💹 Major Currency Snapshot:
USDZAR: 19.78
EURZAR: 21.83
GBPZAR: 25.25
Introduction:
Significant economic and political developments, both domestically in South Africa and internationally. In South Africa, the adoption of a new fiscal framework including a VAT increase has been met with legal challenges and has strained the recently formed Government of National Unity. Simultaneously, the global economic landscape is being shaped by the United States’ implementation of new tariffs, impacting international trade and potentially leading to wider economic consequences, including for South Africa.
Key takeaways from sources:
- Globally, there is increasing concern over the economic impact of the United States’ newly implemented tariffs. Investors are showing signs of unease by selling off U.S. Treasuries, traditionally safe assets, and moving towards cash, reminiscent of the early days of the COVID-19 pandemic. This selling pressure is fueled by fears that President Trump’s tariffs will be severe enough to cause a recession, potentially forcing the Federal Reserve to cut interest rates. Deutsche Bank suggests this could signify a broader loss of investor confidence in U.S. assets, marking a significant shift in the global financial system, with simultaneous drops in U.S. equities, the dollar, and the bond market. Consequently, the U.S. dollar has fallen, even against traditional safe-haven currencies like the Swiss franc, as investors seek alternatives like gold.
- The U.S. tariff actions have triggered retaliatory measures from other major economies and raise the risk of a global recession. China and the European Union have announced new tariffs on U.S. goods. Analysts at JPMorgan believe that the rapid increase in U.S. tariffs on China represents a substantial tax hike on U.S. households and businesses and could be disruptive enough to cause a global recession. The historical perspective from economist Thomas Sowell highlights the dangers of tariff increases, noting that they historically lead to further retaliation and can cause devastating worldwide trade wars, potentially hindering economic growth. He even suggests that the Great Depression was primarily caused by the Smoot-Hawley Tariffs.
- South Africa faces economic headwinds due to the U.S. tariffs and domestic political instability within the Government of National Unity (GNU). The South African rand has fallen to an all-time low, partly due to concerns about the U.S. trade war and the potential collapse of the GNU. While many of South Africa’s key exports to the U.S. are exempt from the tariffs, the overall effective tariff increase is still significant and is expected to lead to a decrease in exports. This could lead to downward revisions in South Africa’s GDP forecast for 2025.
- The GNU in South Africa is facing internal challenges due to strong disagreements over the national budget and a VAT increase. The Democratic Alliance (DA), a key member of the GNU, voted against the budget and has launched legal action to challenge the “fundamentally flawed” adoption of the fiscal framework and to interdict the implementation of the 0.5% VAT increase. The EFF has also joined this legal challenge. The DA argues that the budget needs to be renegotiated with their terms to kickstart economic growth and job creation and that they cannot support measures that could lead the country to bankruptcy. Helen Zille, the DA Federal Council Chairperson, has warned that if President Ramaphosa reshuffles the Cabinet and removes DA ministers due to this opposition, it would signify the end of the GNU. Despite the ANC’s National Working Committee deciding to maintain its working relationship with the DA for now, investors remain concerned about the coalition’s stability.
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Sources referenced:
South African rand hits record low on new tariffs and coalition risk | Reuters
Zille warns Ramaphosa: Removing DA Ministers would end GNU
How the DA and EFF plan to fight the VAT hike and Budget process in court
Painful decision of 1920s repeated – Daily Investor
From worst-case scenario to worst-case reality – BusinessTech
Treasuries, dollar fall as trade war drives recession fears; US stocks up | Reuters