Tensions with U.S. Pose Risk to South Africa’s Growth Recovery –Moody’s
Tensions with U.S pose risk to South Africa’s growth recovery, Moody’s said in a recent commentary note after President Donald Trump signed an executive order (EO) freezing financial aid to South Africa early in February.
Moody’s noted that the order was prompted by the new US administration’s views on recent land expropriation legislation as well as South Africa’s stance towards Israel. According to Moody’s, the amount of aid that South Africa receives from the US is limited, and therefore the executive orders is unlikely to significantly impact on South Africa’s gradual fiscal consolidation.
However, analysts noted that a rise in tensions with the US could hinder the economic recovery that is currently underway – particularly if it would impact on South Africa’s trade with the US or foreign investor sentiment – as well as potentially increase domestic political tensions in the new coalition government.
The most significant funding at risk is related to the US President’s Emergency Plan For AIDS Relief (PEPFAR) programme, under which around $440 million was allocated for the 2024/2025 fiscal year for HIV/AIDS treatment and support services.
Moody’s said this amount represents 17% of the total funding for South Africa’s HIV/AIDS programme. On the other hand, USAID funding was minimal in 2024. The US embassy in South Africa confirmed that the waiver issued on 1 February exempting “life-saving” PEPFAR-funded aid from suspension will continue to apply to South Africa.
This makes an immediate sudden stop in PEPFAR funding unlikely. Nevertheless, there remains some uncertainty around how long the exemption will last, the extent of PEPFAR programmes covered by the waiver and the process for receiving official accreditation.
In the commentary note, Moody’s said PEPFAR funding is equivalent to around 0.4% of the government budget and, while it would add to spending pressures, analysts don’t expect a significant fiscal impact should the government need to step in to supplement these crucial health programmes.
“We expect South Africa’s government to remain committed to fiscal consolidation, even as tensions with the US may add to fiscal pressures. Although fiscal metrics are expected to slightly deteriorate in the fiscal year 2025/2026 because of weaker revenue, we expect the government to stabilise the general government debt burden at around 80% of GDP by delivering debt-stabilizing primary surpluses”.
However, South Africa’s fiscal trajectory is noted to remain highly vulnerable to revenue shortfalls from weaker domestic economic growth or lower mining prices. The higher than expected expenditure, driven by significant spending pressures from weak state-owned enterprises and the need to support the most vulnerable parts of the population, also pose a risk, Moody’s stated.
The rating agency stated that these geopolitical tensions pose a greater risk to the growth outlook. South Africa’s trade with the US could also come under increasing scrutiny by the new US administration. Exports to the US amounted to $14.6 billion in 2024 or 3.6% of GDP.
South Africa also benefits from duty-free trade with the US under the preferential trade programme AGOA2 , which may now also come under scrutiny. The US government confirmed South Africa’s participation in AGOA in December 2024, though this is up for review again later in 2025.
That said, only 28% of exports to the US benefited from AGOA in 2024. More broadly, Moody’s said any impact on investment sentiment from rising tensions with the US could hurt South Africa’s economic recovery.
The economic backdrop for 2024 was weaker than we previously expected. Real GDP growth was revised down to 0.6% from 1.1% compared to 0.7% in 2023, given the weakness in the agriculture sector in the second half of the year as droughts hit production.
“Under our baseline that tensions will not impact the recovery, we expect an acceleration in growth to 1.7% in 2025 and 2026 driven by household consumption, less restrictive monetary policy, favourable commodity prices and private sector investments, particularly in the energy sector.
“The government’s strategy is to encourage a significant and sustained increase in the levels of private sector investment in the economy, including participating in the recovery of the energy and logistics sectors.
“The prompt formation of the Government of National Unity (GNU) in June 2024, including the pro-market Democratic Alliance party, alongside the improvements to electricity supply security, has generated positive economic sentiment,” Moody’s said.
However, analysts said they are yet to see concrete early signs of a sustainable improvement in economic growth #Tensions with U.S. Pose Risk to South Africa’s Growth Recovery –Moody’s #CBN Opens FX Window for BDC to Stock up at NFEM Rate
