Research

Division

26 February 2018

Absa Research is produced by Absa Bank Limited acting through its Corporate and

Investment Bank division, which is a part of Barclays Africa Group Limited and also

affiliated with the Investment Bank of Barclays Bank PLC and its affiliates (referred to as

“Absa”).

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 7

South Africa Morning Sheet

ANC NEC meeting concludes today and could seal deal for cabinet reshuffle this

week

ANC calling for expansion of goods zero rated for VAT purposes to be expanded

The January private sector credit extension (PSCE) and February car sales data

will provide a pulse check on the consumer; we expect broadly unchanged PSCE

growth and a slower rate of contraction in car sales

The January PPI due to be published on Wednesday will contain changes to the

weights and product list of the basket

We expect a merchandise trade surplus of ZAR0.9bn and the January main

budget balance to reflect a deficit of ZAR39.3bn

The African National Congress’s National Executive Committee (NEC) is due to

conclude a two day meeting today, with a briefing scheduled for tomorrow. Now that

the 2018/19 Budget is tabled, expectations are running high that a cabinet reshuffle

will follow, with President Ramaphosa in some pressing need to appoint a Deputy

President and remove some of the ministers closely associated with allegations of state

capture or whose departments have struggled. In particular it will be interesting to see if

Ramaphosa selects ANC Deputy President David Mabuza as the state president or

instead aims for gender balance by choosing a senior ANC woman, such as Naledi

Pandor or Lindiwe Sisulu. Also of particular interest will be Ramaphosa’s decision about

whether to retain Malusi Gigaba as Finance Minister. President Ramaphosa has also

spoken about the need to shrink the bloated cabinet and government in general, but

such an approach, which would likely lead to the merging of some ministries,

would probably need to be carefully planned, thus suggesting that a broader cabinet

reshuffle and reorganisation could follow a smaller immediate one. This would give the

ANC time to reshuffle its parliamentary list to bring in new MPs, which would give

Ramaphosa a broader set of officials from which to pick his cabinet. Only two of

Ramaphosa’s cabinet picks can come from outside parliament. Two of the most

promising candidates for the Finance Minister post, Nhlanhla Nene and Mcebisi Jonas,

are currently not serving MPs. One interesting idea that is getting some airtime is

whether Ramaphosa might nominate ministers from the opposition benches, as Nelson

Mandela did, but this is less than likely, in our view, especially given that South Africa is

entering a pre-election year.

Separately, there have been some noteworthy high level deployments to the ANC

headquarters. Speaking yesterday, the ANC Secretary General, Ace Magashule, said

that the former spokesperson Zizi Kodwa, an ally of Ramaphosa, had been deployed to

the office of the ANC presidency to monitor implementation of party policy, service

delivery progress and, critically, the performance of ANC deployees. Meanwhile, Senzo

Mchunu, another Ramaphosa ally whom Magashule narrowly defeated, was deployed

Peter Worthington

+27 21 927 6525

peter.worthington@absacapital.com

Absa, South Africa

Miyelani Maluleke

+27 11 895 5655

miyelani.maluleke@absacapital.com

Absa, South Africa

www.absa.co.za

ABSA | South Africa Morning Sheet

26 February 2018 2

as the chair of the ANC’s organizing committee. Magashule also said that the ANC is

moving “with speed” on a new cabinet, but declined to give a specific time frame for any

announcement, except to say that it would be “very soon”.

Secretary General Magashule also said that the NEC had resolved that further steps

needed to be taken to protect the poor from the impact of the 1 percentage point VAT

hike in the 2018 Budget. He said that the NEC had discussed whether or not the number of

zero-rated goods needed to be expanded. Currently, 19 basic foodstuffs and fuel are zero-

rated for VAT purposes. We think the National Treasury will not be enthusiastic about

increasing the number of goods that are VAT-free, because it is an imprecise way to protect

the poor. Currently, for example, fruit is zero rated for VAT purposes, but fruit is

predominantly consumed by higher-income households.

Attention will also refocus on regular data flow, with a flurry of key releases scheduled

for the week ahead. The January private sector credit extension due out on Wednesday and

February car sales data due on Thursday will provide a pulse check on the consumer. In

explaining an upward revision to its GDP growth forecast by 0.4pp to 1.5% for 2018, the

National Treasury last week argued that more favourable credit conditions and a confidence

boost would key in supporting stronger household consumption growth this year. In the

PSCE data, household lending growth has been relatively subdued across most major

categories of credit except instalment sales credit, which improved steadily over the course

of 2017 to 5.2% y/y by December from 0.7% y/y at the start of the year and 1.8% by mid-

year. That said, there is little evidence in the National Credit Regulator or Experian credit

data of increasing consumer debt strain. We expect overall PSCE, which includes corporate

sector credit extension, to have remained broadly unchanged at 6.6% y/y in January.

