD59/bbl at the end of 2018. On food, we think the lower crop prices and favorable

base effects could dominate rising meat price inflation and we still expect an easing to 3.2%

in Q1 18. Meanwhile, we expect core to fall slightly and track around 4.7% over the coming

months before easing further to 4.5% by year-end. Against this, we expect headline CPI

inflation will bounce higher from August but continue its broad trend downwards, reaching

4.6% y/y by year-end and reaching a low point of 4.3% in February 2018.

The May retail sales data had some strong upside surprises. Seasonally adjusted retail

sales rose by 0.9% m/m during May, delivering y/y growth of 1.7%. This was well ahead

of consensus (-0.5% y/y) and our relatively more pessimistic forecast (-1.5%). The strength

in the May data is even more significant given that the April data were revised higher to

show an increase of 2.0% y/y (previous: +1.5%). Following the surprisingly sharp

contraction in retail sales during Q1, the latest data are a welcome sign that a strong

rebound is likely in Q2. The data add further material upside risk to our Q2 GDP forecast of

0.6% q/q saar. More significantly, ahead of today’s rate decision, the data would have been

a further welcome signal to the MPC that the surprise GDP contraction in Q1 is likely to be

short lived; see South Africa: A welcome upside surprise in May retail sales , 19 July 2017.

Fitch today published its analysis of Treasury’s action plan for inclusive growth,

published on 19 July. Consistent with our own analysis (see South Africa Morning Sheet, 14

July for more details), Fitch is doubtful that the plan will do much to boost growth, since

much of the plan is simply previously announced measures or business as usual. Fitch

welcomed the introduction of deadlines for the measures, though it noted that many of

them were quite tight and not all of them were likely to be met. Fitch also noted that the

need to reform state-owned enterprises was imperative, but difficult to achieve. Fitch said

that weak growth remained a key risk to its BB+ sovereign rating on South Africa (Stable

Outlook), which it reaffirmed in June. On balance we think the rating agencies will wait to

see the results of the ANC’s December electoral conference before deciding on any further

rating changes, but we would not be surprised if Fitch changes its outlook to Negative

before then, if growth continues to disappoint, fiscal consolidation slides markedly or state-

owned enterprises manifest further needs for bailouts.

Barclays | South Africa Morning Sheet

20 July 2017 4

FIGURE 1

Calendar

Time Country Event Period Consensus Barclays Prior Prior-1

19-Jul 10:00 SA CPI, % y/y Jun 5.2 5.1 A 5.4 5.3

10:00 SA CPI, % m/m Jun 0.2 0.2 A 0.3 0.1

10:00 SA Core CPI, % y/y Jun 4.7 4.8 A 4.8 4.8

10:00 SA Core CPI, % m/m Jun 0.2 0.4 A 0.1 0.2

13:00 SA Retail Sales constant, % y/y May -0.3 1.7 A 2.0 R 0.9

13:00 SA Retail Sales constant, % m/m, sa May 0.2 0.9 A 0.7 0.4

20-Jul SA SARB Repo rate, % Jul-20 7.00 7.00 7.00 7.00

Source: Bloomberg, Barclays Research

FIGURE 2

Review of last few weeks’ key domestic data releases

Main indicators Period Survey Actual Prior Comments

South Africa: Manufacturing production,

% y/y May -2.5 -0.8 A -4.2 R

South Africa: Manufacturing production,

% m/m, sa May 0.5 -0.3 A 2.3

South Africa: Mining production, % y/y May 2.2 3.6 A 1.6 R

South Africa: Mining output, % m/m sa May 1.0 -0.2 A -1.4 R

Source: Statistics South Africa, Bloomberg, Barclays Research

Note: In the Period Column F indicates “final”. In the Prior column, an R signals “revised” while a P signals “preliminary”

Barclays | South Africa Morning Sheet

20 July 2017 5

FIGURE 3

Rand price of oil

FIGURE 4

SA petrol price movements, as of 18 July 2017

Source: Thomson Reuters, Barclays Research Source: CEF, Barclays Research

FIGURE 5

Agriculture futures prices

FIGURE 6

ZAR performance

Source: SAFEX, Thomson Reuters, Barclays Research Note: Rise/fall in Nominal effective exchange rate implies ZAR app/depreciation.

