South Africa at risk of financial and economic collapse 

South Africa could collapse financially if the United States escalates its efforts to force change in the country, including barring American investors from owning local assets, particularly government debt. 

This risk has become more pronounced in recent weeks, with South Africa failing to secure a trade deal with the United States ahead of the 1 August deadline. 

United States President Donald Trump has singled out South Africa for criticism so far in 2025, saying that bad things are happening in the country and slating the government’s policies around black economic empowerment (BEE). 

Reuters reported that Zane Dangor, the director-general at the Department of International Relations and Cooperation, said his US counterparts expect certain things from South Africa, and BEE was high on the agenda.

South Africa’s trade ministry has said it is yet to get a firm answer to its initial trade framework, which promises around R60 billion of investment in the United States, increased purchases of US liquefied natural gas, and simpler rules for American poultry imports. 

While much of the focus has been on the impact of US tariffs on South African exports and local economic growth, some analysts are increasingly warning of potential bans on American investment in South Africa. 

One of these analysts is Efficient Group chief economist Dawie Roodt, who warned that this could cause a financial crisis in South Africa, even if full-scale sanctions are not imposed. 

“Whatever the reason, whether it is sanctions, uncertainty, or even fears of sanctions and tariffs, foreigners will begin to start selling government debt if things deteriorate further,” Roodt told the State of the Nation podcast. 

“That means long-term interest rates will go up and the rand will weaken as money flows out of South Africa, potentially spiking inflation.”

As a result of spiking inflation, the Reserve Bank would most likely raise short-term interest rates. This risks collapsing the economy as growth is forecasted at less than 1% for the year. 

While this is a dire situation, Roodt explained that the real trouble will start when local financial institutions have to pick up the slack left by investors selling government debt. 

“Somebody will have to buy that debt, and the most likely buyers will be local pension funds, the local savings industry, and local banks – all of which already hold a lot of government debt.”

“When bond yields go up, the value of those instruments goes down. This will put the balance sheets of local banks under immense pressure and can result in a financial crisis.” 

Roodt was clear in saying this is nothing to do with how South African banks are run, with them being some of the best capitalised banks in the world and are extremely well managed. 

South Africa’s saving grace

South Africa’s saving grace in this potential situation is the Reserve Bank’s sound management and prudent monetary policy. 

This is in stark contrast to how the country’s fiscal policy has been handled over the past decade, with runaway government spending saddling the state with a significant debt burden without much economic growth. 

“The fiscal accounts, which the politicians are responsible for, have been messed up big time. Not only the national accounts, state-owned enterprises, local authorities, the Road Accident Fund and all of that sort have been messed up,” Roodt said. 

Roodt explained that this is part of the reason why South Africa is where it is, without a significant fiscal buffer to protect it from external shocks and with meagre economic growth. 

“But there is one thing that has worked very well in South Africa and that is the Reserve Bank, with Governor Lesetja Kganyago doing a fantastic job.” 

“The Reserve Bank is maintaining interest rates at relatively high levels, with significant room to cut rates. But the reality is, these rates are necessary to act as a counterweight to the mismanagement of the economy on the fiscal side.” 

South Africa’s central bank has had an extremely difficult job in trying to maintain price stability in the country over the past 15 years. 

While the rand has weakened significantly over that period, South Africa’s inflation has remained relatively contained within the Reserve Bank’s 3% to 6% range. 

The currency went from trading at just over R5 to the US dollar in 2006 to crossing R16 a decade later, after the country was downgraded to junk investment status. 

As the state’s finances continued to deteriorate, with spending ramping up and economic growth slowing, the rand continued to weaken. 

The currency has flirted with R20 to the US dollar several times since 2020, being saved by a commodity boom and renewed optimism following the formation of the Government of National Unity (GNU) in 2024. 

The rapid weakening of a currency typically results in elevated inflation as it dramatically increases the cost of importing goods and services.

Despite this, the Reserve Bank has kept headline inflation well anchored around its target range of 3% to 6%, with it bringing the rate down to 3% for most of 2025 so far. 

However, this has come at the expense of relatively elevated interest rates in South Africa, which have played a role in stifling economic growth.