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We talk Budget negotiations, Emerging Markets, USD losing its crown and Volatility.

💹 Major Currency Snapshot:

USDZAR: 19.01
EURZAR: 21.62
GBPZAR: 24.93

Introduction:

The ANC is facing significant pressure to abandon its proposed VAT increase due to strong opposition from coalition partners and other political parties within South Africa’s Government of National Unity. This domestic fiscal challenge unfolds against a backdrop of considerable global economic uncertainty, largely stemming from the United States’ trade policies and their potential repercussions for developing nations like South Africa. The need for alternative revenue sources in South Africa is becoming increasingly urgent as the VAT hike appears unlikely to proceed.

Key takeaways from sources:

Proposed VAT Increase in South Africa Faces Strong Opposition: The ANC’s proposal to increase the Value Added Tax (VAT) is likely to be abandoned due to significant opposition from its coalition partners in the Government of National Unity (GNU) and other political parties. Parties like the DA have been firm in their opposition, citing concerns about the negative impact on economic growth and job creation. Even smaller parties within the GNU and outside of it have voiced their disagreement with the VAT hike.
Need for Alternative Revenue Sources: With the VAT increase appearing unlikely, the South African government, particularly Finance Minister Enoch Godongwana, is under pressure to find alternative ways to address the country’s fiscal crisis and plug the estimated R13.5 billion revenue shortfall. Economist Duma Gqubule suggested an emergency budget, while political analyst Sandile Swana proposed approaching the Unemployment Insurance Fund (UIF).
Global Economic Uncertainty Driven by US Trade Policies: The trade policies of the Trump administration, characterized by tariffs, are creating significant uncertainty in the global economy. Experts argue that these tariffs are based on flawed logic and will disproportionately harm developing nations like South Africa. The trade war between the US and China has intensified with escalating tariffs.
Negative Impact on Emerging Markets and Currencies: Strategists anticipate that most emerging-market currencies, including South Africa’s rand, will decline due to the global trade uncertainty caused by US policies. Investor pessimism towards emerging markets is high as fund managers prepare for the repercussions of the trade war. The dollar has also weakened due to a loss of investor confidence.
South African Industries Vulnerable to US Tariffs: South Africa’s agricultural and automotive industries are particularly vulnerable to the negative effects of US tariffs due to the potential loss of preferential access to the US market under the African Growth and Opportunity Act (AGOA) and increased competition from countries like China seeking alternative markets. This could lead to negative consequences for employment and South Africa’s trade balance.
Domestic Market Performance Amid Global Volatility: Despite the global economic uncertainty and domestic political debates surrounding the VAT, South African share, bond, and foreign exchange markets have shown relative strength compared to many developed and developing countries. The JSE All Share Index (ALSI) has recovered, and the Rand has strengthened against major currencies. The rising gold price has also positively impacted the JSE.
Political Dynamics within South Africa’s GNU: The strong opposition to the VAT increase highlights the influence of coalition partners within South Africa’s Government of National Unity. The ANC’s likely decision to abandon the VAT hike suggests a need to maintain cooperation and consensus within the GNU. The DA has consistently opposed the VAT increase, emphasizing the need for structural reforms instead.

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Sources referenced:

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