Source: Thomson Reuters

400

450

500

550

600

650

700

750

800

850ZAR/bbl Petrol 95

unleaded

Petrol 93

unleaded

Diesel

0.05%

Diesel

0.005%

Pump price (c/l) 1,286 1,263 1,097 1,102

Basic fuel price (c/l) 527 510 512 518

Daily over/(under)

recovery (c/l)-22 -19 -27 -28

Avg. over/(under)

recovery (c/l)-10 -7 -21 -23

o/w due to int'l price 4 7 -7 -8

o/w due to FX rate -15 -14 -14 -15

A petrol price move that fully reflects the month-to-date over/under

recovery in July will add 0.04pp to the CPI.

1,500

2,000

2,500

3,000

3,500

4,000

3,700

3,900

4,100

4,300

4,500

4,700

Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17

R/mtR/mt Wheat (LHS)

White maize (RHS)

Yellow maize (RHS)

12

12.5

13

13.5

14

14.5

15

50

52

54

56

58

60

62

64

66

68

70

Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

IndexNEER (LHS) USD/ZAR (RHS)

Barclays | South Africa Morning Sheet

20 July 2017 6

FIGURE 7

Barclays exchange rate forecasts (end of period)

USDZAR EURZAR CNYZAR ZARJPY GBPZAR

Monthly

Dec-16 13.74 14.45 1.96 8.53 16.94

Jan-17 13.48 14.55 1.96 8.37 16.95

Feb-17 13.13 13.88 1.91 8.59 16.25

Mar-17 13.41 14.30 1.95 8.30 16.84

Apr-17 13.37 14.56 1.94 8.34 17.32

May-17 13.12 14.71 1.92 8.47 16.87

Jun-17 13.07 14.94 1.93 8.58 17.03

Jul-17 F 13.31 14.98 1.96 8.31 17.73

Aug-17 F 13.43 14.99 1.98 8.18 18.08

Sep-17 F 13.66 15.03 2.01 7.90 18.79

Oct-17 F 13.73 15.10 2.02 7.81 19.12

Nov-17 F 13.76 15.14 2.02 7.76 19.29

Dec-17 F 13.83 15.21 2.03 7.66 19.63

Jan-18 F 13.96 15.13 2.05 7.59 19.34

Feb-18 F 14.03 15.09 2.06 7.56 19.20

Mar-18 F 14.17 15.01 2.08 7.48 18.92

Apr-18 F 14.28 15.49 2.10 7.31 20.03

May-18 F 14.34 15.73 2.11 7.22 20.59

Jun-18 F 14.46 16.20 2.13 7.05 21.71

Jul-18 F 14.63 16.45 2.15 6.95 22.21

Aug-18 F 14.72 16.57 2.16 6.89 22.46

Sep-18 F 14.88 16.82 2.19 6.79 22.96

Oct-18 F 15.10 17.13 2.22 6.66 23.55

Nov-18 F 15.21 17.28 2.24 6.60 23.85

Dec-18 F 15.43 17.59 2.27 6.48 24.45

Quarterly

Q4 16 13.74 14.45 1.96 8.53 16.94

Q1 17 F 13.41 14.30 1.95 8.30 16.84

Q2 17 F 13.07 14.94 1.93 8.58 17.03

Q3 17 F 13.66 15.03 2.01 7.90 18.79

Q4 17 F 13.83 15.21 2.03 7.66 19.63

Q1 18 F 14.17 15.01 2.08 7.48 18.92

Q2 18 F 14.46 16.20 2.13 7.05 21.71

Q3 18 F 14.88 16.82 2.19 6.79 22.96

Q4 18 F 15.43 17.59 2.27 6.48 24.45

