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We talk Rand keeping cool, investors optimistic about SA’s long term view, VAT reversal and the tradeoff thereof.

💹 Major Currency Snapshot:

USDZAR: 18.57
EURZAR: 21.14
GBPZAR: 24.89

Introduction:

Insights into private equity investment priorities and challenges across Africa, notably in South Africa, Kenya, Egypt, and Nigeria, alongside the significant hurdle of exchange rate volatility. They then shift focus to the turbulent landscape of global markets under US trade policies, detailing how tariffs and their associated uncertainties impacted supply chains, venture capital flows, and currency valuations. Finally, the sources delve into a specific domestic policy event in South Africa: the reversal of a proposed VAT increase, examining its reception within the agricultural industry, potential effects on consumers and zero-rated goods, and its connection to broader concerns about revenue and spending.

Key takeaways from sources:

Private Equity in Africa: Private equity investors view South Africa and Kenya as the top investment destinations over the next three years. Egypt and Nigeria were also named as preferred choices by about 50% of respondents. However, investors face significant challenges, with exchange rate volatility being the top concern for 84% of respondents. The “America-first investment approach” and its potential impact on foreign investments by US investors was the second concern, cited by 59%. This context coincides with a drop in venture-capital funding for African startups, which fell 22% to $3.6 billion last year. Key priority sectors for GPs in Africa over the next three years are expected to be energy, healthcare, and consumer goods, reflecting strategic shifts driven by global trends and local market dynamics.
Global Markets and US Tariffs: US President Donald Trump’s administration’s tariff policies created turbulence in global markets. Announcements of tariffs on goods entering the US, initially targeting most countries, and specifically on foreign auto parts, along with preventing tariffs from stacking up on other duties, were made. The administration signaled a softening of some tariffs, particularly on auto parts for domestically manufactured cars, following pressure and lobbying from automakers. This decision was framed as a victory for the president’s trade policy by rewarding domestic manufacturing. The US had previously exempted auto parts from tariffs until May 3rd, indicating a desire to help car companies shift parts production domestically. Trump also reportedly exempted electronic products from tariffs after sell-offs in Apple’s stock. Despite these signals of de-escalation, conflicting signals remained, particularly regarding trade talks with China. US Treasury Secretary Scott Bessent stated it was “up to China to de-escalate” tariffs. China has reportedly made some exemptions but held off on stimulus. These uncertainties led to concerns about permanent damage to supply chains, with a noted significant slump in China shipments to the US.
Impact on Currencies and Assets: The uncertainty and signals regarding trade policy affected currency markets. The dollar initially edged higher, but despite some tariff rollbacks, it only managed to stabilise, without a big rebound. The dollar fell sharply against safe-haven currencies like the Japanese yen and Swiss franc. The euro saw significant monthly gains against the dollar, with investors reportedly fleeing US assets for alternatives in Europe. However, later reports indicated the euro weakened against the dollar during one Asian session as risk-off sentiment faded amid signs of trade de-escalation, also pressuring the Swiss franc and gold. Sterling remained near a three-year top against the dollar. Gold price fell, and Brent crude oil was weaker. Markets were bracing for US economic data, including GDP and jobs figures, which could indicate the impact of the trade war, with some analysts expecting further deterioration in US economic data.
South African VAT Reversal: South Africa’s Finance Minister reversed a proposed 0.5 percentage point increase in the Value-Added Tax (VAT), which was originally planned for implementation within days. This reversal was met with mixed reactions from the agricultural industry. For small-scale farmers not VAT-registered, the increase would have meant absorbing higher input costs, and its reversal is positive. Commercial farmers, being VAT-registered, were less concerned about the direct impact as it’s a pass-through cost. However, many welcomed the scrapping as a burden reduction for consumers, noting that prices for all VAT-rated products and services would have increased. A significant concern highlighted was the late timing of the reversal, causing wasted expenses for businesses that prepared for the increase. While seen as a victory by some, others argue it doesn’t solve deeper issues like structural reform and private sector suffocation. A controversial consequence of not increasing VAT was the withdrawal of measures to cushion lower-income households, specifically the decision not to include certain items like offal and tinned vegetables in the list of VAT zero-rated goods. Critics argue this forces poor people to pay more for food, a “shocking way” to recoup lost revenue. There was also a long-standing campaign to remove VAT from chicken portions consumed by low-income households. Some are concerned the VAT reversal may lead to deeper spending cuts elsewhere, potentially harming grant recipients and public services. Domestically, the rand strengthened following the VAT reversal, and the JSE indices closed higher.

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Sources referenced:

Share This PFS Market Sentiment Update