Meanwhile, after improving for most of H2 2017, car sales collapsed in December and

January but these data tend to be volatile around this period and we expect some

normalisation to about -2.6% y/y in February, compared with the 8.8% y/y fall in January.

Despite recent political developments, which may be positive for confidence, consumers

could remain in a defensive mindset, particularly with the tax hikes announced in the

Budget.

Stats SA is due to publish the January PPI data on Wednesday with an updated product

list and new weights. Since it revamped the index in 2013, the statistics office has been

updating industry weights annually on the basis of estimates from the national accounts

data. A total of 47 unmentioned products will fall out of the PPI while 49 new ones will be

added. As a result of this and the weight update, the ‘food products, beverages and tobacco

products’ category grows to be 34.77% of the basket from 33.72% previously. Our forecast,

based on the old weights is for PPI inflation to remain unchanged at 5.2% y/y (consensus:

5.1%) but the updating of the basket could affect the headline print.

South Africa’s ‘twin deficits’ will also come into focus this week with the release of the

January merchandise trade balance and main budget data on Wednesday at 14:00. An

improvement in the terms of trade and import compression have driven a strong

improvement in South Africa’s merchandise trade balance with December 2017 printing the

second highest surplus (ZAR15.7bn) since the start of the restated trade in 2010. The

January trade data usually show a large deficit, partly due to seasonal factors. However, in

light of the recent momentum, we forecast a small surplus of ZAR0.9bn. In the January main

budget data, we expect a deficit of ZAR39.3bn broadly in line with the provisional financing

data published early this month. In tabling a smaller projected revenue shortfall for FY

17/18 of ZAR48.2bn (compared to ZAR50.6bn in the MTBPS) last week, the Treasury

would have factored this data in. Therefore, the data are likely to reflect an improvement in

the gross tax revenue run rate.

ABSA | South Africa Morning Sheet

26 February 2018 3

FIGURE 1

Calendar

Time Country Event Period Consensus Absa Prior Prior-1

28-Feb 08:00 SA Money Supply M3, % y/y Jan 6.5 -- 6.4 6.6

08:00 SA Private Sector Credit, % y/y Jan 6.7 6.6 6.7 6.5

11:30 SA PPI, % y/y Jan 5.1 -- 5.2 5.1

11:30 SA PPI, % m/m Jan 0.3 -- 0.6 0.5

14:00 SA Monthly budget balance, ZAR bn Jan -- -39.3 13.2 -15.3

14:00 SA Trade balance, ZAR bn Jan -1.6 0.9 15.7 13.1

01-mar 11:00 SA Absa Manufacturing PMI, index Feb -- -- 49.9 44.9

- SA Naamsa vehicle sales, % y/y Feb -- -2.6 -8.8 -2.4

Source: Bloomberg, Absa Research

FIGURE 1

Review of last week’s key domestic data releases

Main indicators Period Survey Actual Prior Comments

Leading Indicator index Dec -- 104.6 A 105.2 R

Decline mainly due to a deceleration in the 12-month

percentage change in number of passenger cars sold

and lower hours worked in the manufacturing sector.

CPI, % y/y Jan 4.4 4.4 A 4.7

We expect the cyclical low point to come in February at

3.9% y/y after which a gradual increase is likely as

favourable base effects on food price inflation fade.

Core CPI, % y/y Jan 4.2 4.1 A 4.2

Softer-than-expected core CPI print likely reflects the

effects of subdued domestic demand and the recent

strength in the exchange rate.

Source: Bloomberg, Absa Research

ABSA | South Africa Morning Sheet

26 February 2018 4

FIGURE 3

Rand price of oil

FIGURE 4

SA petrol price movements, as of 22 Feb 2018

Source: Thomson Reuters, Absa Research Source: CEF, Absa Research

FIGURE 5

Agriculture futures prices

FIGURE 6

ZAR performance

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

Source: Thomson Reuters, Absa Research

500

550

600

650

700

750

800

850

900

950

1,000

Feb-17 May-17 Aug-17 Nov-17 Feb-18

ZAR/bbl Petrol 95

unleaded

Petrol 93

unleaded

Diesel

0.05%

Diesel

0.005%

Pump price (c/l) 1,412 1,419 1,257 1,259

Basic fuel price (c/l) 581 567 599 603

Daily over/(under)

recovery (c/l)41 43 47 45

Avg. over/(under)

recovery (c/l)35 38 47 45

o/w due to int'l price 18 21 29 27

o/w due to FX rate 17 17 17 17

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

recovery in Feb will trim 0.14pp from the CPI.

