Disaster for South Africa falls flat
The market response to the US tariff disaster that hit South Africa this month has left analysts confounded and scratching their heads, with the rand barely showing a blip.
This is despite the country being hit with one of the highest trade tariffs among the United States’ trade partners and the Trump administration giving Pretoria the cold shoulder.
According to Aluma Capital chief economist Frederick Mitchell, many had anticipated a crash in the rand as the tariffs came into effect on August 7, but instead, the response has been flat.
Mitchell noted that the rand depreciated sharply from approximately R18.50 to R19.74 against the US dollar following the initial tariff announcement in early April.
Over the past four months, the unit has appreciated back to a range of R17.50 to R17.70, effectively shrugging off the market shock.
While the rand is still hugely undervalued against the US dollar, this is not a new or unique thing, with the currency having been in that position for over a decade.
In reality, it has proven to be quite resilient in the wake of the trade and geopolitical chaos that has been wrought this year.
Mitchell said the resilience likely comes from the early depreciation and the tariff tubulance being priced into the market – thus no shocks – and investors understanding the wider context and impact of the rates.
“The fact that the rand has since recovered and strengthened suggests that the markets had already incorporated the potential effects of the tariffs well in advance,” he said.
“The market seems to have recognised that the tariffs, while impactful, are unlikely to devastate South Africa’s current economic trajectory.”
This is not an altogether positive thing, however. If the rand is at better-than-expected levels with the tariff and economic impact priced in, it means that the unit would be much stronger had the government secured a better trade deal.
As it stands, diplomatic relations between Pretoria and Washington have been strained, casting doubt on immediate negotiations for a new trade deal.
“As such, the market’s ‘pricing-in’ reflects a sober assessment: elevated tariffs are a risk, and a challenging obstacle in the medium term that needs urgent attention as time goes on,” Mitchell said.
Too soon to tell
The rand’s resilience is also more reflective of the short-term reaction to the tariffs and current affairs.
Several economists have noted that the true impact of the tariffs is unlikely to be felt in the near-term, and likely only to start truly reflecting in the economy six months ahead, ie in 2026.
The impact of the tariffs will be felt most acutely in the agricultural and manufacturing sectors, where businesses are already feeling the pinch.
While South Africa’s agricultural exports to the US surged by 26% to $161 million in the three months before the tariffs, with the imposition of a 30% rate, the profitability of these exports may diminish, especially if alternative markets are not promptly secured.
Mitchell noted that positive strides have been made here, with South Africa securing a promising trade agreement with China to export stone fruits, including peaches, nectarines, plums, and apricots.
However, the manufacturing and automotive sectors face greater hurdles.
“Major exporters like Mercedes-Benz South Africa and other vehicle manufacturers, due to export reliance on the US, will see their competitive edge eroded once tariffs are levied,” Mitchell said.
“This could lead to closures and job losses, particularly in regions like the Eastern Cape, which is heavily dependent on vehicle exports.”
The current employment figures reflect this fragile situation, with the Eastern Cape’s manufacturing employment declining by 36,000 jobs in the second quarter.
Then there’s the impact on economic growth and potential inflationary pressures over the medium- to long-term.
“Slower economic growth, driven by uncertainties in trade, declining industrial activity, and potential job losses, could exert downward pressure on the rand in time,” Mitchell said.
A depreciating rand would raise import prices, feeding into inflation and prompting tighter monetary policy.
“The true test will unfold over the coming months. As the landscape shifts, conservative fiscal management and trade diversification will be key to maintaining stability and fostering sustainable growth going forward in an ever-changing geopolitical and international economic landscape,” the economist said.
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