Key points

• In the past week, there have been many geopolitical developments that have raised some eyebrows. Most of them can potentially escalate into something catastrophic and negatively impact risk appetite. Given the ZAR’s recent appreciation and the stretched nature of the move, the ZAR faces some risk asymmetry. The greater the geopolitical tensions, the more reason to be sceptical of the ZAR’s ability to remain resilient.

• Russia’s war in Ukraine holds the potential to spill over into a broader NATO conflict that could, in the worst-case scenario, turn nuclear. Similarly, the war betweenHamas and Israel is a proxy war between Israel and Iran that also threatens to spill over into a broader regional conflict. Just this week, tensions between Israel and Iran ramped up as Israel attacked nuclear installations and key military officials.

• Concurrently, the US is imposing its will that Iran does not gain nuclear capabilities and that too is a development worth watching. In response to Israel’s attack on Iran, not only has it launched drones against Israel and Israeli installations, but it warned that it would attack the US as well. This cocktail of risks ismore than enough of a reason to reduce global risk appetite levels and cause dislocations in some markets.

BASELINE VIEW:

Towards the back end of this week, the ZAR showed some signs of faltering. Its appreciative trend has extended to alevel that is difficult to sustain. The current rise in geopolitical tensions is enough of a catalyst to trigger a USD-ZAR correction to potentially as high as 18.5000. Such levels should not be seen as a reversal of fortunes for theZAR; instead. The move should be considered a healthy correction.

The rand has been performing well and appears poised to remain strong in 2025. Easing US-China tensions, improved local politics, and lower-than-expected inflation in South Africa are all contributing to the currency's strength. 

The rand is now trading at a fair value, and with the US dollar likely to weaken, the rand could move closer to R17 per dollar.  More money flowing into South African bonds should also support the rand, as investors are drawn to higher returns in this market.  Overall, the trading range for 2025 is likely to remain between R17.50 and R18.50 per dollar, depending on global and local developments. 

Bottom Line 

• The SARB resumed its monetary policy easing cycle, cutting the Repo Rate by 25bp to 7.25% at its May MPC meeting. The vote among MPC members was split 5-1, with the dissenting voice favouring a 50bp rate cut.
• The SARB lowered its inflation forecasts through 2027. It now expects inflation to average 3.2% in 2025 (down from 3.6%), and 4.2% and 4.4% in the following two years (previously 4.5% for both). The revision is due to a stronger exchange rate, lower global oil prices, and the cancellation of planned VAT increases.
• The domestic growth forecast for 2025 was revised lower once again to 1.2% (prior: 1.7% and 1.8% in January). Economic growth is expected to remain weak at 1.5% in 2025 and 1.8% in 2027.

Analysis

• Once again, Governor Lesetja Kganyago kicked off the announcement by highlighting uncertainties abroad that cloud the global and domestic economic outlooks. Although conditions have improved since early April, the SARB still expects that global economic growth will be weaker than forecast in March.
• This weaker global growth outlook translated into downward revisions for South Africa’s economic outlook. While there is no official Q1 GDP data yet, the mining and manufacturing figures we have seen so far suggest that the economy struggled, and unemployment levels rose.
• The lower growth forecasts mean that risks are now assessed as balanced. The SARB notes that the outlook for structural reforms remains positive. However, even if we do see some of the GNU promises fulfilled, they will take time to significantly impact the economy. Therefore, South Africa looks set to remain in a phase of low growth for some time to come.

Key points

• Many of SA’s failings were highlighted publicly when President Ramaphosa and his SA delegation flew to the US to meet with President Trump to correct any misinformation and repair relations with the US. Relations have frayed for many reasons, and it would be a mistake to think it was only due to recent events. They have not helped, but SA’s relations with the US have deteriorated steadily over the past twenty years, and it is worthwhile recapping how that occurred for context.
• SA may have recovered from a very awkward position and pushed back against the misinformation of genocide but no longer has the latitude to operate at will without suffering consequences. SA’s politicians will now be acutely aware of the consequences of their policies and actions and should treat this as an opportunity to focus on and address failed outcomes.

Baseline view:

Ramaphosa’s US visit may have turned into a blessing in disguise. If SA responds appropriately, it can limit any economic damage that frayed relations may have caused and re-establish itself as a stable trade partner with the US. SA has much more to lose than the US and cannot afford any further missteps.

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