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

3,400

3,600

3,800

4,000

4,200

4,400

4,600

4,800

Aug-17 Oct-17 Dec-17 Feb-18

R/mtR/mt Wheat (LHS)

White maize (RHS)

Yellow maize (RHS)

11.5

12

12.5

13

13.5

14

14.5

15

50

52

54

56

58

60

62

64

66

68

70

Feb-17 May-17 Aug-17 Nov-17 Feb-18

IndexNEER (LHS) USD/ZAR (RHS)

ABSA | South Africa Morning Sheet

26 February 2018 5

FIGURE 7

Absa exchange rate forecasts (end of period)

NEER USDZAR EURZAR CNYZAR ZARJPY GBPZAR AUDZAR

Monthly

Feb-18 60.71 13.05 15.96 2.04 8.49 18.02 10.20

Mar-18 57.62 13.80 16.84 2.14 8.08 19.04 10.76

Apr-18 57.30 13.86 16.96 2.15 8.06 19.18 10.87

May-18 57.14 13.89 17.03 2.15 8.05 19.25 10.92

Jun-18 56.82 13.95 17.15 2.16 8.03 19.39 11.02

Jul-18 56.64 13.97 17.24 2.17 7.99 19.47 11.09

Aug-18 56.54 13.98 17.28 2.17 7.97 19.51 11.13

Sep-18 56.36 14.00 17.36 2.17 7.93 19.60 11.20

Oct-18 56.11 14.04 17.47 2.18 7.88 19.66 11.23

Nov-18 55.99 14.06 17.52 2.18 7.85 19.68 11.25

Dec-18 0.00 14.10 17.63 2.19 7.80 19.74 11.28

Quarterly

Mar-18 57.62 13.80 16.84 2.14 8.08 19.04 10.76

Jun-18 56.82 13.95 17.15 2.16 8.03 19.39 11.02

Sep-18 56.36 14.00 17.36 2.17 7.93 19.60 11.20

Dec-18 55.75 14.10 17.63 2.19 7.80 19.74 11.28

Mar-19 54.89 14.30 17.88 2.23 7.69 20.08 11.52

Jun-19 54.64 14.40 17.95 2.23 7.66 20.17 11.59

Sep-19 54.43 14.45 18.01 2.24 7.63 20.25 11.65

Dec-19 53.71 14.50 18.27 2.28 7.52 20.59 11.89

Mar-20 53.12 14.75 18.50 2.29 7.39 20.85 11.86

Jun-20 52.94 14.86 18.56 2.29 7.35 20.91 11.85

Sep-20 52.80 14.90 18.62 2.29 7.32 20.98 11.85

Dec-20 52.35 14.96 18.85 2.30 7.19 21.24 11.82

Annual

Dec-18 55.75 14.10 17.63 2.19 7.80 19.74 11.28

Dec-19 53.71 14.50 18.27 2.28 7.52 20.59 11.89

Dec-20 52.35 14.96 18.85 2.30 7.19 21.24 11.82

Dec-21 50.45 15.43 19.75 2.38 6.97 21.61 12.35

Dec-22 49.01 16.00 20.00 2.46 6.88 23.84 12.32

Source: Bloomberg, Absa Research

ABSA | South Africa Morning Sheet

26 February 2018 6

FIGURE 8

Absa exchange rate forecast (period average)

