The end of the sugar high

1 September 2025 — Where has the post-GNU optimism gone? Why is SA manufacturing in the doldrums? Will SA be able to replace the US as a trade partner? After a second adverse court ruling, will the Trump tariffs remain in place? Could SA be excluded from the SWIFT international payment network?

The end of the sugar high

The Government of National Unity (GNU) has not been able to deliver on the expectations created in the wake of its formation in June 2024. The initial hope was that the new government would introduce significant reforms that would trigger higher levels of growth.

This was reflected in the significant value appreciation of shares of companies exposed to the South African market, including in sectors such as construction, retail and food manufacturing, in the second half of 2024. In those six months, the share prices of retailers appreciated by 32%, construction companies by 48% and food producers by 29%, as reported by the Daily Investor.

By contrast, in the first half of 2025 investors switched out of these sectors to shares in companies with greater exposure to faster-growing foreign economies, including such industries as telecommunications, mining, and tobacco.

The skittish approach of investors to South Africa is reflected in the fact that they invested in quick-to-move financial assets rather than long-term fixed assets. Investment in fixed assets, as recorded in the rate of gross fixed capital formation, declined by 1.7% in the first quarter of 2025, following a 0.5% drop in the fourth quarter of 2024, according to Stats SA.

Our read is that the initial tentative optimism that greeted the GNU is now dissipating. Reforms are moving too slowly and are too limited in scope to kickstart faster economic growth. In addition, they are focused exclusively on infrastructure while neglecting policy.

In the policy space, rather than eliminating obstacles to growth, barriers are being reinforced through measures such as the Expropriation Act, the National Health Insurance Act and the amended Employment Equity Act. From today, 1 September, employers are forced to start complying with highly intrusive racial and gender requirements for their workforces under pain of significant penalties.

And yet, in theory there is considerable upside potential. If South Africa was able to attract some capital even while positioned as a low-growth and hostile investment environment, it could attract exponentially more by embarking on a reform course that decisively addresses its weaknesses.

Manufacturing in the doldrums

South Africa’s manufacturing sector is in a deep funk. The CRA's June Macro Review, SA's deindustrialisation dilemma, reports that the value contribution of manufacturing to the economy dropped from 23% of gross value added in 1994 to approximately 14% in 2014 and has remained at that level ever since.

Manufacturing contracted in six of the last ten years, shrinking by 0.4% in 2024, and annualised output volumes in the first four months of 2025 were at just 82% of their 2007 levels — lower even than the volumes achieved in the year 2000.

This is reflected in low manufacturing business confidence. The RMB/BER Business Confidence Index records manufacturing business confidence at 33 in the second quarter of 2025. The index ranges between 0 for a complete absence of confidence and 100 indicating extreme confidence, with 50 representing the neutral mark. The last time manufacturing business confidence was above 50 was in the fourth quarter of 2007.

Comments included in the Italtile group results for the year ended 30 June 2025, released last week, illustrate some of the obstacles confronting manufacturing companies: “An onerous regulatory environment, deteriorating infrastructure, uncertain energy supply and spiralling municipal costs [are] leading to the acceleration of de-industrialisation.”

These challenges impact profitability but are also a direct threat to employment. The manufacturing sector has historically been a major employer of low-skilled workers. The unemployment rate for youth aged 15-34 years is 46.1%, posing a significant threat to social and economic stability.

Last week, vehicle manufacturer Ford announced it was retrenching about 470 workers; the closure of Goodyear’s tyre plant, announced at the beginning of August, meant the loss of over 700 jobs. While US tariffs might have played a role in this, the greater part of the blame belongs to the South African government for having failed to create a compelling investment environment.

SA’s export Plan B looking shaky

The growth prospects of two of South Africa’s key non-US export markets continue to flag, constrained by growth challenges as well as political instability and uncertainty.

In China, a long-term depressed domestic housing market, coupled with weakening manufacturing and factories output, have dropped the country’s GDP growth rate into the 4% to 5% range, down from 6% to 10% in the decade before Covid.

With the total government debt-to-GDP ratio at 300%, the state has less room to stimulate the economy than ten years ago, when debt to GDP stood at around 200%. The new normal of higher US tariffs will also press down on Chinese growth.

In 2024, South African merchandise exports to China totalled R220.5 billion, representing 15.9% of total exports. In 2023, foreign direct investment (FDI) from China into South Africa totalled R104.8 billion, or 5% of the total FDI received by South Africa. For comparison, 8% came from the US.

In Europe, meanwhile, political upheaval and heightened uncertainty once again reared up last week. The Dutch Prime Minister Dick Schoof and his cabinet survived a motion of no confidence. Snap elections are scheduled for 29 October. In June, Geert Wilders’ Freedom Party pulled out of the ruling coalition; the government has experienced bouts of increased turbulence and uncertainty since.

In France, Prime Minister François Bayrou called a confidence vote for 8 September, with mounting debt representing an existential threat for the government. With Mr Bayrou very likely to lose the vote, President Emmanuel Macron will need to name a replacement.

Last year, the European Union accounted for 20.6% of total South African merchandise exports, with a value of R372.1 billion. In 2023, South Africa attracted R1,497 billion of foreign direct investment from Europe, representing 73% of all FDI into South Africa.

While President Cyril Ramaphosa and the South African government have talked a big game about developing alternative export markets, the less than stellar growth forecasts of China and the EU will continue to weigh on South Africa’s export opportunities. Its ongoing domestic policy constraints on growth will increase the difficulty of delinking from the US.

Trump tariff ruling: uncertainty deepens

A US federal appeals court has ruled that President Donald Trump’s universal “reciprocal tariffs” were imposed illegally, declaring them outside the president’s emergency powers. While the tariffs remain in place until mid-October, the Trump administration will appeal to the Supreme Court, where a conservative majority could yet uphold them.

For South African exporters, the ruling adds to an already uncertain trade environment. Tariffs raise costs for importers and weaken competitiveness, particularly in sectors such as automotive, agriculture, and manufactured goods. A Supreme Court affirmation would likely force Washington to unwind the tariffs, raising the possibility of repayment claims and renegotiated trade deals with countries like Japan and the United Kingdom. But a reversal would entrench tariffs as a permanent fixture of US trade policy, with South Africa locked into one of the highest global tariff brackets.

Either way, volatility in US trade policy is set to continue. South African businesses should plan for tariffs as a long-term risk rather than a temporary disruption.

SWIFT action against SA?

Although considered unlikely, the possibility that South Africa could face exclusion from the Society of Worldwide Interbank Financial Telecommunication (SWIFT) payments system has entered the financial policy debate in South Africa.

It featured on the agenda of a meeting of the board of directors of the Banking Association of SA, which the finance minister, Enoch Godongwana, attended. Russia, a fellow BRICS ally of South Africa’s, was cut off from SWIFT in 2022 after it invaded Ukraine.

South Africa’s National Treasury, however, maintains there is “little to no risk of withdrawal or removal of South African banks from the SWIFT network.” SWIFT falls under EU jurisdiction, and South Africa’s regulators have longstanding, cooperative ties with Brussels. EU authorities are unlikely to act against Pretoria absent a major escalation, and Treasury is quietly working on diversifying payment systems to cushion against shocks.

The broader geopolitical consequence is that Pretoria may accelerate its pivot towards BRICS financial infrastructure. While the outright removal from SWIFT remains technically remote, the fact that the scenario is openly discussed between government and banks is significant for South African businesses. It reflects the uncertainty stemming from the deteriorating US-South Africa relations, trickling down from political disputes to testing the resilience of the country’s financial system.