2016 has come around like a whirlwind, and I would have liked to have begun the first article of the year on a lighter note, however, the demons of 2015 seem to have gained momentum and entered 2016 with vengeance, making them difficult to ignore. The economy has been a hot topic even for those who don’t normally follow financial news. The articles relating to the weakening Rand, the Chinese economy and 2016 outlook have come in abundance. I thought it may be worthwhile to re-visit some of my blogs from 2015 and see exactly how they tie into what is happening in 2016 as well as summarise some of the events that have lead up to our current economic condition.
The impact of the Chinese stock market crash in 2015 had severe consequences for South Africa’s export of iron ore and other commodities and contributed to the weakening Rand due to China being South Africa’s largest trading partner.
China’s continued slow-down of its economy has been exacerbated in the start of 2016 when the Chinese government once again suspended trading in an attempt to ease the fall in the stock market.
“Direct and indirect trade impacts from a sharper than anticipated slowdown in China will harm the already struggling mining sector. In the South African context, that has a direct impact on labour in that industry.”- Mamokgethi Molopyane, Moneyweb
The slow-down in the Chinese economy means less export opportunities for South Africa and reduced investment into the African continent.
The interest rate
As mentioned in a previous newsletter (South Africa- Repo rate adjustment), one of the reasons the interest rates were increased in July 2015 was to reduce the effect of the pending US interest rate increase on the Rand.
Since then, the Rand has continued to weaken due to drought which has significantly affected the agricultural sector resulting in a decline in exports, the US interest rate increase and reduced investor confidence to name a few.
No one expected the removal of finance minister Nhlanhla Nene in early December. Given the already low investor confidence, the Rand was sent spiralling out of control. The following graph depicts the Rands fall:
(South African Reserve Bank)
The following article by Fathima Bhoola (WITS) also give a good summary of the weakening Rand:
Furthermore, South Africa was downgraded by Standard and Poors and Moody’s and given a negative outlook. The fear of a junk status rating hangs over us and (official) recession is a very real possibility.
The Reserve Bank is likely to increase the interest rate by 50 basis points to 6.75% at the end of January. Given the increasing cost of food, electricity and possibly water in the near future, together with South African’s indebtedness, one may wonder how this is intended to help.
The South African economy is currently so fragile that decisions taken must be done so with the utmost care and consideration. An increase in the interest rate is intended to avoid investors from pulling out their investments by attempting to offer higher rewards for those investing over a long period of time.
There is only so much that can be done going forward to attempt to mend decisions taken in the past that adversely affected the economy.
In another prior newsletter (South Africa close to recession), the following was mentioned which is now even more relevant given the developments of the African Growth and Opportunity Act (AGOA):
Fin24 published an article on 1 October 2015 relating to South Africa’s trade restrictions imposed on the importation of American chicken and cattle. Understandably, this is to protect the local market from an influx of cheaper imports.
In June, the US also complained that its products were being shut out of South Africa as a result of the South African-European Union trade, development and cooperation agreement.- Business Day
South Africa is a member of the African Growth and Opportunity Act (AGOA) which allows preferential trade agreements with the US. Under these agreements, ALGOA members are free from import levies on more than 7000 products.
“AGOA has enabled South Africa to more than double its exports to the US since 2000, with vehicles and agriculture products benefiting the most. Shipments under AGOA accounted for more than a fifth of the nation’s exports to the US last year, according to data compiled by the Tralac Trade Law Centre, based in Stellenbosch, near Cape Town.”
If the US succeeds in proving South Africa no longer qualifies for membership, the consequences for South African exports is far reaching. In protecting the poultry industry, many other industries will be adversely affected. South Africa’s part in the AGOA agreement has been a contentious issue for over a year and while we have struggled to remain a member of AGOA, we need to invest in ways that allow better trading conditions.
Current AGOA development
The US has provided South Africa with an ultimatum; either allow imports of poultry cattle and poultry or South Africa will be removed from the agreement. South Africa has until 15 March in which to finalise negotiations to allow the importation of these products to avoid suspension.
You should expect to see American produce hitting the shelves in the next 30-60 days!
So what does 2016 hold for us?
It is difficult to predict at this point, but we do know that the following will have an effect:
Determination of the political hierarchy (Is all the power really in one man’s hands?)
The quantum of interest rates hikes
Municipal election results
Management of wage disputes
Exchange rate weakness
The above are among others that will determine the economic environment for 2016.
- Natasha Bhowani Seeth CA (SA)