Coface Economist Highlights Risks, Reforms, And Recovery Path

• Aroni Chaudhuri – Chief Africa Economist – Coface

“The question I’m asking myself right now is: are some of these engines permanently broken, or can they still be functional if the right policies are implemented?” — Aroni Chaudhuri

Despite persistent challenges, South Africa retains a strong foundation of economic fundamentals. However, global headwinds, ranging from geopolitical conflicts to trade wars, continue to exert pressure on the country’s open economy.

Global Trade Tensions and Tariff Pressures

The global trade environment remains volatile. Tariff levels have surged to historic highs, with South Africa facing 30% tariffs on certain exports. Countries like India and Brazil are experiencing even steeper rates, up to 50%.

“The average tariff level in the US is now at historic highs—multiplied by seven or eight compared to pre-2016 levels. This will have consequential effects on trade flows, inflation, and global growth.” — Chaudhuri

These developments have introduced significant uncertainty, making traditional economic forecasting increasingly difficult. Instead, Chaudhuri advocates for scenario-based planning and risk frameworks to navigate the evolving landscape.

Monetary Policy: A Positive Shift

South Africa’s inflation rate has stabilized around 3%, creating room for monetary easing. The South African Reserve Bank is expected to reduce the policy rate from 7% to potentially 5.25% by 2027, a move that could stimulate investment and ease borrowing costs.

“Lower interest rates will be good for borrowing, investment, and real wage growth. If inflation remains anchored, monetary easing can begin in the second half of next year.” — Chaudhuri

This shift is expected to benefit both consumers and corporates, while also reducing the cost of servicing public debt—most of which is held domestically in rand.

Fiscal Reform: A Balancing Act

South Africa’s fiscal health remains a concern. The government’s failure to implement VAT reforms underscores the difficulty of generating revenue in a low-growth environment. With one of the highest tax burdens among emerging markets, options are limited.

The target of reducing the budget deficit to 3% of GDP by 2027 is ambitious. Encouragingly, the country’s fiscal multiplier, measuring the impact of public spending on growth, is currently near zero, suggesting that spending cuts may not significantly harm economic performance.

“The cost of cutting expenditure on growth is not that significant. The fiscal multiplier has decreased very strongly in the past two decades.” — Chaudhuri

The upcoming budget will be a critical test for the Government of National Unity (GNU), which must balance fiscal consolidation with strategic investment.

Investor Confidence and Currency Stability

Investor sentiment and currency stability are closely linked. The rand, a fully flexible currency, is expected to remain weak due to widening current account deficits. However, its volatility will be shaped by the perceived credibility of reforms.

“Even if the rand remains weak, some amount of stability will make it easier for the central bank to conduct monetary policy and anchor inflation.” — Chaudhuri

South Africa’s potential removal from the FATF grey list following an in-person review in October could further boost investor confidence and improve access to foreign capital.

Looking Ahead: Signals Matter

Chaudhuri emphasizes that perception and signaling are as important as policy execution. The success of South Africa’s recovery will depend on the clarity and credibility of its reform agenda.

“Signals are just as important as what happens in the economy itself.” — Chaudhuri

With inflation under control, interest rates poised to fall, and a chance to reset fiscal priorities, South Africa has a rare opportunity to chart a path toward sustainable growth. But this will require bold leadership, policy coherence, and a commitment to long-term structural reform.

For more information about Coface: Visit www.coface.co.za.