Changes in exchange rates and government bond yields
Since 2022, South Africa’s external accounts have deteriorated. After two years of exceptional surpluses in 2020 and 2021, the current account has returned into deficit again since Q2 2022, due to the normalisation of trade terms and strong growth in imports (32% of GDP in 2022-23). At the same time, the financial account has not regained its pre-pandemic momentum so far. Net portfolio investment flows, which were close to 3% of GDP on average over 2010-19, have become negative since 2020, while net foreign direct investment (FDI) inflows have remained modest (1.5% of GDP on average over 2020-231).
The global monetary tightening cycle that began in March 2022 has added to the internal factors that have fuelled capital outflows since 2020. Sluggish economic growth (0.8% on average over the last ten years), slow reforms aimed at turning it around and the sharp rise in public debt have weighed heavily on investor confidence. The share of non-resident government bond holders fell steadily from 38% in 2019 to 24.6% in April 2024.
Political uncertainty has reduced following the general elections on 29 May. So far, the financial markets have reacted positively to the formation of a Government of National Unity (GNU) composed of the ANC, the Democratic Alliance (DA) and the Inkatha Freedom Party (IFP). After 30 May, the average yield on 10-year government bonds fell by 4.2% and the South African rand (ZAR) appreciated by 4.1% against the dollar. It then fell below the threshold of 18 ZAR/USD for the first time since the beginning of the year.
In the GNU, the presence of the DA, a centre-right party in favour of fiscal consolidation and reforms aimed at restoring the potential for economic growth, should enable some macroeconomic continuity. However, the risk of political instability remains high, as the alliance with the DA, which has long been the ANC’s primary opposition party and very critical of it, may seem fragile. Without the absolute majority of the ANC in Parliament, South Africa has entered a situation unprecedented since the ANC came to power in 1994.
