Why policy uncertainty in SA has hit a new high

Political uncertainty in South Africa worsened in the second quarter of the year, largely driven by the global upheaval caused by the conflict in the Middle East.

The North-West University (NWU) policy uncertainty index rose to 81.9 in the quarter from 77.8 during the first three months of the year, moving further into negative territory and away from the baseline 50-point mark.

It was strongly influenced by the immediate shock stemming from the conflict, which has had worldwide negative consequences for growth, inflation and supply chains, including the South African economy. The recent interim memorandum of understanding between the US and Iran, while being a positive outcome, came too late in the quarter to make a real difference.

“Even favourable developments, such as successful negotiations and the opening of the Strait of Hormuz as a result of the US-Iran memorandum of understanding ― as well as lower global oil prices ― will take time to unwind the damage that the latest global energy crisis has done to the world economy,” the report said, adding that the agreement is still fraught with uncertainties and conditionalities.

It noted how some central banks, including the European Central Bank, the Bank of Japan and the South African Reserve Bank, are keen to keep inflationary expectations anchored. They no longer have a “wait-and-see” attitude to the supply-side shocks and have begun to raise interest rates.

Read: How La Niña, gold and PGMs carried SA’s economy in first quarter

The Bank lifted the key policy rate by 25 basis points to 7% in May, arguing that to wait for the second-round effects of the global oil market turbulence to emerge before taking action might have been leaving it too late.

The first-round effects made themselves felt with the first steep fuel price increases in April, which rattled consumers even when the government stepped in with a temporary reduction of the general fuel levy to soften the blow.

“The highly uncertain situation to date has already clearly tested global economic resilience, and new shocks may yet come in different shapes and sizes over the next few months,” the NWU said on Thursday.

“Despite short-term mitigation measures taken by many countries, most oil-importing economies have experienced severe economic pain. The most vulnerable economies have not just been those that need imported oil but also those that cannot easily absorb a big jump in oil, freight, food and financing costs simultaneously.”

The NWU report said recent positive reports on South Africa from S&P Global and Fitch signalled that the country has the potential to lift its growth rate and reduce its public debt faster “if it continues to do the right things on economic policy”.

But it flagged that gross fixed capital formation — as the key to sustained future job-rich growth — remains the Achilles heel of South Africa’s economic performance. Ideally, if the government of national unity’s economic growth target of 3.5% is to be achieved, total fixed investment needs to be closer to 20% of GDP, rather than about 14% at present.

“Investor confidence must continue to be nurtured through accelerating the pace of growth-friendly policies and projects,” NWU said.

The policy uncertainty index was launched 10 years ago to craft a more accurate measurement of how negative shocks and developments lead to bad outcomes and tough policy challenges. Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it lowers investment, employment and output.

The NWU report said the AI boom, highlighted by tech company SpaceX’s initial public offering, has driven unprecedented investment into technological infrastructure.

But analysts have raised a number of red flags, including severe market concentration, highly leveraged investment and excessive market expectations.

In its recent global economic outlook, the Bank for International Settlements also warned that optimism about AI may not last, despite its promise of future productivity gains. The surge in related capital expenditure could prove unsustainable if supply bottlenecks restrain production. The IMF, for its part, said the AI boom resembles the late-1990s internet bubble, with its concomitant risks.

Investor confidence in South Africa must continue to be nurtured through accelerating the pace of growth-friendly policies and projects, such as through Operation Vulindlela, the NWU report said.

The second-quarter “policy uncertainty index suggests that elevated uncertainty will remain until the negative external shocks have been fully dissipated and the geopolitical outlook is indeed stabilised in the months ahead”, it said.

“Domestic policy choices, nonetheless, exist to help sustain South Africa’s economic performance later in 2026 amid whatever global headwinds may still stem from ongoing geopolitical uncertainty.”