The World Bank has urged South Africa to ease its regulatory burden and reform BEE laws to address economic stagnation. The country’s economy has been on a declining trajectory, with real per capita output in 2023 lower than in 2007. In addition, government economic policy has done little to nothing in terms of reducing high unemployment and persistent inequality. The World Bank criticised cumbersome policies, including BEE and labour regulations, for hindering public administration and fostering corruption. It recommended streamlining industrial policies, encouraging investment, and reducing protections for incumbents like state-owned enterprises. It is unlikely that the government will respond to external pressure such as this from the World Bank, but the criticism is valid and may hold some weight in shaping public perception around SA’s policymaking.

In other news, the ANC reportedly plans to raise VAT by 0.75 percentage points in its revised national budget this month, warning it may seek support outside its governing coalition if necessary, according to the Sunday Times. Opposition from the GNU partners delayed Finance Minister Enoch Godongwana’s budget presentation last month, now rescheduled for March 12. The EFF, though opposing the VAT hike, signalled willingness to join the government if current partners exit. President Ramaphosa backed the increase, assigning Deputy President Paul Mashatile to explore options, with a report due today. The friction between the ANC and its coalition partners is not a good look for the market-friendly GNU, and could weigh on sentiment if there are any signs of escalation. However, this VAT standoff is interesting insofar as it is the first policy clash within the GNU where the ANC will not be able to count on support from outside the GNU, meaning it may need to yield to its partners’ demands concerning the budget.

ZAR Markets

The ZAR depreciated sharply into the end of last week, declining to levels north of R18.7000/$ on Friday. This was consistent with a broader selloff in EMFX as the USD surged into the weekend. More broadly, diminished risk appetite has placed EM currencies under pressure, while the USD remains the preferred safe haven despite a sharp decline in US Treasury yields as speculators weigh the possibility of further Fed easing in the year ahead. Recent equity market movements suggest growing unease over a potential slowdown in the US economy. Economic data has been mixed, amplifying concerns about upcoming risks, including trade tensions, retaliatory measures from partners, fiscal tightening, and a shrinking civil service. As uncertainty rises, so does the likelihood of increased stock market volatility—raising the prospect of further instability in the ZAR.

Global FX Markets

European currencies strengthened on Monday, driven by expectations of increased growth and defence spending as regional leaders worked on a plan to support Ukraine. The euro rose up to 0.5% against the dollar, reversing Friday’s losses, after UK Prime Minister Keir Starmer highlighted the cooperation between the UK, France, and other nations to secure Ukraine amid concerns about a potential U.S. pullback. Hedge funds also reduced their bearish positions on the euro for the second consecutive week, according to recent data from the Commodity Futures Trading Commission. The Polish zloty, Romanian leu, and Scandinavian currencies also gained on expectations that further spending could boost growth in the region. Analysts view the U.S. pivot as a historic opportunity for Europe to strengthen its defence capabilities, with potential positive economic impacts. Europe, which has relied on the U.S. for security for almost 80 years, is now facing the challenge of reasserting its military power. This could lead to higher inflation and interest rates, with bonds coming under pressure due to expectations of increased issuance to finance the added defence spending. The spread between swaps and Germany’s 10-year bond futures dropped to its lowest level since 2014, indicating concern about the rising debt supply. France’s 10-year bond futures also fell, partly due to a negative outlook on the country’s creditworthiness by S&P Global Ratings