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A diplomatic row between the US and South Africa that’s sent the rand to its weakest level on record against the dollar may quash Pretoria’s record of outperforming International Monetary Fund expectations for key budget metrics.
Years after fiscal buffers were eroded by an era of government graft and bailouts for dysfunctional state-owned companies, the National Treasury’s resolve to stabilise public finances led to significant improvements in state debt and budget deficits. It even beat IMF estimates for the key metrics every year since 2020.
Staff of the Washington-based lender that visited South Africa and met local authorities in March are scheduled to present their findings to its executive board Monday. While the IMF cut its gross domestic product forecast for South Africa to 0.1% from 1.2% and predicted that the budget deficit would widen through the fiscal year ending March 2026 in the days after the visit, it’s expected to publish a full report with estimates for other key metrics this week. The report will come as severe power outages undermine the country’s economic growth prospects and add to the cost of doing business amid the country’s most aggressive interest-rate hiking cycle in at least two decades. It will also follow American allegations that Pretoria supplied weapons to Russia, which rattled traders concerned that the US could punish South Africa, and have weighed on the rand and government bonds.
Rand weakness, increased price-growth and borrowing costs undermine efforts to rein in debt and reduce budget deficits, according to an analysis published by the National Treasury in February. At the time, it said one percentage point increases in inflation and interest rates, together with a one rand depreciation in the local currency against the dollar, would push combined government debt and loan-service costs up by more than R60 billion. South Africa’s rand has weakened more than 12% against the dollar this year, making it the worst performer in a basket of 16 major currencies tracked by Bloomberg.
