Global Markets

South Africa’s Recession: A Big Blow to Ramaphorian Efforts

The Back Story
After a scandal – tainted nine years reign, the former South African president, Jacob Zuma, in February, 2018 handed over to Cyril Ramphosa, of the ruling African National Congress (ANC) to lead Africa’s second largest economy – South Africa. South Africans felt a brief exhilarating feeling of “Ramaphoria” as the new president mounted the steering wheels of the nation promising a “new dawn” for the populace. Half year down the line, a frigid reality has set in – one that even analysts never saw coming.

What happened?
On September 4 th , 2018, South Africa officially entered a technical recession after the economy suffered two consecutive quarters of negative economic growth performance. South Africa last dipped into a recession in 2009, the year after the global financial crisis and coincidentally the same year Jacob Zuma took over power. A recession just half way into Mr Ramphosa’s reign was a big blow on his efforts to revive the economy

What caused it?
Statistics South Africa shows that the economy contracted by 0.7 percent in Q218, after a decline in growth in the Q118 at 2.6 percent, which clearly depicts a technical recession in South Africa. It is important to note that the agricultural, transport and retail sectors were the top contributors to this contraction. Statistics South Africa also shows that agricultural output fell 29.2 percent in the second quarter, while the transport, communication and storage sectors fell 4.9 percent. Conversely, mining output grew by 4.9 percent and finance by 1.9 percent. Despite the growth in the mining and finance sectors, the poor performing sectors – agriculture, transport, retail – outweighed this growth. With a deep dive into the contraction of the agricultural sector, Statistics South Africa shows that the sector was hit by a fall in field crops, drought in the Western Cape and severe hailstorms in Mpumalanga province which damaged agricultural production and resulted in its dismal performance.

The Effect of the Recession
At the release of this news, the Rand fell against the greenback by more than 2 percent hitting its lowest level since early 2016. Also, the news made the Rand experience a stretched loss – falling 19 percent year to date – in addition to the general emerging market currencies sell-off in recent times. On the fixed income side, government bonds also fell by the recession news release. The crucial question now is whether this recession will continue in the third quarter – July to September, or whether the situation will improve in the coming quarter?

Proposed Way Out
Overall, it is clear that the decay of the Zuma years is proving difficult for Mr Ramaphosa to obliterate and with the upcoming national elections next year, we believe that Mr Ramphosa’s government will work assiduously to steer the South African economy out of this recession in the next quarter. According to economic theory, the typical ways out of a recession are expansionary fiscal policy, contractionary
monetary policy, and increased investment amongst others. In the meantime, we at Commercially Aware propose a practical and immediate solution – increased investment – for the South African economy to come out of the recession. Increase in the investments in the South African economy is crucial to getting out of the recession. Investments will be attracted by a business friendly environment and an improved business confidence levels in the economy. Increased investment in the South African economy will create more job opportunities thus reducing the high unemployment rate in South Africa. Also, it will boost demand of goods and services which will increase economic production levels in the economy. It is also very important to note that the investment inflows into the South African economy should be diversified across the various sectors in the economy.

One of the risks looming the proposed strategy of increased investment in South Africa is the upcoming review of credit rating of Rand – denominated debt in October by Moody’s – a rating agency. Should Moody’s cut them to junk, South African bonds would be turfed from global indices, prompting a sell-off by investors. This implies higher borrowing costs and yet more pressure on the South African economy.
Also with the ANC looking to embrace land expropriation without compensation we could see a weakened investment and business sentiment, which would be another risk to our proposed solution.

Sources

  • Statistics South Africa
  • The Economists
  • The Financial Times
  • Punch News paper
  • CNBC
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