At the start of 2018, the consensus in South Africa was that economic growth would accelerate at a rate close to 2%, due to improved investor sentiment with President Cyril Ramaphosa at the helm, our avoidance of a downgrade to junk status, and strong global economic growth. But these positive outlooks have not materialised.
Instead, South African consumers have faced tax hikes, higher petrol and food prices, and poorer economic growth numbers than expected.
A weaker rand, rising yields on bonds, and foreign portfolio outflows have added to our economic woes, says Greg Morris, CEO of MICROmega Holdings.
And then there was a trade war
It's important to look at SA's woes in the context of Donald Trump's 'trade war'.
After months of speculation, the US imposed a 25% levy on $34 billion worth of Chinese imports entering the US market. Both sides currently show no signs of backing down, which places emerging market economies, like ours, in the firing line.
The US is currently in a stronger position than China, as China exported around $430 billion to the US last year, while the US exported only $130 billion to China. However, China has other forms of retaliation: a currency devaluation, the offloading of its $1 trillion in US treasuries, or targeting US companies doing business in China.
It looks more and more likely that this will not remain solely a tariff battle and, if hostilities continue, it is difficult to anticipate how severe the fall-out may become.
Many analysts believe that lower confidence and disruptions to the supply chain will not only slow global economic growth, but an intensified trade shock may also push the global economy towards another recession. To be fair, we are far from a full-scale global trade war, but the risks are escalating and anything is possible.
What's the implication for SA?
The economic slowdown in China is a worry for us because around 20% of South African exports go to China, including approximately 50% of mineral exports, and the slowdown will increase the pressure that already plagues our beleaguered mining sector (which is in a recession after consecutive quarters of decline).
The trade war has also caused investors to shift to 'safe haven' assets, and the rising US rates weakened the investment case for high-yielding assets.
In the middle of June 2018, we saw a heavy depreciation of emerging market currencies, including the rand, which depreciated to levels close to R14 to the dollar.
Weaker emerging market currencies usually cause higher inflation in these countries, which places a dampener on growth, as central banks need to adopt restrictive monetary policy by raising interest rates to keep inflation under control.
Further, a stronger dollar raises the cost of foreign dollar-denominated debt, raising the debt burdens of developing nations and decreasing the money available for government expenditure. Luckily, ours is an emerging market that is better shielded than its fellows, because only 10% of our debt is denominated in other currencies.
But, on top of our poor economic performance over the last quarter, deteriorating trading conditions continue to subdue our economic outlook in the coming months.
Is there any good news at all?
SA still has some competitive strengths: a well-functioning, independent central bank that makes prudent monetary policy decisions, a sound financial system with strong property rights, and a stock exchange and government sector that is representative of well-functioning companies with strong corporate governance.
These won't be sufficient to attract and keep investment in SA, but with the right policy implementation towards structural reforms, and some patience from investors, our medium- to long-term prospects look brighter than those of the short term.
There are also analysts who see a general up-side; specifically, that the pessimism of the trade war has been overstated for emerging markets.
The large readjustment in these markets may give investors an opportunity to re-enter into emerging market bonds and currencies at attractive levels, including yields in their portfolios they can't find elsewhere.
My advice in this regard? An industry approach may be more prudent than a country approach; that is, companies that are multinational may be more exposed to a global trade conflict, so focus on those that have more domestic exposure.
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