Although global economic expansion retained momentum, risks to the outlook continued to build. These include the shift towards less accommodative monetary policy in developed economies, increased US trade protectionism, the trade-off between addressing financial sector risk and maintaining firm GDP growth in China, and the peaking impact of US fiscal expansion. Even in the US, where real GDP growth exceeded potential, signs of a slowdown emerged in interest-sensitive sectors.

A notable feature of developed economies was the lack of significant core inflation pressure, despite firmer wage increases amid historically low unemployment rates. Accordingly, the shift towards monetary policy “normalisation” in developed markets remained pedestrian, but persistent, as the US Federal Open Market Committee (FOMC) increased the federal funds rate three times by 25bps.

The path of interest rate hikes in the US since late 2015 has been gradual, but relentless, amounting to a cumulative increase of 2,25%. This reflects concern over possible inflation pressure due to a tight labour market, and the risks posed by apparent financial imbalances. The US FOMC softened its stance late in 2018 against the backdrop of benign inflation, indicating that future interest rate decisions would be data dependent. However, it maps a gradual interest rate hiking path through 2019 and into 2020.

Elsewhere, the European Central Bank (ECB) left its key policy interest rates unchanged but indicated that the net purchases under its asset purchase programme (APP) ended in December 2018. Even so, the Bank indicated that principal payments from maturing securities purchased under the APP will be reinvested beyond the date at which the ECB (eventually) increases interest rates.

Uncertainty surrounding the United Kingdom (UK) exit from the European Union (EU) and its likely form continued. The Bank of England, after increasing its Bank rate in mid-2018, adopted a “wait and see” approach, leaving its policy interest rate unchanged for the remainder of the year.

Looking ahead, in a relatively benign scenario an amended UK-EU Withdrawal Agreement is negotiated, which wins the support required in the UK parliament.

If so, the UK either enters into a transition phase as from 29 March 2019, or remains in the EU as the Article 50 negotiation period is extended. Failure by the UK parliament to conclude a deal with the EU would throw up the possibility of a second referendum, an early general election or, alternatively, a disorderly exit. The latter implies material downside risk to the UK economy, given a likely fall in business confidence and investment, as well as probable capital outflows.

Against the background of increasing risk-free interest rates in the US, renewed US dollar strength and concerns about the possible impact of escalating trade protectionism on future GDP and profits growth in emerging market (EM) economies, a dominant theme in 2018 was the re-pricing of risk assets. This was reflected in EM currency weakness and marked decreases in EM bond and equity prices.

The currencies of vulnerable EM economies, which depreciated sharply from mid-year, stabilised in the final quarter of 2018, partly in response to interest rate hikes in, for example, Turkey, Argentina and South Africa.

Also, the US and China agreed in December 2018 to negotiate on a number of trade-related issues, including tariff increases, which effectively amounted to a temporary ceasefire in the trade war. The risk of renewed trade hostility remained.

The South African economy disappointed with real GDP growth estimated at less than 1%. Household income and consumption growth was soft, due to a marked slowdown in compensation growth, a structurally high unemployment rate and an increasing tax burden.

In contrast, the total gross operating surplus of corporations improved to an annual increase of 7,9% in 3Q18, from a trough of 4,7% in 1Q18. At the same time, earnings of listed companies on the JSE/FTSE All Share Index advanced 14,5% in the year to end-December 2018, supported by an increase of 29,1% for companies listed on the Industrial Index. However, the FTSE/All Share Index yielded a total return of negative 8,5% in domestic currency in the year to end-December 2018. Average equity market levels in 2018 were broadly in line with 2017, placing severe pressure on growth in the Group’s assets under management and hence fund-based fee income.

Persistent weakness of the economy has its roots in structural economic deficiencies and the crowding-out effect of the government’s deteriorating fiscal position. Despite years of fiscal consolidation, the state continues to absorb a large share of the available resources in the economy, reflected in a high level of government consumption spending, an increasing tax burden and high real interest rates.

The Medium Term Budget Policy Statement, released in October 2018, suggests National Treasury’s intent to stabilise the debt ratio. However, the timeframe for fiscal consolidation was extended once again as National Treasury projected wider budget deficits over the medium term, while the level of the government’s gross loan debt continues to increase relative to GDP. Encouragingly, though, the promise of economic reform under the leadership of President Ramaphosa helped South Africa avoid further sovereign debt-rating downgrades in 2018.

Still, given constrained real economic activity, unfavourable balance of payments ratios and a lack of progress in reducing the fiscal imbalance, the South African rand was not spared the EM sell-off in 2018. The currency recorded a double-digit decline of 16% relative to the US dollar in the year to December 2018. The weakening of the rand against major currencies where Sanlam operates is depicted in the following graph:

The weaker rand had a positive impact on the RoGEV of the non-South African operations. The rand, however, strengthened initially before weakening later in the year. Movements in the average rand exchange rate were more subdued with an insignificant overall impact on Sanlam’s translated earnings.

