Introduction:

The global economic landscape in May 2025 is facing significant uncertainty and instability, largely driven by U.S. trade policies and concerns regarding the U.S. dollar. Amidst this, South Africa is grappling with considerable domestic political turmoil and a deteriorating economic outlook, yet the rand has demonstrated surprising resilience against the dollar. Upcoming events, including the critical meeting between President Ramaphosa and President Trump and the presentation of the third budget for 2025, are poised to significantly influence the rand’s trajectory and the country’s economic future.

Key takeaways from sources:

South Africa faces significant domestic challenges despite surprising rand strength: South Africa is experiencing considerable domestic political instability, with the Government of National Unity (GNU) described as having “toppled over and is lying face down in the dirt”. There are significant disagreements between governing parties, particularly regarding the Employment Equity Amendment Act and the SANDF deployment in the DRC. The country’s underlying economic outlook is also grim, with the IMF, Moody’s, and the Bureau for Economic Research at Stellenbosch University all slashing their growth forecasts for 2025, now expecting growth closer to 1% to 1.5% compared to the initial 3.3% government target. However, despite this negative backdrop, the South African Rand has shown surprising resilience and has strengthened considerably against the US dollar.
Global factors, especially US Dollar weakness, are key drivers of rand strength: The rand’s resilience is largely attributed to external factors. Global investor confidence in the US economy has been shaken by President Trump’s “chaotic and aggressive approach”, including his “reciprocal tariffs”. The US dollar, typically seen as a safe haven, has been hit hard as investors moved money out of dollar-denominated assets. The US dollar index has tumbled significantly from its January highs. This weakness is also linked to concerns about the ballooning US fiscal debt and growing interest costs. Moody’s recently stripped US debt of its AAA rating due to large annual fiscal deficits and growing interest costs, further contributing to the dollar’s sell-off.
Carry trades, SARB credibility, and high commodity prices also support the rand: Beyond the weak dollar, the rand has benefited from carry trades, where speculators borrow in currencies with low interest rates and invest in higher-yielding ones like the rand. The international financial community has confidence in the South African Reserve Bank (SARB) due to its demonstrated independence and competence in navigating crises, contributing to the rand’s standing. Furthermore, South Africa’s healthy trade balance, driven by historically high prices for commodities like gold, coal, and platinum, boosted by strong Asian demand, is significantly contributing to export revenue and supporting the currency.
Upcoming events are critical for the rand and South Africa’s future: Wednesday, May 21, 2025, is identified as a potentially pivotal day. Key events scheduled include the meeting between President Ramaphosa and President Trump in Washington, the tabling of the third version of South Africa’s Budget for 2025 (Budget 3.0), and the release of domestic inflation and retail sales figures.
The Ramaphosa-Trump meeting is crucial for US-South Africa relations and trade: The meeting is considered highly significant due to strained diplomatic relations and the critical importance of South Africa’s access to US markets. South Africa holds a nearly 100% positive trade balance with the US. A major concern is the potential non-renewal or premature termination of the Africa Growth and Opportunity Act (Agoa), which is set to expire in September 2025. Experts estimate that losing Agoa access could result in a loss of $3.567 billion in annual exports, particularly in the automobile and agricultural sectors, potentially reducing GDP by approximately 0.3%. The meeting is seen as an opportunity for dialogue, but tensions persist over issues like the US accepting Afrikaners as refugees and South Africa’s stance on geopolitical matters.
Budget 3.0 is expected to be difficult with spending cuts and specific tax changes: The third budget is anticipated to feature significant spending cuts, reportedly around R60 billion. The government is expected to avoid increasing debt levels. While the controversial VAT increase is not expected to be reintroduced after being rejected by GNU partners, taxpayers are likely to face pressure through other means. Expected tax measures include maintaining unadjusted personal income tax brackets, leading to “bracket creep”, and potential increases in excise duties (sin taxes) and fuel levies. There might also be a reduction in medical aid tax credits.
The sustainability of the rand’s strength is uncertain: Analysts caution that the rand’s current strength is built on potentially unstable foundations, including external events, central bank credibility, and high commodity prices. Risks that could quickly reverse the positive trend include further political instability, trade disruptions (from the US or Asia), or an unexpected return of power cuts (load shedding). Outlooks for the rand vary widely, with some forecasting depreciation later in the year.
China is implementing monetary easing to support its economy: Amidst the global uncertainty and the Sino-US trade war, China has cut benchmark lending rates (LPRs) and major state banks have lowered deposit rates for the first time since October 2024. These measures are aimed at stimulating consumption and loan growth, and repairing commercial banks’ net interest margins. China’s economic stability and demand for commodities are significant for South Africa.

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Sources referenced:

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