The previous Monetary Policy Review (MPR), published in October 2016, welcomed an improvement in global conditions. This progress has mostly been sustained. Pessimism about world growth has faded somewhat, with themes of secular stagnation and ultra-low long term interest rates retreating in favour of reflation and a degree of optimism. In the United States (US), measures of policy uncertainty are elevated, yet volatility is unusually low while equity markets are close to record highs. Inflation is reverting to target levels following half a decade of outcomes below 2%, and employment gains remain robust. In this context, the US Federal Reserve (Fed) is moving with a new resolve towards policy normalisation. Yet the prospect of higher interest rates, which previously sent shockwaves through financial markets, now seems to be inspiring more confidence than fear. Meanwhile, policy stimulus in China appears to have stabilised growth at relatively high levels. This has allayed fears of a sharper slowdown and has breathed new life into industrial commodities.

In this environment, South Africa’s terms of trade have rebounded to a five-year high. The exchange rate has recovered some ground: 2016 was the first year this decade in which the rand was stronger in December than it had been in January. These experiences have parallels across the emerging market space, with peer countries including Brazil, Chile, Colombia and Russia all experiencing stronger capital inflows and currency appreciation. However, the rising tide is not lifting all boats. In particular, Turkey (where macroeconomic imbalances remain acute) and Mexico (which is especially vulnerable to US policy risk) stand out as exceptions to the emerging market trend.

As in 2013, investors appear to be differentiating between emerging markets based on country specific characteristics. South Africa has benefited from its improved economic fundamentals. The current account deficit is likely to reach 3.2% of GDP this year, from 5.9% in 2013, reflecting a lower external financing requirement. Fiscal consolidation has so far reduced the fiscal deficit to 3.9% of GDP in 2016/17, from 4.4% by 2018/19. Household debt stocks – which peaked at nearly 90% of disposable incomes in 2008 – are now back to 2006 levels, slightly above 70%. This suggests the hangover from the pre-crisis debt boom may at last be fading. Inflation is slowing and should be back within the target range during the second quarter of 2017. These macroeconomic improvements are complemented by other positive outcomes, ranging from normalising rainfall patterns to a sharp reduction in the number of work days lost to strikes. The combined effect is somewhat better economic prospects over the medium term, potentially reversing the trend of slower growth and rising inflation which has dogged South Africa through the post-crisis period and 2016 in particular.