Economic Update February 2026

The Downside

The war in Iran has raised geopolitical uncertainty to a new level. The decision by the USA and Israel to attack Iran was not entirely unexpected, as patience had been running out with Iran’s two-decade long refusal to obey UN Security Council resolutions over its nuclear weapons programme.

At the time of writing this note, it had become clear that the hostilities in the Middle East were bound to drag on for weeks, with the whole region having to face unprecedented turmoil. Iran’s attack on other Gulf nations via ballistic missiles and drones has caught observers by surprise, with the United Arab Emirates, Saudi Arabia, Qatar, Bahrain. Kuwait and Oman having reported the interception of hundreds such weapons, although some of them have managed to cause damage to buildings and an oil tanker. Strikes by Iran have hit urban centres, energy infrastructure and airports, causing anxiety and fear amongst populations that have become used to relative security.

The initial capital market reaction to the war in the Middle East has been fairly predictable, with the US dollar index gaining 100 basis points and emerging market currencies taking a dip. The South African rand lost more than 3% between 25 February and 3 March, whilst the price of Brent crude oil jumped to around $80 per barrel on 3 March - a 33% increase from early January. With the strait of Hormuz reportedly having been closed by Iran, global energy markets will remain volatile, as 20% of the world’s oil supplies travels through this sea route. Although exporters will not mind some reprieve from an overvalued currency, any lengthy weakness of the rand is likely to halt the Reserve Bank’s rate-cutting cycle.

The Upside

Tourists return in droves

Ever since the end of winter, tourists from all over the world have been converging on South Africa’s favourite tourist destinations, with Cape Town International Airport consolidating its position as the preferred point of entry (providing ample justification for the decision to build a new international airport in the Cape winelands).

During the fourth quarter of 2025, the post-Covid recovery rate for overseas visitors to South Africa came within a whisker of a full recovery, reaching a level of 96% (using the number of tourists in the same quarter before the Covid-19 pandemic as the denominator). The UK remained the top source country with 350,000 visitors and a year-on-year growth rate more than 15%. The US was in second position, followed by Germany, the Netherlands and France.

Double-digit year-on-year growth rates were recorded for eight of the top-twelve source countries for overseas tourists. Brazil was the star performer for year-on-year tourist arrival growth, namely 28% - providing an example of the benefits from implementing direct flights between the two countries. Australia also impressed with a year-on-year growth rate of 23%. 

New record high for retail sales

Following a solid recovery from the damaging effects of the Covid-19 pandemic, retail trade sales posted a swift recovery between 2021 and the 3d quarter of 2022, aided by an accommodating monetary policy stance and a prime overdraft rate that had dropped to 7%.

Unfortunately, the Monetary Policy Committee (MPC) then returned to its hawkish ways, which resulted in an increase in the prime rate to 11.75% - its highest level in 15 years, despite the absence of any sign of demand inflation. Declining levels of real household disposable income followed, which predictably led to a declining trend in retail trade sales that lasted for six quarter (seasonally adjusted). 

The tide started turning in 2024, when an interest rate-cutting cycle commenced, with the prime rate now having been lowered by 150 basis points to 10.25% (as at 2 March 2026). This facilitated a new growth trend for retail sales, with a new quarterly record high of R444 billion having been achieved in the fourth quarter of 2025 a year-on-year increase of 3.1% (in real terms). Online spending continues to command an increasing portion of total retail spending, which is estimated to have grown by 50% in 2025 to a share of 11.5% of the total.

Some cheer in the 2026 Budget

The tabling of the 2026/27 budget went smoothly, receiving plaudits from the country’s financial sector and the business community at large. The underlying reason for the overwhelming positive reaction to the latest budget may be found in a sterling performance of South Africa’s mining companies, most of whom benefited from the record prices achieved for platinum group metals (PGMs) and gold during 2025. Marginally higher GDP growth in 2025 was also helpful.

As a result of higher company profits, the National Treasury was able to realise a healthy revenue overrun on the 2025/26 budget of almost R29 billion. This allowed the Minister of Finance to introduce a range of measures that provide tax relief to individuals, especially via adjustments to personal income tax brackets, whilst also assisting the small business sector via a significant increase in the VAT registration threshold, namely from R1 million to R2.3 million.

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Dr. Botha

On Balance, by Dr Roelof Botha, deliberately emphasizes positive news. It often highlights the resilience of the South African economy and the immense scope for new business opportunities.