Nonetheless, the decline in the real trade-weighted rand should improve net exports, while the collapse in oil prices in late 2018 is expected to increase South Africa’s terms of trade and support domestic purchasing power. President Ramaphosa’s “investment drive” also holds some promise, given its emphasis on cooperation between government and the private sector. However, structural economic constraints will take time to address and although an economic recovery appears to be under way, it is fragile. Accordingly, real GDP growth of less than 2% is expected in 2019.

Despite sustained rand weakness, the spike in oil prices during the first three quarters of 2018 and the 1% hike in the VAT rate in April 2018, core inflation surprised on the low side relative to expectations. This suggests companies lacked pricing power against the background of weak domestic final demand.

Subdued inflation prompted the South African Reserve Bank to cut its repurchase rate by 25bps in March 2018. However, given an increase in the annual advance in headline inflation from a trough of 3,8% in March 2018 to 5,2% in November 2018, against the backdrop of US interest rate hikes and depreciation of the rand, the Reserve Bank’s Monetary Policy Committee increased its repurchase rate by 25bps in November 2018. In an important development the Bank stressed its intention to guide inflation expectations and outcomes towards 4,5% – the middle of the inflation-target range – in the long run.

The lack of progress in fiscal consolidation maintained upward pressure on real interest rates. Domestic bond yields remained elevated, despite relatively well-behaved inflation. Concomitantly, the All Bond Index yielded a total return of 7,7% in local currency in the year to December 2018.

The increase in long-term interest rates impacted negatively on RoGEV and growth in VNB in 2018.

Real GDP growth in sub-Saharan Africa (SSA) was constrained by the under-performance of the region’s largest economies: South Africa, Nigeria and Angola. Indeed, the estimated SSA regional growth rate of 2,8% for the year masks a wide divergence in growth outcomes between individual countries. Given an expected improvement in growth in the large economies, though, average growth for the region is forecast to lift to 3,25% in 2019.

The further tightening of global financial conditions or any unexpected slowdown in China would, however, imply downside risk in the region. Numerous countries on the African continent will need to limit the potential negative impact on exports should the UK leave the EU without agreeing to new trade deals. Those trade agreements with the UK which were previously negotiated through the EU will have to be renegotiated.

At least, after running expansive fiscal policies for a number of years following the Global Financial Crisis (GFC), general government budget balances in SSA, in aggregate, stopped expanding. Countries in the region are increasingly focused on fiscal consolidation, but deficits, nonetheless, remained large in, for example, South Africa, Zambia, Ghana, Namibia, Kenya and Uganda. At the same time, the gross government debt level for the region, in aggregate, continued to increase relative to GDP.

A number of the African economies that continue to deliver high economic growth rates are to be found in East Africa. Although lending was constrained in Kenya by the retention of interest rate caps, real GDP growth remained strong, partly supported by buoyant tourism-related receipts. Growth of around 6% is forecast for 2019, similar to the estimate for 2018. Kenya has continued to run large budget and current account deficits and the country’s International Monetary Fund (IMF) stand-by credit facility, extended by six months in March 2018, was not renewed. Although a large share of Kenya’s total public debt is external debt, concessional loans remain a significant source of funding for infrastructure projects.

Real GDP growth also remained strong in Rwanda, Tanzania and Uganda. The latter runs large twin deficits and government debt is expected to continue rising. However, a significant portion of the Ugandan government’s spending reflects capital expenditure. The country is supported by multilateral organisations and it attracts a significant amount of concessional financing.

As experienced elsewhere in EM, global economic developments, including the shift towards greater US trade protectionism and US dollar strength, proved unfavourable for Africa’s financial markets, including countries where economic growth is strong. In East Africa, total equity market returns in US dollar were negative in Kenya (-13,3%) and Tanzania (-14,1%), despite their relatively stable currencies.

Angola made progress in fiscal consolidation. However, the economy contracted in 2018 and lower oil prices are likely to renew pressure on the government’s revenue receipts. Additional risk emanates from non-performing loans, which have accumulated in state-owned banks. After depreciating sharply, the Angolan kwanza remains vulnerable to fluctuating oil prices. However, access to IMF funding is supportive. Also, the nascent shift by the Banco Nacional de Angola towards a more flexible currency regime should assist the economy in adjusting to macroeconomic imbalances.

Among other oil producers on the continent, Nigeria remained lacking in structural economic reform. The country experienced persistent high inflation and soft real GDP growth. The latter was constrained by disappointing oil production. Against the backdrop of a lacklustre domestic environment, the Nigerian equity market recorded a negative total return in US dollar of 15,1% in 2018.

Following a marked improvement in response to foreign capital inflows early in 2018, Nigeria’s foreign exchange reserves declined late in the year as the country’s external accounts weakened. Nonetheless, the sovereign issued $2,86 billion in Eurobonds in November 2018, which helped to keep the Nigerian Autonomous Foreign Exchange Rate relatively stable.

On the fiscal front, Nigeria’s total government debt is low, but reflects a moderate upward trajectory. Debt servicing cost is high. Encouragingly, the government’s budget for 2019 reflects an intended fiscal consolidation. However, economic activity is undiversified and total GDP and fiscal outcomes are materially influenced by fluctuating oil prices and production levels.

