South Africa risks running out of luck

South Africa must get its house in order to benefit from a potentially favourable global environment and shield itself from external shocks. 

Currently, the country is running on luck to avoid the worst consequences of shifting global trade policies and geopolitical tension. 

Old Mutual Wealth’s chief investment strategist, Izak Odendaal, recently explained that a weaker dollar has prevented the rand from falling through the floor amid elevated local political tension. 

Odendaal said South Africa is a small boat adrift on a big ocean and will be buffeted around by global events and superpowers. 

However, the country obsesses over local politics, not without reason or cause, but often misses the global picture and how it impacts South Africa. 

Odendaal explained that the country has gotten lucky with the timing of local political tension and global events, resulting in their relatively limited impact on the country. 

For example, over the last week, the rand barely reacted to the news that President Cyril Ramaphosa removed a DA deputy minister from his Cabinet, threatening the stability of the Government of National Unity (GNU). 

Typically, this would result in the rand weakening significantly as the GNU is viewed by investors as vital for any improvement in South Africa’s economic fortunes. 

However, the US dollar has been on the back foot, and this has prevented the rand from falling much. The trade-weighted US dollar index has fallen 10% this year.

The rand lost ground against the pound and the euro after Whitfield’s firing and is weaker year-to-date against both. 

The dollar matters more for investments, but the European currencies are important for trade and tourism. The greenback also matters more for interest rates, since South Africa’s main import, oil, is priced in dollars.

This was a lucky turn of events for South Africa, as it prevented the rand from rapidly weakening against the dollar, which would have resulted in significantly higher inflation. 

Simply put, South Africa can still get lucky, but luck is not a strategy. Odendaal said the country needs to get its house in order to truly benefit when the global environment is favourable and to shield itself when it is not. 

The rand’s fluctuating value against major global currencies can be seen in the graph below. 

GNU holding on – for now

The good news from the past week is that the GNU appears to have held together despite a significant test, with the DA opting to remain part of the coalition. 

This came with immense uncertainty over the past week, with the GNU’s future looking much more unstable than previously. 

Not long after the 10-party GNU reached the milestone of its first anniversary, the President unexpectedly fired Andrew Whitfield, a DA deputy minister. 

This was for the seemingly minor transgression of not getting approval to travel overseas in February. Some questioned whether this was the real reason, and it caused much unhappiness on the part of the DA. 

Although the party indicated that it would not leave the GNU as it is not in South Africa’s best interest, it will withdraw from Ramaphosa’s upcoming National Dialogue, expected to take place on 15 August 2025. 

More importantly, the relationship between the ANC and the DA, the two largest members of the governing coalition, took another knock. The question of whether it will be a fatal blow is too soon to answer.

However, despite this uncertainty, Odendaal believes the current arrangement remains the most stable option for South Africa. 

He argued that, by including the two largest parties in parliament, the ANC and DA, the GNU is more stable than alternative coalition scenarios that small single-seat parties can undo, as seen at the municipal level. 

The other benefit is that while the two largest parties disagree on many issues, they agree on core issues such as respect for the constitution and broadly centrist economic policies. 

From an ideas point of view, they are natural bedfellows, but clearly not when it comes to personalities or political style.

Positively, the scenario that investors feared most before the 2024 election, namely that either the EFF or MKP would join the ANC in a coalition, still seems unlikely. 

Even if the DA were to withdraw from the GNU, the remaining parties would have 50% of the seats in the National Assembly and could, therefore, survive a motion of no confidence.