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We talk Arno’ Rand report, VAT hike officially off the table, inflation lows, China ready for talks with US

💹 Major Currency Snapshot:

USDZAR: 18.45
EURZAR: 20.88
GBPZAR: 24.54

Introduction:

Recent sources highlight the volatile state of the South African Rand, which has reached historic lows against the US dollar amid global trade tensions and domestic political challenges, particularly regarding fiscal policy within the Government of National Unity. Despite a surprising drop in inflation, downgraded economic growth forecasts and concerns about mounting debt pose significant risks to the economy and public finances. The government is working on a revised budget framework following a decision to abandon a proposed VAT increase, aiming to stabilize debt but facing pressure to find alternative funding or spending cuts.

Key takeaways from sources:

The South African Rand has experienced significant volatility, reaching historic lows against the US dollar (touching 19.9328 in early April 2025) before recovering slightly by mid-April. This depreciation is attributed to a “triple whammy” of factors: its use as a liquid emerging market currency, falling commodity prices, and domestic political instability. Global trade tensions, such as US tariff threats, have also influenced the Rand’s performance.
South Africa’s economic growth forecasts for 2025 have been downgraded, with median estimates now around 1.5% and some as low as 1%. There is a warning that achieving the government’s forecast of 1.9% growth is crucial but unlikely based on other estimates, which could lead to lower-than-anticipated revenue collection and a larger budget deficit.
Surprisingly, inflation has dropped substantially, with annual consumer price inflation falling to 2.7% in March 2025, below the South African Reserve Bank’s target range and marking the lowest level since June 2020. This decline is partly due to softening fuel prices and more moderate increases in education fees and food prices. Core inflation has also decreased.
Despite the low inflation, the South African Reserve Bank is expected to maintain a cautious stance on interest rates, likely pausing cuts through much of 2025 (potentially until November) due to elevated global uncertainties, despite the Quarterly Projection Model suggesting room for a cut. This represents a shift from earlier expectations of significant easing. The surprisingly low inflation could eventually create space for monetary easing if it persists, but this must be balanced against currency stability concerns.
The Government of National Unity (GNU) has faced tensions over fiscal policy, particularly the proposed increase in Value Added Tax (VAT), which faced opposition and legal challenges. The decision to abandon the proposed VAT increase has provided clarity and highlights the lessons being learned in coalition politics, potentially improving political stability and investor confidence in the near term. The survival of the GNU is considered crucial for South Africa’s reputation as a trading partner and investment destination.
South Africa faces a serious fiscal challenge with mounting debt, which has risen significantly and is projected to peak at 76.2% of GDP this year, or potentially closer to 95% when including state-owned enterprises and local authorities. Debt service costs are high, consuming about 22 cents of every rand of tax collected.
The cancellation of the proposed VAT increase has created a significant funding gap (R75 billion over three years), putting pressure on the Treasury to maintain its fiscal consolidation targets, which include narrowing the budget deficit and stabilizing debt. The Treasury is working on a revised budget framework to address this, involving revised economic assumptions, fiscal projections, and borrowing strategies. Addressing the funding gap may require spending cuts or additional revenue measures like a fuel levy hike.
Without the expected higher economic growth, the budget deficit will be larger, requiring more borrowing and further increasing debt. There is a warning that failure to address the unsustainable debt burden could lead to a financial disaster, including a collapse in the bond market, significant weakening of the Rand, turmoil in financial markets affecting banks, insurance, and equity prices, potentially forcing the SARB to hike rates due to inflation from a weaker currency, and leading to a deep recession.
A revised budget speech is scheduled for May 21st, following the VAT reversal and the court challenge. The revised budget process will involve formal consultations with various bodies and political parties within the GNU.
Globally, the US dollar has strengthened recently amid signs of progress in trade talks with some partners and better-than-expected data. There are signals from both the US and China that discussions over tariffs may occur, indicating a potential de-escalation in trade tensions, although Beijing is still evaluating the offer and expects Washington to show sincerity.
For investors and businesses, the South African economic landscape presents a mixed picture with low inflation but downgraded growth and high uncertainty driven by political developments, trade policies, and global risk sentiment. Adaptability and close monitoring are crucial.

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Sources referenced:

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