Morgan Stanley economist Andrea Masia is concerned about South Africa's growth profile in the near term, describing it as uneven and susceptible to downside risks. This sentiment is influenced by a challenging global backdrop, including the Iran war which has led to a surge in oil prices, higher inflation, and a more hawkish South African Reserve Bank. These factors have clouded the short-term outlook, even though Morgan Stanley maintains a positive view on South African assets in the medium term, citing fading geopolitical headwinds and potential credit-rating upgrades.
Masia's concerns are reiterated in the bank's third-quarter macro outlook, highlighting that the current energy-price shock and its associated impacts are hindering immediate economic acceleration. While Morgan Stanley anticipates a rate hike of 25 basis points by the central bank in July, reaching a peak of 7.25%, there's an acknowledgment of credible arguments for a pause in rate increases due to moderating energy prices and inflation nearing an expected peak of around 4.8% in June. The bank also projects a reduction in interest rates to 6.25% by the end of 2027, which would improve financial conditions.
Despite the immediate growth concerns, Morgan Stanley is optimistic about South Africa's domestic bond market, expecting improved public finances and higher commodity prices to reduce the nation's risk premium. This, along with stabilizing government debt, could lead to further credit-rating upgrades. The bank foresees economic expansion of 1.2% this year and 1.6% in 2027, driven by fading energy price shocks, lower inflation, central bank rate cuts, and improved electricity supply. However, the report cautions that this growth is unlikely to put South Africa on a significantly faster long-term growth path, with potential growth capped at about 1.4% due to weak investment and an unwillingness to be a long-term bull on corporate earnings.