USDZAR EURZAR CNYZAR ZARJPY GBPZAR AUDZAR

Monthly

Feb-18 12.87 15.96 2.04 8.49 18.02 10.20

Mar-18 13.43 16.40 2.09 8.28 18.53 10.48

Apr-18 13.83 16.90 2.14 8.07 19.11 10.81

May-18 13.87 16.99 2.15 8.06 19.21 10.89

Jun-18 13.92 17.09 2.16 8.04 19.32 10.97

Jul-18 13.96 17.20 2.16 8.01 19.43 11.05

Aug-18 13.97 17.26 2.17 7.98 19.49 11.11

Sep-18 13.99 17.32 2.17 7.95 19.56 11.16

Oct-18 14.02 17.41 2.17 7.90 19.63 11.22

Nov-18 14.05 17.49 2.18 7.86 19.67 11.24

Dec-18 14.08 17.57 2.18 7.83 19.71 11.26

Quarterly

Mar-18 12.87 15.74 2.01 8.59 17.76 10.05

Jun-18 13.87 16.99 2.15 8.06 19.21 10.89

Sep-18 13.97 17.26 2.17 7.98 19.49 11.11

Dec-18 14.05 17.49 2.18 7.86 19.67 11.24

Mar-19 14.20 17.75 2.21 7.74 19.91 11.40

Jun-19 14.35 17.92 2.23 7.67 20.12 11.55

Sep-19 14.43 17.98 2.24 7.65 20.21 11.62

Dec-19 14.48 18.14 2.26 7.57 20.42 11.77

Mar-20 14.63 18.39 2.29 7.45 20.72 11.88

Jun-20 14.80 18.53 2.29 7.37 20.88 11.86

Sep-20 14.88 18.59 2.29 7.34 20.95 11.85

Dec-20 14.93 18.73 2.30 7.25 21.11 11.83

Annual

Dec-18 13.24 16.24 2.04 8.42 18.23 10.47

Dec-19 14.30 17.95 2.23 7.66 20.17 11.59

Dec-20 14.73 18.56 2.29 7.35 20.91 11.85

Dec-21 15.19 19.30 2.34 7.08 21.42 12.08

Dec-22 15.72 19.88 2.42 6.92 22.72 12.33

Source: Bloomberg, Absa Research

ABSA | South Africa Morning Sheet

26 February 2018 7

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-17 100.6 6.6 100.3 5.5 101.6 11.4 55.4 752

