💹 Major Currency Snapshot:
USDZAR: 18.66
EURZAR: 21.17
GBPZAR: 24.76
Introduction:
South African fund managers are showing a preference for gold amidst a dimming economic growth outlook and uncertainty regarding reforms, as indicated by Bank of America data. Globally, US-China trade tensions and potential tariff reductions by the Trump administration are creating market volatility. These factors, along with domestic inflation figures in South Africa, are influencing investor sentiment and monetary policy considerations.
Key takeaways from sources:
- South African Economic Outlook and Fund Manager Sentiment:
- South African fund managers are increasing their preference for gold due to a dimming economic growth outlook and weakening confidence in reforms within the country.
- Bank of America (BofA) data indicates a “high positioning” in gold, banks, and bonds among South African fund managers, reflecting negative growth and reform perceptions, with “political shifts” identified as the top risk.
- BofA noted a decreased confidence in the pace of reforms.
- Growth and reform perceptions have turned negative, and recession risks are perceived to be rising among fund managers.
- More than half of surveyed South African fund managers anticipate slightly higher inflation and a weaker exchange rate of R18.44 to the US dollar.
- For the first time in five years, South African fund managers have become net offshore sellers.
- Over a 12-month horizon, resources, particularly gold, are gaining favor, while industrials and financials are losing ground. Banks are becoming the favorite sector, and real estate the least preferred over the next year.
- Despite fund managers’ growing concerns, BofA analysts previously noted optimism among South African corporates regarding earnings, although banks and CFOs have become more cautious. Companies are hesitant to invest due to global uncertainty and a lack of consumer growth, but are investing in energy infrastructure.
- South Africa’s VAT Policy:
- The planned 0.5 percentage point VAT increase, initially set for May 1, 2025, will be reversed following significant resistance, including legal challenges.
- Finance Minister Enoch Godongwana will introduce legislation to maintain the VAT rate at 15%.
- This decision follows extensive consultations and consideration of parliamentary committee recommendations.
- The reversal is expected to result in a government revenue shortfall of around R75 billion over the medium term.
- Consequently, the Finance Minister is withdrawing the Appropriation Bill and the Division of Revenue Bill to propose necessary expenditure adjustments.
- Parliament will need to adjust expenditures to ensure fiscal sustainability.
- Measures to cushion lower-income households against the VAT increase will also be withdrawn, meaning previously planned zero-rated food items will remain subject to the 15% VAT.
- Additional revenue collected by SARS may be considered to offset expenditure adjustments.
- The Democratic Alliance (DA) and the Economic Freedom Fighters (EFF) had initiated court challenges against the VAT increase, arguing it would disproportionately affect the poor.
- Economist Dawie Roodt and tax expert Dennis Davis argued that the VAT increase was unnecessary due to higher-than-expected tax collections by SARS. SARS reported a record gross revenue collection for the 2024/25 fiscal year, exceeding previous estimates.
- South African Inflation and Monetary Policy:
- South Africa’s annual inflation rate slowed to 2.7% in March, the lowest in almost five years and below the Reserve Bank’s target range.
- This has led traders to increase bets that the South African Reserve Bank will resume its rate-cutting cycle at its next meeting in May.
- However, some economists are less certain about a rate cut, citing potential inflationary pressures from US President Donald Trump’s trade war and a weaker rand.
- Standard Chartered economist Razia Khan believes rates will remain on hold due to the recent readjustment of the inflation basket, the upcoming (though now reversed) VAT increase, and potential for higher inflation in the future.
- Reserve Bank Governor Lesetja Kganyago had previously expressed concerns about the negative impact of global trade tensions on South Africa’s economy and rising risks to domestic inflation and growth. He also noted the central bank’s estimate that the (now reversed) VAT increase could add to headline inflation.
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