Q1 19 F 16.12 18.54 2.37 6.14 26.15

Q2 19 F 16.71 19.38 2.46 5.87 27.71

Q3 19 F 16.96 19.81 2.51 5.73 28.72

Q4 19 F 17.28 20.21 2.56 5.61 29.41

Q1 20 F 17.55 20.57 2.60 5.51 30.04

Q2 20 F 17.72 20.91 2.64 5.42 30.95

Q3 20 F 17.67 20.99 2.64 5.41 31.40

Q4 20 F 18.02 21.45 2.69 5.30 32.17

Annual

2016 13.74 14.45 1.96 8.53 16.94

2017 F 13.83 15.21 2.03 7.66 19.63

2018 F 15.43 17.59 2.27 6.48 24.45

2019 F 17.28 20.21 2.56 5.61 29.41

2020 F 18.02 21.45 2.69 5.30 32.17

2021 F 19.01 23.01 2.84 5.00 35.20

Source: Bloomberg, Barclays Research

Barclays | South Africa Morning Sheet

20 July 2017 7

FIGURE 8

Main macroeconomic variables in South Africa

2016 2017 2018

2015 2016 2017F 2018F 2019F 2020F Q3 Q4 Q1 Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Output (% q/q saar)

Real GDP 0.4 -0.3 -0.7 0.6 0.5 0.8 1.2 1.4 1.6 2.0 1.3 0.3 0.3 1.2 1.8 2.0

Real GDP (%y/y) 0.6 0.4 0.6 0.0 0.0 0.3 0.8 1.0 1.3 1.6 1.3 0.3 0.3 1.2 1.8 2.0

Private consumption 2.2 2.2 -2.3 1.0 1.1 1.6 1.0 1.0 1.0 1.0 1.7 0.8 0.6 1.1 1.7 1.9

Public consumption 1.9 0.3 -1.0 2.8 1.9 0.1 1.0 1.0 1.0 1.0 0.5 2.0 1.0 1.1 1.0 1.0

Investment -3.5 1.7 1.0 -4.3 -0.8 0.5 1.4 1.6 1.7 2.0 2.3 -3.9 -1.0 0.7 2.3 2.8

Exports -21.2 12.5 -3.2 5.6 0.5 1.1 1.3 2.0 2.1 3.4 3.9 -0.1 0.5 1.8 2.1 2.2

Imports -1.0 6.1 3.2 4.6 1.9 1.9 1.5 1.5 0.7 1.1 5.4 -3.7 2.4 1.7 1.9 2.3

Prices (% y/y)

CPI inflation 6.0 6.6 6.3 5.3 5.1 5.0 4.7 5.2 5.7 5.8 4.6 6.3 5.4 5.3 5.6 5.5

Core CPI inflation 5.7 5.7 5.2 4.9 4.8 4.7 4.8 5.2 5.3 5.4 5.5 5.6 4.9 5.3 5.4 5.4

PPI inflation 7.1 6.9 5.5 4.8 4.6 4.4 4.3 4.4 4.8 5.3 3.6 7.1 4.8 4.7 4.9 4.7

External and government accounts (% of GDP)

Current account -3.8 -1.7 -2.1 -2.6 -2.9 -3.1 -3.3 -3.4 -3.4 -3.4 -4.4 -3.3 -2.7 -3.4 -3.6 -3.6

Consolidated fiscal balance* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a -3.4 -3.3 -3.5 -3.1 -2.9 -2.6

Consolidated primary balance* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a -0.1 0.2 0.1 0.7 0.9 12

Government debt* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 49.0 51.0 53.1 55.1 55.0 54.6

Interest rates (% eop)

Repurchase rate 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 6.25 7.00 7.00 7.00 7.00 7.00

Prime rate 10.50 10.50 10.50 10.50 10.50 10.50 10.50 10.50 10.50 10.50 9.75 10.50 10.50 10.50 10.50 10.50

Note:*For fiscal year commencing 1 April.

