This week's Africa & Alpha offers a comprehensive examination of monetary trends, sovereign bond performance, capital flow dynamics, energy strategy, municipal fiscal conditions, and the evolving geopolitical backdrop shaping South Africa’s path forward.

Inflation and Monetary Policy: Anchored Yet Precarious

Headline consumer inflation remained stable at 2.8 % year-on-year in May, matching April’s figure and falling below the SARB’s midpoint target. Core inflation also softened to 3.0 %, reinforcing the dovish narrative. Governor Lesetja Kganyago revealed that the SARB is actively considering formal adjustments to the inflation target band, which could structurally lower long-term inflation expectations and reduce real interest rates.

Standard Chartered’s Razia Khan highlighted this window of price stability as pivotal for anchoring credibility. The real policy rate remains positive, and the SARB has managed to separate domestic inflation dynamics from global price shocks which is an achievement few emerging market peers can claim. This credibility, however, must be defended amid geopolitical uncertainty and liquidity stress across the global system.

Sovereign Bonds: Durability in the Face of Volatility

Sovereign bond markets displayed resilience throughout the week. The SARB’s weekly nominal bond auctions for the R2037, R2040, and R2053 series produced strong bid-to-cover ratios of 5.54, 3.18, and 4.25, respectively, with yields ranging between 10.57 % and 11.13 %. The benchmark 2035 bond yield fell 3.5 basis points to 10.105 %, indicating steady demand from local institutions and a constructive view on inflation.

Inflation-linked instruments also saw robust uptake. The SARB sold:

• R400 million of 2033 linkers at a 5.12 % yield (bid-cover: 1.73)

• R355 million of 2046 linkers at a 5.19 % yield (bid-cover: 2.32)

These real-yield instruments continue to draw interest from investors seeking inflation protection. However, the currency backdrop and global sentiment remain limiting factors.

On Friday, foreign investors sold a net R81.2 million in South African bonds. For the week ending June 19, foreign investors were net buyers of R387 million, compared to a sizable R8.36 billion net inflow the previous week. Yet month-to-date flows remain negative at R6.01 billion.

While foreign holdings of government bonds rose by R27.2 billion from December 2024 to May 2025, their share declined marginally to 24.5 %, underlining a cautious investor sentiment.

Table: Foreign Investor Bond Flow (JSE Ltd.)

While foreign holdings of government bonds rose by R27.2 billion from December 2024 to May 2025, their share declined marginally to 24.5 %, underlining a cautious investor sentiment.

Capital Flows and Financial Stability: A Delicate Balance

The SARB Financial Stability Review released this week underscores the fragility of South Africa’s financial position amid external shocks. Foreign investors have sold R111 billion in equities in the first five months of 2025. This exodus mirrors trends across emerging markets but is amplified by local vulnerabilities: overleveraged state-owned enterprises, weak GDP growth, and investor caution toward political risk.

Nevertheless, the SARB emphasised the robustness of South Africa’s banking system, supported by healthy capital buffers and limited credit excesses. The first-ever climate risk stress test of systemic banks showed preparedness, although data gaps remain. Notably, 32 % of banking sector credit exposure is considered climate sensitive. Still, the SARB warned of downside risks: a major selloff in rand-denominated bonds could raise government borrowing costs and tighten liquidity. Reduced foreign participation may increase reliance on domestic funding sources.

Amid this backdrop, there is a positive development: South Africa has met all 22 Financial Action Task Force (FATF) action items. A potential delisting from the greylist in October 2025 may help reverse some of the negative capital flow momentum.

Trade and Geopolitics: South Africa at the Crossroads of US Policy

As global trade fragmentation accelerates, South Africa is caught between alignment and diversification. The looming July 9 tariff deadline where duties on South African vehicle and steel exports to the United States could intensify diplomatic urgency. In response, Pretoria has proposed a multifaceted agreement: LNG terminal access, mineral trade incentives, and export quota flexibility. While there is guarded optimism, hedging against US disengagement remains prudent. The Department of Trade and Industry is pursuing diversification into 22 new bilateral trade relationships, including within ASEAN, Latin America, and the Middle East.

Failure to secure favourable US trade terms could add further pressure on the rand, increase import costs, and stoke inflation. Meanwhile, market sentiment is being shaped by shifting geopolitics. South African equity markets remain undervalued, with the FTSE/JSE Top 40 Index trading at a forward price to earnings ratio of 11.31, compared to 13.0 for the MSCI EM Index. Despite USD 6.3 billion in foreign equity outflows year to date, South African equities have outperformed both the S&P 500 and MSCI EM in dollar terms in since the beginning of Q2 2025.

However, volatility is back. USD/ZAR one week risk reversals widened sharply, suggesting hedging against geopolitical escalation in the Middle East. Bond yields rose slightly, with the 2035 benchmark up 2 basis points to 10.07 %. Momentum Investments observed that investor conviction hinges heavily on the durability of the Government of National Unity. If coalition fractures emerge before the 2026 election cycle, renewed risk premia and increased capital flight are likely.

Municipal Finance: Structural Weakness Persists

South Africa’s municipal balance sheets however reflect rising systemic risk. By March 2025, consumer debt to municipalities reached R416.1 billion, with households responsible for 72 %. Recovery rates remain weak, with only 2.6 % written off and revenue collection at 63.6 %, well below the budgeted 85 %.

Municipal creditors now stand at R131.8 billion, with 84.8 % overdue beyond 90 days. Capital expenditure execution remains low at 33.6 %, dragged by planning deficiencies and procurement delays. While conditional grant allocations exist, disbursement rates remain below 50 % for many categories, threatening infrastructure development.

Outlook

South Africa’s macroeconomic posture reflects a country both vulnerable and visionary. It faces short-term capital volatility, geopolitical shocks, and fiscal tightrope walking. Yet it also presents strategic value in its inflation management, real yield profile, energy ambition, and fiscal transparency.

 At Regal Capital, we retain a cautiously constructive view. We favour selective exposure to:

Long duration government bonds, where real yield and price stability remain attractive

High quality equities with foreign revenue bases and strong governance metrics. While global headwinds persist, we see signs of underlying durability. The outlook hinges on continued SARB credibility, political cohesion, and diplomatic agility in trade and energy diplomacy.

This is not yet a breakout narrative. But for the patient, informed investor, South Africa continues to offer asymmetric opportunities.

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