SA backs down, marginally

24 March 2025 - Is SA’s stance towards the US shifting? ⁠⁠Can Germany revive its military? Will Trump’s policies help or hurt US growth? Why didn’t the SARB cut rates?

SA backs down, marginally

In United States (US)-South Africa (SA) relations, there has been some movement from the South African government on questions of symbolism. The African National Congress (ANC) in the Western Cape has desisted from plans to receive South Africa’s expelled former ambassador to Washington, DC, Ebrahim Rasool, with a hero’s welcome after President Cyril Ramaphosa urged people to refrain from actions that might seem inflammatory. In Johannesburg, the Presidency has been in communication with the City of Johannesburg council to stop the renaming of Sandton Drive after Leila Khaled, a Palestinian terrorist.

However, other sections of South African society are not playing along. The ANC Veterans League said: “As the ANC, our strategic position, both politically and diplomatically, should be to oppose, call out, and build alliances against the rising reactionary, imperialist moves of Trump and his allies. It is naïve to believe that you can rebuild diplomatic relations with an implacable enemy.” Economic Freedom Fighters (EFF) leader, Julius Malema, went back to singing about killing farmers to a large audience last week. Trade union federation Congress of South African Trade Unions (Cosatu) and the South African Communist Party — members of the Tripartite Alliance together with the ANC — said they would welcome Mr Rasool back with honours, even if the ANC would not. And in the Eastern Cape, land invasions likely encouraged by the signing of the Expropriation Act were highlighted on social network X by Ian Cameron, the police portfolio committee chair, before being picked up and reposted by influential accounts in the US. All this will have done South Africa’s image in Washington no favours.

Quo vadis without US funding?

This means that expectations of further US funding cuts to SA could soon be confirmed. Last week, the acting director of the US National Institutes of Health (NIH), Matthew Memoli, was reported to have requested his staff to provide a list of SA-related grants, a preliminary step which suggests they could soon be cancelled.

In SA terms, the amounts in question are considerable. The NIH is the biggest funder of medical research in SA, through grants to projects at the SA Medical Research Council (MRC) and many of SA’s top universities. Thousands of jobs and entire university departments and research organisations depend on them. For example, the US contribution makes up 28% of the MRC’s scientific budget, while the University of Cape Town (UCT) is the single largest recipient of NIH funding outside North America.

The MRC’s chief scientific officer, Glenda Gray, is reported as calling the impending funding cuts “an assault on science”, while MRC president, Ntobeko Ntusi, warned that no single partner in the global health environment could close the gap that would be left by a departed US. Similar financial concerns are being raised at UCT, where 155 projects are supported by grants from US federal agencies, of which 140 are NIH research programmes worth R2.75 billion. The university estimates that the salaries of 475 academic and research support staff depend on NIH funding entirely or in part.

And yet the university persists in pursuing an academic boycott of Israel, which will not strengthen its case for US funding — or indeed local funding, from which the Jewish community has reportedly stepped back. Further cuts in US funding could have dramatic effects on the sustainability of SA research, especially in healthcare. While this is to be deplored, the US will feel that it is justified in directing its benefits towards countries with which it can cooperate rather than those that actively oppose its interests.

Germany rearms

Germany has been rattled by the Russian war on Ukraine and by US President Donald Trump’s rapid resetting of the US military partnership with Europe. Having taken a decidedly pacifist turn after losing World War II, and confident that it was safe from military threats after the fall of the Soviet Union and thanks to US and Nato protection, Germany allowed complacency to take over and let its defensive capabilities wither. From 1992 to 2021, the number of tanks declined from over 4,000 to 340, a drop by over 90%; the number of howitzers fell from over 3,000 to 120; the number of fighter jets declined by more than 50%.

But now, a rapid mindset shift is occurring. Last week, the upper house of Germany’s Parliament, the Bundesrat, passed an amendment to Germany’s constitution, the Basic Law, that throws overboard the country’s post-2009 fiscal conservatism. The legislation creates a €500 billion climate and infrastructure fund and exempts defence spending above 1% of GDP from tight debt restrictions, effectively permitting unlimited borrowing for defence.

If Germany makes use of its new power to borrow, as seems likely, it raises the risk of higher inflation and the risk of armed conflict, as countries that feel threatened by Germany and its European partners also increase their defence spending. But it could spell a boom time for German and European armaments manufacturers as well as construction companies. Germany’s economy has not grown since the second quarter of 2023, and its businesses and consumers will be hoping that the massive impending stimulus will kickstart the economy once the money starts flowing.

Economic uncertainty in Washington

Regarding the economy, the mood in Washington vacillates between uncertain and subdued. In less than two weeks from now, on 2 April, the US could impose new reciprocal import tariffs on its trading partners, an event which Mr Trump has called a “liberating day for [the US]”. Some countries can prevent high US tariffs against their exports by acting ahead of time to lower their respective tariffs on US goods and other imports. This then could spur a period of greater trade liberalisation. Until then, though, businesses and investors, especially in the US, are holding back on capital outlays and investments, worried about the impact of higher prices and more stubborn inflation on their businesses.

While US Treasury Secretary, Scott Bessent, indicated “each country will receive a number that we believe represents their tariffs... For some countries, it could be quite low, for some countries, it could be quite high”. Mr Trump’s varying assessments of countries will play a large role in the level of tariffs imposed. According to Bloomberg, “The rates [tariffs] could be adjusted based on Trump’s perception of whether a country has been cooperative or combative. There’s also a chance some of the duties don’t take effect in early April, and would only come after a USTR [Office of the United States Trade Representative] or Commerce Department probe that could drag on for several months”. Continued tariff uncertainty coupled with seemingly subjective or arbitrary decision-making will press down on short-term growth prospects. Countries like South Africa, which have chosen a confrontational stance towards the US, could find themselves at the sharp end of high US tariffs.

Interest rates in a state of suspense

The central banks of both the US and SA opted to hold interest rates steady at their last meetings. The US Federal Reserve (Fed) kept its benchmark overnight rate at 4.25% to 4.50%, while the SA Reserve Bank (SARB) paused its rate-cutting cycle to hold its benchmark repo rate at 7.5%.

Both Fed chair Jerome Powell and SARB governor Lesetja Kganyago highlighted the risk of higher inflation resulting from rising trade tariffs originating from the Trump administration. They also emphasised heightened uncertainty about Mr Trump’s next actions and the impact of those actions. Mr Powell said after the Fed’s two-day March meeting: “It’s just really hard to know how this is going to work out.” Mr Kganyago said: “The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable. Globally, we do not know where policy will end up.”

South Africa’s inflation rate was 3.2% in February, below the 3.4% expected by analysts, and close to the lower boundary of the 3%-6% target range. The Treasury expects the South African economy to grow at 1.9% in 2025, while the growth forecast for the US economy is 1.7%, marked down from the previous 2.1%. Central bankers, like governments the world over, are unsettled by Mr Trump’s rapidly shifting actions. This suggests that an era of heightened volatility and uncertainty lies ahead.