Source: SARB, National Treasury, Stats SA, Thomson Reuters, Barclays Research

Barclays | South Africa Morning Sheet

20 July 2017 8

FIGURE 9

Detailed CPI inflation forecasts

Date CPI index CPI % y/y Core CPI index Core CPI % y/y Food CPI index Food CPI % y/y Brent, $/bbl* Brent R/bbl

Jan-16 94.4 6.2 95.1 5.5 91.2 6.9 31 502

Feb-16 95.7 7.0 96.4 5.7 93.1 8.6 32 508

Mar-16 96.4 6.3 97.3 5.4 94.6 9.5 38 590

Apr-16 97.2 6.2 97.6 5.5 96.3 10.9 42 608

May-16 97.4 6.2 97.7 5.4 96.6 10.5 47 716

Jun-16 97.9 6.3 98.1 5.5 96.6 10.9 48 728

Jul-16 98.7 6.0 98.7 5.7 97.0 11.2 45 656

Aug-16 98.6 5.9 98.9 5.8 97.8 11.3 47 644

Sep-16 98.8 6.1 99.2 5.5 97.9 11.3 48 669

Oct-16 99.3 6.4 99.4 5.6 98.8 11.8 51 717

Nov-16 99.6 6.6 99.5 5.6 99.2 11.5 47 656

Dec-16 100.0 6.7 100.0 5.9 100.0 11.7 55 761

Jan-17 100.6 6.6 100.3 5.5 101.6 11.4 55 752

Feb-17 101.7 6.3 101.4 5.2 102.3 9.9 56 740

Mar-17 102.3 6.1 102.1 4.9 102.8 8.7 53 680

Apr-17 102.4 5.3 102.3 4.8 102.8 6.7 54 724

May-17 102.7 5.4 102.4 4.8 103.3 6.9 51 699

Jun-17F 102.9 5.1 102.9 4.8 103.0 6.6 53 729

Jul-17F 103.1 4.5 103.4 4.7 102.9 6.1 55 752

Aug-17F 103.7 5.2 103.6 4.7 102.9 5.3 56 765

Sep-17F 104.1 5.4 104.0 4.8 103.0 5.2 57 778

Oct-17F 104.3 5.1 104.2 4.8 103.5 4.8 58 789

Nov-17F 104.5 4.9 104.3 4.8 103.6 4.5 58 801

Dec-17F 104.7 4.7 104.5 4.5 103.3 3.3 58 812

Jan-18F 105.3 4.6 104.9 4.6 104.8 3.1 58 821

Feb-18F 106.1 4.3 106.0 4.5 105.0 2.6 59 833

Mar-18F 107.2 4.8 107.2 5.0 105.6 2.7 59 846

Apr-18F 107.6 5.1 107.5 5.1 106.1 3.2 60 863

May-18F 107.9 5.1 107.7 5.2 106.7 3.2 60 875

Jun-18F 108.3 5.2 108.2 5.2 106.6 3.5 61 885

Jul-18F 109.3 6.0 108.8 5.3 106.8 3.8 60 888

Aug-18F 109.6 5.6 109.1 5.3 107.3 4.2 60 897

Sep-18F 110.1 5.7 109.6 5.3 107.8 4.6 60 906

Oct-18F 110.4 5.8 109.8 5.4 108.8 5.1 60 913

Nov-18F 110.6 5.9 109.9 5.4 109.3 5.5 60 927

Dec-18F 110.9 6.0 110.2 5.5 109.4 5.9 61 946

Quarterly averages

Q1 16

6.5

5.6

8.4

Q2 16

6.2

5.5

10.8

Q3 16

6.0 5.7 11.3

Q4 16

6.6 5.7 11.7

Q1 17

6.3 5.2 10.0

Q2 17F

5.3 4.8 6.8

Q3 17F

5.0 4.8 5.5

Q4 17F

4.9 4.7 4.2

Q1 18F

4.6 4.7 2.8

Q2 18F

5.1 5.2 3.3

Q3 18F

5.8 5.3 4.2

Q4 18F

5.9 5.4 5.5

Annual averages

2012

5.6

4.6

7.1

2013

5.8

5.2

5.7

2014

6.1

5.6

7.6

2015

4.6

5.5

5.1

2016

6.3 5.6 10.5

2017F

5.4 4.9 6.6

2018F

5.4 5.2 4.0

Note: *Forecasts are based on the futures curve of Brent crude oil. Source: Stats SA, Barclays Research

Analyst Certification

We, Miyelani Maluleke and Peter Worthington, hereby certify (1) that the views expressed in this research report accurately reflect our personal views

about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or

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