At Coface South Africa’s inaugural Risk Conference, Aroni Chaudhuri, Chief Africa Economist for Coface, provided a comprehensive analysis of South Africa’s economic trajectory, inflation trends, and investment outlook for 2025. His insights highlighted key macroeconomic challenges and opportunities shaping the nation’s economic environment.
Inflation and monetary policy: limited scope for rate cuts
Reflecting on South Africa’s inflation trends, Chaudhuri noted that “South Africa had a quite important disinflation process, especially in the second half of 2024. Now inflation is well below the target midpoint of 4.5%, and it is expected to remain below it in 2025.” However, he cautioned that inflation could increase above 4% in the latter half of the year, primarily due to electricity price adjustments.
Despite the downward inflationary trend, the South African Reserve Bank (SARB) has limited flexibility to cut interest rates. “Where the Reserve Bank was initially signaling that the policy rate would be around 7% in 2025, they are now suggesting that maybe there is one, maximum two, rate cuts left before stabilizing at around 7.0–7.25%,” Chaudhuri explained. He attributed this limitation to the influence of US monetary policy, emphasising that South Africa’s import dependence and currency fluctuations restrict the extent to which SARB can leverage monetary policy to boost economic growth.
The Rand’s volatility and external pressures
Chaudhuri underscored the complex factors influencing the rand, highlighting its sensitivity to external market dynamics and investor confidence. “The rand is very suited to study emerging markets with a completely flexible exchange rate regime,” he stated. South Africa’s current account deficit is expected to widen, as domestic demand recovers, increasing import needs while South Africa’s commodity price basket should remain under pressure.
He also pointed to investor confidence as a key determinant of the rand’s fluctuations, noting that confidence initially increased post-election but has since weakened due to increased uncertainty. Additionally, geopolitical risks, such as potential shifts in South Africa’s relationship with the US (already under strain in recent years) regarding the AGOA framework and BRICS involvement, could further impact investment sentiment.
Fiscal Outlook: A gradual path to stability
While fiscal consolidation is underway, Chaudhuri emphasised that progress will be gradual. “Revenue is unlikely to increase significantly due to the absence of major tax reforms, and economic growth remains subdued,” he observed. However, he acknowledged improvements in government expenditure control, with a commitment to more fiscal prudence.
Despite concerns over debt levels, he reassured that “South Africa remains extremely unlikely to default. The country’s debt is essentially domestic (nearly 80%), denominated in rand and has a long maturity, making it less vulnerable to exchange rate fluctuations, making financing relatively manageable.” Nonetheless, he stressed that the effectiveness of fiscal policy hinges on how government funds are allocated. “If spending is directed toward productive investments, it’s a different ballgame compared to financing inefficient SOEs or an inflated wage bill,” he noted.
Sectoral analysis: Challenges and opportunities
The South African economy faces sector-specific challenges, with most industries categorised as high-risk by Coface, except for ICT and pharmaceuticals. However, some sectors show potential for resilience:
- Agriculture: While the current season’s crop production is expected to be lower, future growth may benefit from favorable climatic conditions.
- Energy & Transport: Ongoing reforms and infrastructure investments could gradually improve conditions in these critical sectors.
Chaudhuri also highlighted structural shifts within the mining industry, noting that “companies are diversifying their portfolios, moving away from traditional minerals like PGMs and gold towards high-demand commodities such as chromium, manganese and copper.” This transition reflects broader global economic trends and the necessity for South African firms to adapt to evolving market demands.
Investment climate: Uncertainties and growth prospects
Investor sentiment remains fragile, influenced by both domestic policies and external shocks. “If growth returns to higher levels, if the perception of the Government of National Unity (GNU) is positive, and if reform commitments are met, this will boost investor confidence,” Chaudhuri emphasised.
However, global market fragmentation and geopolitical uncertainties continue to pose risks. “The world is moving towards a more protectionist and fragmented environment, which makes strategic economic planning all the more critical,” he concluded.
