Introduction:

This past week offered a mixed economic picture for South Africa, marked by rand stability driven partly by eased fears around the government of national unity and the VAT rate decision, while local equity markets saw gains despite weakness in basic materials. Discussions around Finance Minister Enoch Godongwana’s upcoming revised budget and concerns about balancing finances without raising VAT were prominent. Globally, trade tensions, particularly US tariff policy under President Trump, continued to influence market dynamics and economic forecasts, alongside movements in commodity prices like gold and oil, and anticipation of central bank decisions.

Key takeaways from sources:

South Africa’s Economy and Fiscal Outlook: A revised budget is scheduled for May 21st, following the decision to keep the Value Added Tax (VAT) rate at 15%, abandoning previous proposals for an increase. This decision, influenced by political debate and public opinion, has reportedly helped ease fears about the stability of the government of national unity (GNU) and contributed to the rand’s stability and appreciation. Finance Minister Godongwana stated the aim is to balance the budget without raising VAT while protecting vital sectors, though economists note that balancing finances may require spending cuts or alternative revenue measures, such as increasing the fuel levy, which could impact prices and necessitate austerity measures given the country’s sub-investment grade ratings. The Treasury is developing a new fiscal framework to maintain debt stabilisation, involving updating economic assumptions, potentially revising down GDP forecasts, and recalculating revenue estimates. Funding for government services, provinces, and municipalities continues under the Public Finance Management Act until the new budget is passed.
Local Equity Markets and Trade Balance: Despite weakness in basic materials, the JSE All Share index (ALSI) saw gains for the third consecutive week, reaching a new record high. Financial shares also gained, suggesting positive domestic market sentiment. South Africa’s trade balance widened in March, driven by exports increasing faster than imports, with notable contributions from machinery and electronics (possibly front-loaded shipments ahead of US tariffs) and mineral products. However, the trade outlook faces uncertainty due to ongoing global trade tensions, and South African exports are expected to weaken this year due to gloomier global growth prospects among key trade partners.
Global Trade Tensions and US Tariff Policy: US President Trump’s tariffs are significantly impacting the world economy, acting as a “serious negative shock” and creating uncertainty that drags down growth and business confidence. China is evaluating the US offer for talks on the 145% tariffs, and Trump mentioned meeting with countries on trade deals, prioritizing a fair deal with China, and potentially lowering tariffs “at some point”. Tariffs have led major companies to cut forecasts and smaller businesses to exit markets. Trade tensions are cited in growth downgrades for several regions and are impacting manufacturing activity globally. While some countries may benefit from production shifts away from China, punitive tariffs on China are seen as likely to persist. Eased fears around the US-China trade war have been noted as contributing to improved global risk aversion.
Currency and Commodity Market Movements: The US dollar has seen weakness, with speculation about Asian currency revaluations impacting it, while speculative short positions suggest expectations of further depreciation and potentially a multi-year bear market. The Taiwan dollar and Chinese yuan have appreciated significantly. The rand has firmed strongly against major currencies, benefiting from domestic stability and eased trade war fears. Gold prices firmed, partly due to the weaker dollar, although they had lost some shine earlier, trading within a range ahead of central bank decisions. Crude oil prices plunged to multi-year lows following the OPEC+ decision to accelerate production hikes in June, adding to pressure from the escalating trade war and rising US-China tensions. Crude is now seen as a primarily demand-driven market, linked to US trade policy and global growth conditions.
Central Bank Focus: Markets are focused on the US Federal Reserve’s policy decision this week, where they are widely expected to keep interest rates steady despite President Trump’s calls for cuts. Expectations for a June rate cut have decreased, with many now anticipating cuts starting in July. The Bank of England is widely expected to cut rates this week and market participants will look for guidance on potential further easing. Central banks in Norway and Sweden are expected to keep rates steady.

Need a business partner that can help mitigate exchange rate risk?

Book an appointment with one of our treasury specialists.

If you are not subscribed yet, make sure to do so by clicking HERE and signing up.

Sources referenced:

Share This PFS Market Sentiment Update