“Every trajectory decays, if we wait long enough, and the average of all trajectories always wins, if we average over enough trajectories. Imagine an economy where income behaves in this way. GDP would grow but practically everyone’s income would decline.”
A great video and illustration of mathematical fact initially seeming pointless, that eventually connect and become useful later on. Things have continuity, such as a compounding of factors that arise from policy, momentum and leverage in any system.
The system orchestrated by the South African GNU (Government National Unity) is currently hanging by a thread, and if the coalition collapses, we might see USDZAR flirting with the 20 mark. This shock would worsen the inflation outlook, but the SARB would probably just sit back and watch the chaos unfold without tightening.
“Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US Tariffs, with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response…our model projected the Rand depreciating to nearly 21 Rand to the USD, with domestic inflation reaching 5%, and the policy rate, 1/2 percentage points higher at its peak relative to baseline forecasts” – Governor Lesetja Kganyago delivers the MPC statement on 30 January 2025.
The situation is particularly dire as the ANC (African National Congress) and DA (Democratic Alliance) haven’t reached a fiscal agreement – this relationship between the ANC and DA is often marked by tension and rivalry. The ANC’s move to seek support from non-GNU parties to bypass the DA further erodes the partnership, following a series of decisions that left the DA out in the cold. In this note, we aim to answer two questions: (1) what happens to the exchange rate and inflation outlook if the coalition collapses? and (2) how would the SARB react?
Our short-term FX models suggest that USDZAR is trading at a relatively modest premium, +2.2% above the average of such models, which is less than one standard deviation (4.3%). If the coalition collapses, we believe that (1) variables linked to South African risk would deteriorate, causing the models to drift higher, and (2) the USDZAR premium relative to such models is likely to widen to extreme levels (2 standard deviations). These observations suggest that USDZAR could approach 20.0 if the coalition were to collapse.
Figure 1: USDZAR: Spot versus Model
Source: Bevon Thomas, Bloomberg
Figure 2: USDZAR: Spot Deviation from Model Av. (%)
“For now, inflation appears contained…” – Governor Lesetja Kganyago delivers the MPC statement on 20 March 2025
This sort of an FX-move towards 20 is likely to be accompanied by a rise in inflation expectations. Contrary to the containment comment made by Governer Kganyago, our inflation forecasting model indicates that if USDZAR stays at 18.6, inflation would probably accelerate and stabilize around 4.0% – below the SARB’s midpoint target (4.5%). A weaker FX and higher inflation expectations would push inflation to 4.4% YoY in 4Q25/1Q26, aligning with the SARB’s more hawkish estimate.
Figure 3: South Africa: Headline Inflation – %YoY
Source: Bevon Thomas, Bloomberg
Given the policy rate remains restrictive at this level, we believe the resulting inflation path wouldn’t necessitate interest rate hikes. In the event of such a shock, we expect the SARB to signal that the easing cycle is over, essentially saying, “Good luck, everyone!”
Disclaimer: This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed to be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.
This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed o be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.
Risk Perspective March/2025: What if the Coalition Collapses?
Here is a short and crisp video from Ole on the subject of Ergodicity, “Random multiplicative dynamics”, from 2021.
Random multiplicative dynamics — Ole Peters
“Every trajectory decays, if we wait long enough, and the average of all trajectories always wins, if we average over enough trajectories. Imagine an economy where income behaves in this way. GDP would grow but practically everyone’s income would decline.”
A great video and illustration of mathematical fact initially seeming pointless, that eventually connect and become useful later on. Things have continuity, such as a compounding of factors that arise from policy, momentum and leverage in any system.
The system orchestrated by the South African GNU (Government National Unity) is currently hanging by a thread, and if the coalition collapses, we might see USDZAR flirting with the 20 mark. This shock would worsen the inflation outlook, but the SARB would probably just sit back and watch the chaos unfold without tightening.
SARB MPC Press Conference, 30 January 2025
“Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US Tariffs, with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response…our model projected the Rand depreciating to nearly 21 Rand to the USD, with domestic inflation reaching 5%, and the policy rate, 1/2 percentage points higher at its peak relative to baseline forecasts” – Governor Lesetja Kganyago delivers the MPC statement on 30 January 2025.
The situation is particularly dire as the ANC (African National Congress) and DA (Democratic Alliance) haven’t reached a fiscal agreement – this relationship between the ANC and DA is often marked by tension and rivalry. The ANC’s move to seek support from non-GNU parties to bypass the DA further erodes the partnership, following a series of decisions that left the DA out in the cold. In this note, we aim to answer two questions: (1) what happens to the exchange rate and inflation outlook if the coalition collapses? and (2) how would the SARB react?
Our short-term FX models suggest that USDZAR is trading at a relatively modest premium, +2.2% above the average of such models, which is less than one standard deviation (4.3%). If the coalition collapses, we believe that (1) variables linked to South African risk would deteriorate, causing the models to drift higher, and (2) the USDZAR premium relative to such models is likely to widen to extreme levels (2 standard deviations). These observations suggest that USDZAR could approach 20.0 if the coalition were to collapse.
Figure 1: USDZAR: Spot versus Model
Source: Bevon Thomas, Bloomberg
Figure 2: USDZAR: Spot Deviation from Model Av. (%)
Source: Bevon Thomas, Bloomberg
SARB MPC Press Conference, 20 March 2025
“For now, inflation appears contained…” – Governor Lesetja Kganyago delivers the MPC statement on 20 March 2025
This sort of an FX-move towards 20 is likely to be accompanied by a rise in inflation expectations. Contrary to the containment comment made by Governer Kganyago, our inflation forecasting model indicates that if USDZAR stays at 18.6, inflation would probably accelerate and stabilize around 4.0% – below the SARB’s midpoint target (4.5%). A weaker FX and higher inflation expectations would push inflation to 4.4% YoY in 4Q25/1Q26, aligning with the SARB’s more hawkish estimate.
Figure 3: South Africa: Headline Inflation – %YoY
Source: Bevon Thomas, Bloomberg
Given the policy rate remains restrictive at this level, we believe the resulting inflation path wouldn’t necessitate interest rate hikes. In the event of such a shock, we expect the SARB to signal that the easing cycle is over, essentially saying, “Good luck, everyone!”
Disclaimer: This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed to be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.
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This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed o be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.