Last week, Finance Minister Enoch Godongwana’s finally delivered the 2025 Budget presentation, reaffirming a commitment to fiscal consolidation and implementing a phased VAT hike of 1%. This week, global markets are closely watching central bank monetary policy decisions, with the Federal Reserve (Fed), the Bank of England (BOE) and the South African MPC all due announce policy rate decisions. The MPC decision will likely be a close one, with a 25 bps rate cut not out of the question.
International Market Developments
The Fed meets this week, and they are widely expected to keep interest rates unchanged. This comes in a period where the US economy faces multiple sources of uncertainty including tariffs, trade policy, unpredictable inflation, declining consumer sentiment, immigration policy’s impact on the labor force, energy policy, tax reforms, federal spending, and geopolitical tensions. Fed Chair Jerome Powell will likely be pressed on whether these sources of uncertainty have dimmed the US economic outlook.
On the trade front, escalating tensions between the U.S. and its trading partners have added to market uncertainty. U.S. President Donald Trump’s imposition of 25% tariffs on steel and aluminum imports, along with duties on hundreds of other products, continues to weigh on global trade sentiment.
Local Market Developments
The Budget presentation last week reaffirmed South Africa’s commitment to fiscal consolidation, with a phased 1 percentage point increase in the VAT rate over two years expected to generate additional revenue. While this may modestly dampen economic growth, the impact will be partially offset by increased social grants, VAT zero-rating on essential food items, and no inflationary adjustment to the fuel levy. The Treasury projects government debt to peak at 76.2% of GDP in FY25/26, with the budget deficit narrowing to 3.5% by FY27/28. Debt-service costs are expected to stabilize and decline thereafter, supported by a growing primary surplus.
The economic growth outlook remains subdued, with real GDP growth forecast at 0.6% in 2024, rising to 1.9% in 2025. Structural reforms in energy, logistics, water, and telecommunications, alongside significant public infrastructure spending exceeding R1 trillion over the next three years, are expected to support growth.
Inflation data due this week is expected to show a slight uptick with February CPI forecast at 3.4% year-on-year, up from 3.2% in January. Retail sales are also expected to rise, reflecting improved consumer activity. The MPC meets this week with the rates decision uncertain, however the expectation is for the repo rate to remain unchanged at 7.50%.