Feb-17 101.7 6.3 101.4 5.2 102.3 9.9 56.0 740

Mar-17 102.3 6.1 102.1 4.9 102.8 8.7 52.6 680

Apr-17 102.4 5.3 102.3 4.8 102.8 6.7 53.8 725

May-17 102.7 5.4 102.4 4.8 103.3 6.9 51.4 682

Jun-17 102.9 5.1 102.8 4.8 103.3 6.9 47.6 614

Jul-17 103.2 4.6 103.3 4.7 103.6 6.8 49.1 646

Aug-17 103.3 4.8 103.4 4.6 103.4 5.7 51.9 687

Sep-17 103.8 5.1 103.8 4.6 103.3 5.5 55.5 729

Oct-17 104.1 4.8 103.9 4.5 104.0 5.3 57.6 789

Nov-17 104.2 4.6 103.9 4.4 104.4 5.2 62.7 884

Dec-17 104.7 4.7 104.2 4.2 104.8 4.8 64.4 846

Jan-18 105.0 4.4 104.4 4.1 106.2 4.5 62.7 796

Feb-18F 105.7 3.9 105.5 4.0 106.4 4.0 60.3 791

Mar-18F 106.7 4.3 106.6 4.4 107.1 4.1 58.0 784

Apr-18F 107.1 4.6 106.9 4.5 107.5 4.6 57.3 793

May-18F 107.4 4.6 107.1 4.6 108.1 4.6 56.7 786

Jun-18F 107.7 4.7 107.6 4.6 108.0 4.5 56.0 779

Jul-18F 108.4 5.1 108.1 4.7 108.2 4.4 56.5 789

Aug-18F 108.7 5.2 108.4 4.8 108.5 5.0 57.0 796

Sep-18F 109.1 5.1 108.8 4.8 109.0 5.5 57.5 804

Oct-18F 109.4 5.1 109.0 4.9 109.9 5.7 57.7 808

Nov-18F 109.6 5.2 109.1 5.0 110.4 5.8 57.8 813

Dec-18F 109.9 5.0 109.4 5.0 110.5 5.4 58.0 816

Jan-19F 110.5 5.3 109.9 5.2 112.1 5.5 59.0 835

Feb-19F 111.4 5.4 111.0 5.2 112.3 5.5 60.0 853

Mar-19F 112.5 5.5 112.2 5.2 113.0 5.5 61.0 872

Apr-19F 113.0 5.4 112.5 5.2 113.5 5.5 61.2 878

May-19F 113.2 5.4 112.7 5.2 114.1 5.5 61.5 884

Jun-19F 113.6 5.5 113.2 5.2 113.9 5.5 61.8 890

Jul-19F 114.4 5.5 113.8 5.2 114.2 5.5 62.0 894

Aug-19F 114.7 5.5 114.0 5.2 114.6 5.5 62.2 898

Sep-19F 115.1 5.5 114.5 5.2 115.0 5.5 62.4 902

Oct-19F 115.5 5.5 114.7 5.2 116.0 5.5 62.6 905

Nov-19F 115.7 5.5 114.8 5.2 116.5 5.5 62.7 908

Dec-19F 115.9 5.5 115.1 5.2 116.6 5.5 62.8 911

Quarterly averages

Q1 17 101.5 6.3 101.3 5.2 102.2 10.0 54.7 724

Q2 17 102.7 5.3 102.5 4.8 103.1 6.9 50.9 674

Q3 17F 103.4 4.8 103.5 4.6 103.4 6.0 52.2 687

Q4 17F 104.3 4.7 104.0 4.4 104.4 5.1 61.6 840

Q1 18F 105.8 4.2 105.5 4.2 106.6 4.2 60.3 791

Q2 18F 107.4 4.6 107.2 4.6 107.9 4.6 56.7 786

Q3 18F 108.7 5.1 108.4 4.8 108.6 5.0 57.0 796

Q4 18F 109.7 5.1 109.2 5.0 110.3 5.6 57.8 812

Q1 19F 111.5 5.4 111.0 5.2 112.5 5.5 60.0 853

Q2 19F 113.3 5.4 112.8 5.2 113.8 5.5 61.5 884

Q3 19F 114.8 5.5 114.1 5.2 114.6 5.5 62.2 898

Q4 19F 115.7 5.5 114.9 5.2 116.4 5.5 62.7 908

Annual averages

2013 82.9 5.8 83.5 5.2 77.3 5.7 108.7 1051

2014 88.0 6.1 88.1 5.6 83.1 7.6 99.8 1080

2015 92.0 4.6 93.0 5.5 87.4 5.1 52.7 666

2016 97.8 6.3 98.2 5.6 96.6 10.5 44.2 646

2017F 103.0 5.3 102.8 4.7 103.3 6.9 54.8 731

2018F 107.9 4.8 107.6 4.6 108.3 4.9 58.0 796

2019F 113.8 5.5 113.2 5.2 114.3 5.5 61.6 886

Note: * Crude oil price assumptions embedded into our inflation forecasts are based on Bloomberg consensus forecasts for Brent. Source: Absa Research, Bloomberg

ABSA | South Africa Morning Sheet

26 February 2018 8

FIGURE 10

Main macroeconomic variables in South Africa

2017 2018 2019

2016 2017F 2018F 2019F 2020F 2021F Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Output (% q/q saar)

Real GDP 2.0 1.5 1.1 1.0 1.2 1.2 1.7 2.1 2.5 2.6 0.3 0.9 1.4 1.7 1.9 1.9

Real GDP (%y/y) 1.0 1.4 1.8 1.4 1.2 1.1 1.3 1.6 1.9 2.2 0.3 0.9 1.4 1.7 1.9 1.9

Private consumption 2.6 0.8 0.8 0.8 0.9 1.1 1.2 2.5 2.7 3.2 0.8 1.3 1.3 1.7 2.0 1.9

Public consumption -0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 2.0 0.3 0.4 0.5 0.5 0.5

Investment 4.3 -0.1 0.9 1.5 1.8 2.1 2.5 3.3 3.4 4.5 -3.9 0.2 1.3 2.7 3.2 3.3

Exports -10.3 3.8 3.4 2.7 4.3 1.9 2.4 1.2 1.9 0.4 -0.1 0.8 2.2 2.1 1.7 1.8

Imports -13.7 3.2 2.2 2.4 3.8 2.4 1.4 2.2 1.9 1.5 -3.7 1.9 1.1 2.2 2.1 1.9

Prices (% y/y)

CPI inflation 4.8 4.7 4.2 4.6 5.1 5.1 5.4 5.4 5.5 5.5 6.3 5.3 4.8 5.5 5.5 5.7

Core CPI inflation 4.6 4.4 4.2 4.6 4.8 5.0 5.2 5.2 5.2 5.2 5.6 4.7 4.6 5.2 5.4 5.6

PPI inflation 4.3 4.9 4.9 5.0 5.2 5.0 4.6 5.3 5.2 5.2 7.1 4.8 5.0 5.1 5.4 5.1

External and government accounts (% of GDP)

Current account -2.3 -1.4 -2.1 -2.2 -2.2 -2.6 -2.8 -2.8 -2.8 -3.1 -3.3 -2.0 -2.3 -2.9 -3.3 -3.7

Consolidated fiscal balance* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a -3.3 -4.3 -3.3 -3.2 -3.0 -2.9

Consolidated primary balance* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 0.0 -0.8 0.4 0.6 0.9 1.0

Government debt* n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 50.7 54.2 56.4 57.5 58.5 59.4

Interest rates (% eop)

Repurchase rate 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75 7.00 6.75 6.75 6.75 6.75 6.75

Prime rate 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.25 10.50 10.25 10.25 10.25 10.25 10.25

Note:*For fiscal year commencing 1 April.

Source: SARB, National Treasury, Stats SA, Thomson Reuters, Absa 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

indirectly related to the specific recommendations or views expressed in this research report.

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