Nedbank says the operating environment in the first four months of 2023 ended up being far more challenging than the group initially expected at the start of the year.

In a voluntary trading update, the bank said that domestic economic activity continues to be hampered by severe electricity shortages, logistical constraints, higher-than-expected inflation and high-interest rates, and weaker global activity and lower international commodity prices.

Moreover, the nation’s slow progress in fighting corruption and the potentially disastrous economic consequences of the United States’ reaction to South Africa compromising its non-aligned stance regarding Russia’s war in Ukraine have added to the country’s risk premium.

Bond yields increased sharply, and the rand hit a record low against the dollar as a result.

“Global liquidity has deteriorated, resulting in much tighter financial conditions with US regional banks suffering particular challenges. This global slowdown is also weighing on economic activity and risk appetite in emerging and developing countries,” the bank added.

Due to the economic challenges facing the country, the Nedbank Group Economic Unit has revised its South African growth forecast for 2023 downwards from 0.7% (February 2023) to 0.2%.

Nedbank’s GDP growth forecast is now lower than the SARB’s 0.3% prediction.

“Energy and logistical constraints remain binding on South Africa’s growth outlook, limiting economic activity and increasing costs. We estimate load shedding alone to deduct two percentage points from growth this year,” said SARB governor Lesetja Kganyago

Other economic indicators 

In addition, the cost implications of load shedding and a weaker rand have seen its inflation forecast also increase, rising from 5.5% (February 2023) to 6.0%.

Due to higher-than-expected inflation, the relative weakness of the rand, and the tightening of foreign monetary policy, the SARB’s Monetary Policy Committee increased the repo rate by 50 basis points in May 2023.

However, the Nedbank GEU now said it expects the prime lending rate to remain flat for the rest of 2023 at 11.75%, with a slow decline in 2024.

It added that the prime interest rate is 75 basis points higher than the 11,0% peak expected at the start of 2023, with the bank saying there is still an upside risk given the rand’s continued weakness.

The bank said that the difficult macroeconomic outcome would lead to higher levels of consumer stress and increase its credit losses, which will likely be offset to some extent by higher levels of endowment income.

Although the economic benefit of increased endowment income is currently greater than the increase in impairments, the bank warned that it would likely reverse if interest rates are further increased.

SOURCE:2023 has been worse for South Africa than expected: economists (businesstech.co.za)