Will a Trump presidency affect the SA economy?

It is a known fact that whatever happens in the US affects South Africa and therefore it is a valid question for people to ask how a Donald Trump presidency will affect the country’s economy. With so many headwinds from around the world, the South African economy is vulnerable to risk.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the main effects of a Trump presidency are anticipated to manifest in South Africa’s currency. “Our scenario modelling shows that depending on the specific outcome, the exchange rate is likely to weaken from the end of 2025 with the peak impact on inflation likely to be felt in 2026.”

However, he says real gross domestic product (GDP) growth is not expected to be affected in a significant way.

Oxford Economics Africa’s latest Global Risk Survey shows that businesses are increasingly focused on the potential fallout from the forthcoming US presidential election. Van der Linde says emerging market risk sentiment has soured somewhat recently as markets assess the impact of a potential Trump presidency.

Meanwhile, President Joe Biden’s decision to pull out of the US election race implies an already uncertain election is now even more possible, although the latest developments do not alter our US colleagues’ views regarding election scenarios or party policies, he says.

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Two plausible scenarios for SA

“We explore the economic impact on South Africa by considering two plausible scenarios: A full-blown Trump presidency, which sees the former president returning to the White House and Republicans gaining full control of Congress after the 2024 election and a limited Trump presidency scenario.

“In a scenario where limitations are placed on Trump’s governance, threadbare congressional majorities, inflation concerns and court challenges scale back the extent of policy changes during his second term.”

According to their model simulations, Van der Linde says, the South African Rand should weaken under both scenarios, adding upward inflationary pressure on domestic prices. By the end of the first quarter of 2027, in the full-blown Trump presidency scenario, the Rand depreciates to R21.0/$, 5.5% weaker relative to a scenario where the Democrats keep the White House.

“This is mainly due to a stronger US dollar and thanks to a positive fiscal impulse boosting the US economy temporarily, while subsequent inflation rises amid renewed trade wars, real incomes are squeezed and the US Fed brings its policy easing cycle to an abrupt end.”

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Stronger Rand under limited Trump presidency

Van der Linde says according to their modelling the South African Rand follows a milder depreciatory path under a limited Trump presidency scenario, slipping to R20.1/$ by the first quarter of 2027, only 1.5% weaker than the Democrat alternative. In both instances, the rand reverts to the current forecast by the first quarter of 2029.

This chart shows how a strong US dollar will put pressure on the rand, while a Trump presidency could be even more burdensome

Source: Oxford Economics

“Although our current forecast assumes a stronger US dollar over the short- to medium term, the potential economic impact of a Trump presidency is unlikely to send the domestic economy into a tailspin.

“Idiosyncratic factors are likely to be key drivers of South Africa’s demand and cost dynamics as the government of national unity (GNU) charts a course to get the economy back on track, although heightened market uncertainty in the build-up to the November US elections could impede the South African Reserve Bank’s anticipated cutting cycle.”

Oxford Economics Africa’s base case is for 25 basis points cut at the end of the fourth quarter of 2024, which, barring unforeseen swings, hinges on sustained domestic disinflation and US monetary policy actions, Van der Linde says.

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What about Agoa and trade with the US?

“However, the loss of preferential trade with the US under the African Growth and Opportunity Act (Agoa), in the face of potentially more protectionist trade policies under a Trump presidency, would hold wider-ranging economic consequences for South Africa.”

He points out that the local currency lost 6.2% compared to the previous quarter of its value during the second quarter of last year amid heightened fears that South Africa might lose access to Agoa.

“That is still a risk (with South Africa’s new minister of trade, industry and competition, Parks Tau, attending the Agoa Forum in Washington currently) and could increase if Trump were to be re-elected president.”

This chart shows that although a weakened exchange rate is not a foregone conclusion in the event of a Trump presidency outcome, a weaker rand is anticipated:

Source: Oxford Economics

Van der Linde says just as South Africa emerged from a protracted period of uncertainty, following a significant shift in the country’s political landscape amid renewed optimism that the GNU could ignite economic growth, geopolitical tensions elsewhere pose disruptive risks.

“Geopolitics is a salient concern for global businesses, as are the risk of higher-for-longer interest rates and financial market conditions. With US politics in a state of flux, the risk-sensitive rand remains vulnerable to volatile fluctuations in the build-up to the November elections.

“The combination of excessive exchange rate volatility and a weaker rand could undermine South Africa’s disinflation process in the second half of 2024 and possibly delay interest rate cuts.”

He points out, that aside from specific event risks, their modelling does not point to a weakened growth outlook in the event of a Trump presidency. “However, increased trade protectionism would not bode well for South Africa, which benefits greatly from preferential trade with the US.

“With domestic uncertainty having quieted down somewhat and things appearing more stable on the electricity front, demand remains weak with supply-side conditions far from ideal. Our base case is for real GDP to grow by 0.75% in 2024, averaging around 1.7% per annum over the next five years.”