The next two weeks are critical for South Africa

 ·11 Jun 2024

The next two weeks of “coalition” talks will be the biggest determinant of South Africa’s economic direction over the next few years.

“We need a government that can fast-track policy and provide policy certainty, but we are unlikely to see this in the year ahead,” said Citadel Chief Economist Maarten Ackerman.

“We may see slower than usual formulation and implementation of policies, especially economic policies, as the new government of national unity (GNU) finds its feet over the next year.”

“We’re unlikely to see any real policy support for the economy in the next year, given that the focus will be on political issues.”

Ackerman added that it remains to be seen if economic policy will change after the GNU talks are completed.

“If the GNU is pro-populist we may see a change in policy.”

“If it tilts towards pro-business or if it is business-as-usual and we can get private sector participation to address some of the important structural issues in the economy, we can get the economy back to capacity growth.”

“However, that is a big ‘if’.”

South Africa’s GDP decreased by 0.1% in the first quarter of 2024, and he added that the country will only escape its ‘per capita recession’—where population growth exceeds economic growth—if it achieves 1.5% GDP growth over a sustained period.

Look beyond South Africa

He added that South Africa’s economic uncertainty is not the only factor that South Africans need to pay attention to, with citizens worldwide heading to the polls this year.

The biggest surprise of 2024 so far is that central banks worldwide have been hesitant to cut interest rates.

Analysts expected the US Federal Reserve to implement six or seven rate cuts over 2024, but none have occurred so far amid sticky inflation.

“The US economy is starting to show early signs of a slowdown, while the rest of the world seems to be slowly coming out of an economic winter period.”

“The South African Reserve Bank was always “in step with the Fed” and was unlikely to cut rates before the US did, as it would reduce our yield attractiveness and put the rand under more pressure.”

“Geopolitical volatility was nowhere near subsiding just yet, and many countries were still facing elections and coalition talks. The major election to look out for is the US Presidential Elections in November.”

Bank of America (BofA) recently said that the 2020 election rematch —Donald Trump vs. Joe Biden—could majorly affect the South African economy.

If Trump is re-elected, he will likely reimplement the tax cuts he introduced during his first term as President.

BofA said that the rand would weaken as more capital flowed to the US.

However, Trump has widely called for cutting interest rates, and he may choose a dovish and/or non-independent chair to replace Jerome Powell when his term ends in 2026.

If this happens, the rand will strengthen against the dollar as investors look to other markets that offer higher returns.

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