The budget put forward by Finance Minister Godongwana’s yesterday will likely be approved by Parliament following previous failures. It focused on fiscal consolidation to stabilise the debt trajectory, with the debt-to-GDP ratio projected to peak just above 77% this year. Revised GDP growth estimates (lowered to a more realistic 1.4% for the current fiscal year from 1.9%) due to the anticipated impact from US tariffs, underscore the cautious economic outlook. To address a R75 billion fiscal deficit over the next three years, the government has recovered R68 billion through measures including expenditure cuts to frontline services like health and education, and maintaining social grants without above-inflation increases. Additionally, unadjusted income tax brackets have increased the tax burden due to bracket creep, while there was also an upward adjustment of the fuel levy in line with inflation. While the budget was much better than previous iterations that failed to pass through Parliament, important reforms are still required to bolster sentiment and rejuvenate the underperforming economy due to years of maladministration and wasteful expenditure.
Notwithstanding the importance of the budget, this morning’s headlines are more focused on the high-profile meeting that took place between South Africa’s delegation, led by President Ramaphosa, and US President Trump last night. The discussion, initially cordial, became tense when Trump raised concerns about farm murders, presenting reports to highlight issues of violence against minority groups. This strained the dialogue, reflecting broader tensions in US-South Africa relations. It would be misguided to portray yesterday’s Trump “ambush” as overly negative. Pointing out issues is a key step toward resolving them. South Africa must reassess policies like BEE and the narrative surrounding EWC, while rethinking economic approaches that have increased, rather than reduced, reliance on the state. A comprehensive economic policy overhaul is needed, and yesterday’s US-SA meeting could signal the logical next step in that direction.
US-SA tensions are compounded by differing geopolitical stances on issues like Russia and Palestine, which were likely discussed behind closed doors. While details of private discussions remain undisclosed, the meeting marked an initial step toward mending ties through persistent engagement. However, South Africa’s lack of an ambassador to the US complicates efforts to clarify misunderstandings or foster constructive dialogue. Therefore, uncertainty continues to linger around the US’s participation in the upcoming G20 summit, underscoring the need for strategic diplomatic efforts to strengthen bilateral cooperation. Suffice it to say that South Africa is not out of the woods yet, but that last night’s meeting could have gone much worse.
ZAR Markets
If the performance of the ZAR and South African bonds serves as a reliable indicator of how South Africa managed yesterday’s key events, it suggests the country performed fairly well. Neither market experienced a sharp sell-off, indicating that the events were within expectations, requiring no major repositioning. The USD-ZAR continues to trade below 18.0000 this morning, albeit with a topside tilt. Moreover, implied vols (which proxy for hedging costs) remain at reasonable levels despite rising through the second half of May.
Global FX Markets
U.S. fiscal worries and a weak 20-year Treasury bond auction drove the dollar to a two-week low against the yen on Thursday, as President Trump pushed his expansive tax-cut and spending bill through Congress. The bill, estimated to add $3 trillion to $5 trillion to the U.S.’s $36.2 trillion debt, fuelled market unease, exacerbated by Moody’s recent downgrade of the U.S. credit rating from AAA to Aa1. This downgrade, coupled with the lacklustre bond sale, reinforced a “Sell America” sentiment, pressuring both the dollar and Wall Street. Safe-haven assets like gold and bitcoin surged amid the dollar’s weakness. Gold hit a near two-week high of $3,325.79, close to April’s record, while bitcoin climbed 1.6% to $110,049.82 after peaking at $110,636.58. The euro held steady at $1.1330 after three days of gains, sterling remained flat at $1.3426, and the Swiss franc edged up 0.1% to 0.8245 per dollar.