In the Common Monetary Area, Namibia’s GDP growth continued to disappoint and fiscal consolidation remained inadequate, partly reflecting an excessive government wage bill. Loss-making state-owned companies imply the balance sheet of the state is deteriorating. The level of public sector debt is moderate, but has increased rapidly in recent years. The pressure emanating from these developments was alleviated by access to African Development Bank financing and an improvement in the country’s current account balance. Ultimately, though, Namibia is unlikely to endure ongoing fiscal consolidation if GDP growth does not lift, implying risk to the Namibian dollar peg to the South African rand over time. The country’s equity market recorded a negative total return of 9,9% in US dollar given the weak economic environment and depreciation of the Namibian dollar.

In West Africa, amid low inflation outcomes, growth remained strong in Côte d’Ivoire. This was supported by a high level of public sector infrastructure investment. The government is focused on improving business conditions and pursuing fiscal consolidation, although progress may be constrained by revenue-underperformance. Real GDP growth of 7% is estimated for 2018, which is also the forecast for 2019.

A number of the African economies that continue to deliver high economic growth rates are to be found in Africa.

Among the non-oil commodity producers, Botswana experienced firm economic growth despite softer mining activity, notably diamonds. Benign inflation precluded the need for monetary policy tightening, while the government’s Economic Stimulus Programme is expected to support economic activity. The country also runs a current account surplus and has a high level of foreign exchange reserves relative to imports. The large weight of the South African rand in the basket of currencies to which the pula is fixed, makes the country vulnerable to tighter global financial conditions. Looking ahead, solid real GDP growth of 4% is forecast for 2019, which follows estimated growth of more than 4% in 2018. Despite the economy’s sound performance, Botswana’s equity market recorded a negative total return of 14,1% in US dollar in 2018.

Elsewhere, Zimbabwe’s economy remained stressed following the end of former President Robert Mugabe’s rule, given severe foreign exchange shortages, liquidity constraints and inadequate economic infrastructure. Supply constraints led to a spike in inflation (an annual inflation rate of more than 40% was recorded in December 2018). A comprehensive economic reform strategy is needed, including a meaningful fiscal adjustment. In late 2018, the IMF discussed the potential for a staff-monitored programme with Zimbabwe, but this precludes an IMF financial programme, which would require the clearance of arrears with international lenders.

In Zambia an excessively loose fiscal policy prevented access to an IMF support package. Even though growth has remained relatively firm, it is insufficient to prevent a continued build-up in the country’s already high debt level. Macroeconomic risk is elevated. Accordingly, Fitch Ratings and S&P each downgraded Zambia’s long-term foreign currency debt rating by one notch to “B-” in late 2018. Assistance from the IMF is imperative, but not assured.

In North Africa, Morocco continues to address its fiscal and external imbalances, but structural economic impediments persist. A high level of imports, to a significant extent reflecting higher oil prices, placed pressure on the current account balance, while credit extension was constrained. Looking ahead, the fall in oil prices late last year, if sustained, should improve Morocco’s terms of trade and its trade balance, while supporting domestic purchasing power against a low-inflation backdrop. Firm non-agricultural GDP growth is expected in 2019, but continued economic reform is needed.

Even though its foreign exchange reserves declined in 2018, Morocco appears unlikely to make use of its IMF Precautionary and Liquidity Line, although foreign debt issues seem probable. In any event, the exchange rate peg (against a basket consisting of the euro and US dollar) was maintained through last year. Early in 2018 the fluctuation band for the dirham was widened, while the country is expected to shift towards a more flexible exchange rate regime in the medium term. Amid modest depreciation of the dirham against the US dollar, the equity index fell 9,9% in US dollar in 2018.

In India, growth remained strong in 2018, estimated at more than 7%. Risks concentrated in the bank sector came to the fore with state banks particularly exposed to non-performing loans. The country, nonetheless, implemented a new solvency and bankruptcy code, while the central bank and government recapitalised public sector banks. Ultimately, softer credit extension is likely to dampen GDP growth in 2019, but lower oil prices should support domestic purchasing power. This, in tandem with firm fixed-investment spending is expected to maintain growth at a high level in 2019. However, given lower-than-expected revenue receipts, there is risk of fiscal slippage, which is likely to be accentuated if growth disappoints.

Meanwhile, India’s equity market yielded a negative total return of 4,1% in US dollar in 2018. This, however, follows a sharp increase of 38,7% in 2017, while India’s rupee depreciated by close to 10% over the year.

In Malaysia, the equity market recorded a negative total return of 4,7% in US dollar in 2018 as supply disruptions to key exports of liquefied natural gas and palm oil weighed on exports and real GDP growth. Further, government infrastructure projects were curtailed. Temporary tax breaks, however, boosted consumer spending and private sector investment proved durable. Looking ahead, the impact of supply disruptions on exports should also fade in 2019. On balance, growth is expected to remain firm in 2019.