A view from the US

25 November 2024 - This week, we ask: How will Trump's return affect SA? Can the country capitalise on its G20 leadership? What's causing turmoil in the State Security Agency? Why is the SARB cautious amid low inflation? What's troubling Gauteng businesses, despite rising confidence?

A view from the US

CRA director John Endres reports from the United States (US) that local observers expect the second Trump administration to be far better organised than the first, while warning that it faces major battles despite Republican control of both chambers of Congress. One of the president-elect's top priorities is to preserve the Tax Cuts and Jobs Act (enacted by Mr Trump in 2017) which will expire in 2025 unless renewed.

Republicans will aim to use a process called budget reconciliation to pass budget legislation in the House and Senate with a simple majority, instead of requiring 60 of 100 votes in the Senate. However, to do so will still be challenging because representatives may not vote along party lines, with a tendency towards prioritising their districts’ needs always a factor. The implication is that the Trump administration will have to focus much of its attention on domestic issues and bruising political battles.

Mr Trump's language on tariffs should be interpreted as a signalling tool rather than being taken at face value. In trade negotiations, he will aim to leverage the credible threat of high tariffs as a metaphorical big stick to secure greater concessions from his counterparts, without necessarily being determined to introduce them at all costs. This style of hyperbolic communication for instrumental purposes was a feature of Mr Trump's first administration and is likely to be repeated.

Although South Africa is not a high priority, its friendliness towards Russia, China and particularly Iran - and its hostility towards Israel — will attract the Trump administration’s unfavourable attention. US foreign relations officials are expected to adopt a far more transactional approach and to be less forgiving of the South African government’s dalliances with regimes considered hostile.

SA’s G20 opportunity

On 1 December, South Africa assumes the chairmanship of the Group of 20 (G20). President Cyril Ramaphosa will take the baton from 2024 chair, Brazil president Lula da Silva, and in late 2025 hand over to US president Donald Trump. Amid conflicts in Ukraine, Gaza, Sudan, and potential conflict over Taiwan — and with a possibly inward-turning US — South Africa’s G20 chairmanship presents risks and opportunities. The Government of National Unity's (GNU) ability to use the G20 platform hinges on clearly communicating and practicing credible non-alignment.

At the recent G20 Summit in Brazil, Mr Ramaphosa highlighted themes for South Africa’s chairmanship, including reforming global institutions and addressing the plight of Palestinians. Given the G20’s economic focus and varied member views on Middle East geopolitics, it is doubtful the G20 is a useful forum for the latter, raising questions about South Africa’s strategic approach.

Incoming South African ambassador to the US, Ebrahim Rasool, recently told News24 that he hoped to recapture the status of “moral superpower” that years of scandal and corruption had deprived the country of. It is, however, doubtful that this is a reputational asset can be reclaimed, and whether it is a realistic objective to stake the country’s diplomacy on, three decades after the transition to democracy. Mr Rasool also stated that relations with the US will likely be “transactional,” aligning with the incoming US president’s approach. South Africa’s opposition to the US on many issues demands considerable diplomatic skill to manage tensions and secure benefits.

Strong ideological and policy differences among GNU parties, especially between the African National Congress and the Democratic Alliance, will likely continue and create tensions.

Ramaphosa’s SSA headache

Serious concerns about the State Security Agency (SSA) among Mr Ramaphosa and his allies are likely driving early moves to radically shake up, and possibly shut down, the agency. Specifically, former president Jacob Zuma’s continued influence in the SSA worries Mr Ramaphosa and others. Compounding their concerns is the hollowed-out South African National Defence Force, which may not be able to effectively counter a coup attempt facilitated by SSA elements.

Last week, the Minister in the Presidency, Khumbudzo Ntshavheni, told a group of senior SSA managers that individuals aged between 50 and 58 would be offered, and encouraged, to take early retirement packages. According to News24, the government is considering similar offers in other departments, providing cover against accusations of singling out the SSA and justifying the move as cost-cutting. That the government is looking to pare down spending on salaries and ‘bloated’ departments will provide additional justification.

Also last week, a court case began between Crime Intelligence whistleblower Brigadier Tiyani Hlungwani and Major General Dumisani Khumalo in the Johannesburg Labour Court. Mr Hlungwani alleges Mr Khumalo is “executing a quiet purge” of senior ranks, notably against those who made disclosures and initiated investigations against him.

‘Caution’ is the watchword

Despite the consumer price index (CPI) reaching its lowest point in four years in October (2.8%), from 3.8% in September, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) unanimously decided at its latest meeting to cut the repurchase rate by only 25 basis points to 7.75%, with the prime lending rate adjusted to 11.25%.

SARB Governor Lesetja Kganyago stressed South Africa’s exposure to global trade and price shifts: “As a central bank in a small, open economy, caution is what is going be in play here.” Medium-term risks loom large for the SARB, with Mr Kganyago stating, “the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.”

October marked the fifth consecutive month of inflation decline. The 2.8% represents the lowest point since June 2020 (2.2%). In the last fifty years, CPI has been at such a low level only in 2004 and 2020.

Globally, disinflation remains uneven. In the United Kingdom, inflation rose to 2.3% in October from 1.7% in September, defying forecasts. Bloomberg forecasts that US inflation data to be released this week will indicate price pressures there also remain stubborn.

Risks to global trade are substantial, potentially leading to inflation if worst-case scenarios materialise. Trade tensions and protectionist policies from a Trump administration could increase global prices, reinforcing the SARB’s caution (and exposing South Africa to elevated imported inflation). If Mr Trump’s policies strengthen the US Dollar, emerging market currencies like the Rand may see lower inflows.

The SARB’s inflation target range remains 3%-6%; the Bank forecasts inflation to remain below 4% until the halfway point of 2025. GDP growth is forecast at 1.1% in 2024, 1.7% in 2025, and 1.8% in 2026.

What’s keeping business awake at night?

According to the fourth quarter (Q4) RMB/BER Business Confidence Index, overall business confidence is rising; the Q4 reading scored 45 — the highest since Q1 2022. Positive sentiment following the GNU's formation was bolstered by retail trade sales data, showing a 0.9% year-on-year increase in September. Retailers cited low inflation and ongoing rate cuts as reasons for optimism.

Despite the positive outlook, Gauteng continues to make day-to-day business difficult. BCI respondents cited water supply constraints and construction mafias as major concerns. Deputy Finance Minister, Ashor Sarupen, noted that since 2019 construction mafias have disrupted over 180 projects worth R63 billion.