South Africa’s currency, the rand, has been making notable gains after recently plummeting to a historic low earlier in the month. However, financial analysts caution that its recovery is unlikely to follow a smooth or stable trajectory. Instead, the currency is expected to experience continued volatility, shaped by both domestic political uncertainty and broader global market dynamics.
Key Takeaways
- Rand rebounds, but volatility persists: The currency has recovered but remains highly sensitive to politics and global markets.
- Budget 3.0 on the way: A third revision is expected after Budget 2.0’s collapse, with spending cuts likely.
- Political and global tailwinds: Better ANC-DA cooperation and US-China talks may support stability.
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According to Annabel Bishop, Chief Economist at Investec, the rand has rebounded to approximately R18.60 against the US dollar, a level that had been forecasted for the current quarter. This marks a considerable recovery from its earlier low of R19.93 to the dollar, which raised concerns in both local and international financial markets.
Bishop attributed the earlier depreciation of the rand to investor apprehension following speculation that the pro-business Democratic Alliance (DA) might withdraw from the Government of National Unity (GNU). Such speculation caused unease among investors, who feared potential instability within South Africa’s coalition government, thereby prompting the currency’s downturn.
Expectations of Continued Strength Amid Dollar Weakness
Looking ahead, there is cautious optimism that the rand could continue to strengthen during the remainder of the second quarter. This expectation is largely based on the current weakness of the US dollar, which has been a favourable external factor for emerging market currencies, including South Africa’s.
The US dollar index has retraced to levels last seen in 2022, after a brief resurgence linked to the post-pandemic economic environment. This weakening of the dollar, combined with relatively stable local economic indicators, could create conditions that support further gains for the rand.
Nevertheless, the rand remains one of the more unpredictable currencies in global markets, with its value often influenced by shifts in both international investor sentiment and the internal political landscape of South Africa.
Tensions in the GNU Persist Despite Progress
The volatility of the rand persists despite recent signs of improved cooperation between the African National Congress (ANC) and the DA—the two major players in South Africa’s GNU. This improvement follows intense disputes over fiscal policy, particularly in the wake of the failed tabling of Budget 2.0.
Currently, South Africa is operating without a formal budget, after Finance Minister Enoch Godongwana withdrew the revised fiscal proposal amidst growing criticism. The move came after the DA refused to support Budget 2.0 in Parliament, citing concerns over specific proposals, including a controversial plan to raise the Value-Added Tax (VAT) rate to 16% by 2026.
The disagreement over VAT was one of the central points of contention between the two parties. The first budget revision, which had been delayed in March, already caused friction. The DA’s continued opposition to Budget 2.0 raised serious doubts about the long-term stability of the GNU.
The situation escalated when the DA successfully challenged the proposed fiscal framework in court, effectively blocking a planned VAT increase to 15.5% that had been scheduled for implementation on 1 May. Although Budget 2.0 had already been withdrawn, the tax hike could have proceeded without the legal intervention.
South Africa Anticipates Third Budget Adjustment
Despite the current absence of a formal budget, South Africa is preparing for the presentation of a third revised budget, informally referred to as Budget 3.0. This upcoming revision is expected to include moderate spending cuts, primarily because the government is now unable to rely on increased VAT revenue, and other tax options are constrained by the weak performance of the domestic economy.
According to Bishop, while most of the government’s day-to-day expenditure and revenue collection activities will continue as normal, the fiscal environment remains tight. This fiscal pressure means that any additional funds collected by the South African Revenue Service (SARS) will likely need to be allocated carefully to compensate for the lack of increased tax income.
There will be no immediate impact on the government’s ability to service its debt or raise additional borrowing, which provides some relief. However, the previously proposed extension of VAT exemptions on basic goods, which was tied to the higher VAT rate, will no longer proceed.
Bishop emphasised that economic growth remains the most sustainable means of increasing government revenue. She warned that further tax increases would likely weigh on economic performance, particularly in an environment where South Africa’s tax burden has already grown significantly over the past decade.
Revised Legislation Expected Without Major Market Impact
The National Treasury has indicated that revised versions of both the Appropriation Bill and the Division of Revenue Bill will soon be introduced in Parliament. However, these new proposals are not anticipated to have a major effect on market behaviour or investor sentiment.
Treasury officials have also noted that some of the government’s spending decisions had to be revised in light of the failed VAT increase, and that a new set of expenditure adjustments will be submitted for consideration. These changes are designed to ensure that the existing revenue base is sufficient to meet fiscal obligations without causing further disruption or requiring additional borrowing.
Should SARS manage to exceed its revenue collection targets in the months ahead, the Treasury is expected to allocate those funds toward offsetting unavoidable spending pressures, thereby reducing the need for deeper cuts or tax hikes.
Encouragingly, the recent improvement in relations between the ANC and DA within the GNU suggests that the revised budget proposals could be passed with less political resistance. Unlike previous attempts, Budget 3.0 may not require support from parties outside of the coalition, streamlining the legislative process.
Global Developments May Also Support Local Economy
On the international front, recent signs of improved dialogue between the United States and China have sparked hope for a reduction in tariffs that have weighed on global trade in recent years. Should these discussions lead to meaningful policy shifts, global economic activity could benefit, potentially creating favourable spillover effects for South Africa’s export-driven sectors.
This improved geopolitical climate, combined with a weaker dollar and the prospect of greater internal political cooperation, could help stabilise South Africa’s economic outlook in the near term. However, the path forward for the rand and the broader fiscal environment remains dependent on careful policy execution and a measure of global good fortune.
Conclusion
South Africa’s economic landscape remains delicately balanced, with the rand showing signs of recovery but still vulnerable to both domestic political shifts and global market dynamics. The failure of Budget 2.0 has exposed ongoing fiscal challenges, yet the government’s ability to function without immediate disruption, coupled with a more cooperative political environment and improving international conditions, provides a cautiously optimistic outlook. Successful passage of Budget 3.0 and sustained economic growth will be critical to restoring investor confidence and ensuring long-term fiscal stability.
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