Portfolio flows and terms of trade buffer ZAR against tariffs

Key points

• Strong inflows into South African bonds, driven by JPMorgan’s index reweighting reducing China and India’s dominance, have boosted ZAR appreciation. Foreign demand injects liquidity, compresses yields, and enhances carry attractiveness, providing a buffer against fiscal weaknesses and supporting ZAR resilience amid improved GNU stability.
• Furthermore, favourable terms of trade maintain a positive trade surplus, narrowing the current account deficit and reducing reliance on debt funding. Combined with bond inflows, this dynamic eases deficit financing, increasing the likelihood of ZAR strengthening and maintaining its performance despite historical sub-investment grade challenges.
• Tariffs, including a 30% levy on South African exports, and AGOA renewal uncertainty threaten to disrupt trade flows, potentially widening deficits and pressuring the ZAR. While only a fraction of exports are affected, strained US relations could detract from the appreciation at the margin if alternative partnerships fail to offset losses.

Baseline view

In conclusion, the ZAR is expected to exhibit resilience and modest appreciation in the near term, buoyed by bond inflows and strong terms of trade, but remains vulnerable to volatility from escalating US tariffs and global trade tensions, necessitating vigilant fiscal reforms. This coming week will be important in this regard as Trump further ramps up the ante on other tariffs, which threaten to trigger a broader trade war.

 

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