21 May Economic Troubles in South Africa and Abroad

Economic Troubles in South Africa and Abroad

It seems almost inconceivable that the world has spent its previous two years in a state of lockdown, yet just as the world breathed a sigh of relief, another crisis emerged.

While the crisis in Ukraine is and always will be primarily a humanitarian one, the economic fallout across the world has placed us all in a precarious position.

Rand Rescue takes a look at the state of the worldwide economy and how this affects your rands.

Closing the taps

Covid-19 was an odd time for the world. While it highlighted just how much certain economics struggle, it also showed us how much money there really is to go round.

Governments, banks, investors, philanthropists and private entities the world over extended loans to each other, to their citizens, the private and public sector and other beneficiaries.

While there is not actual number for how many quadrillion rands these benefactors distributed throughout the world, looking at South Africa’s balance sheet is telling enough.

While certain governments and philanthropists offered financial support with no strings attached, for the most part these monies were offered as low-interest loans. Given that South Africa had struggled to secure such loans before Covid-19 due to the mismanagement of our State Owned Enterprises (among other things), it’s quite surprising that we’d managed to pocket so much. We even received a $750 Million top-up from the World Bank in January 2022.

What many people have wondered, however, is when the taps would be turned off. It was an inevitability, and yet no one is sure quite how this would impact the global economy. Countries now face a stark reality. In addition to the extension of loans tapering off quite dramatically, there’s the added impact and implications of the actual debt and interest due. As reported by Bloomberg, the G-7 aims to shrink their balance sheets by $410 billion during the remainder of 2022. What makes this so significant is the contrast against the $2,8 trillion they added in 2021. This shrinking is, purportedly, due to criticism about soaring inflation as well as the impact of the Ukraine crisis and China’s renewed lockdowns.

Many economists believe the world is facing a looming recession which is already underway.

Quantitative tightening

The quantitative tightening by the G7, among others, will see a significant increase in borrowing costs and reduced liquidity. In the USA, the Fed plains to raise rates by 50 basis points in May and has started to reduce their balance sheet at an incredible pace of $95 billion per month.

Similar trends are witnessed in England, Europe and Canada.

According to the World Bank’s Global Economic Prospects Report, global economic growth is expected to decelerate drastically from 2021 to the end of 2023. Not only that, but the gap between the growth rates of advanced economies and emerging economies will also increase significantly. The Report indicates that advanced economies will have achieved a full output recovery from the pandemic by 2023, while emerging and conflict-affected economies will be 4% and 7,5% below pre-pandemic trends respectively.

Global income inequality

As with strong economies recovering more swiftly and the economic divide between advanced and emerging economies growing, so too income inequality growing globally.

Income inequality not only affects the individual, but it has significant knock-on effects. The more disenfranchised poorer communities become, the less likely they are to contribute to a country’s workforce. For countries which rely heavily on the contributions of menial workers in factories, farms or other industrial undertakings, a loss of workers not only slows down production, but also sees an upsurge in individuals requiring government aid.

Such individuals are also more likely to suffer from health concerns, and children of such households are more likely to drop out of school. In a country like South Africa, growing income inequality also sees retirees re-enter the workforce in an effort to sustain families – a hard task given the lack of employment prospects in general.

Income inequality and disparity occurs in various other ways, of course. A country like South Africa is perpetually on the back foot, since the deck is forever stacked against us. Not only do we owe massive debts to funds the world over, but we don’t have the same incentives or tools to boost our economy.

Consider the Exchange Equalisation Account of the UK and Exchange Stabilisation Funds of the US, for instance. These resources allow the UK and US to stabilise their currencies whenever they feel the Sterling or US Dollar are under threat. Emergency funds can be released by the IMF (UK) or US Treasury which are then flooded into the market to deal in gold and foreign currency – thereby influencing global exchange rates without affecting domestic money supply.

Oil and energy crises

Not only is the world seeing a massive slump in edible oil sources due to Russia’s invasion of Ukraine, but we’re facing an energy crisis the likes of which the world hasn’t seen before.

There are several factors which contribute to this. A primary factor at play in 2022 is Europe’s reliance on Russian oil and natural gas. Additionally the Covid-19 crisis significantly slowed down investment and infrastructure developments around the world as governments diverted funds towards more crucial industries and initiatives. Many clean energy sources which should have been accessible by now are nowhere near completion.

While the world has committed to reducing its carbon footprint and reliance on unsustainable energy sources, the Ukraine crisis places many countries in a tough spot. Canada, for instance, has been compelled to produce more crude oil and natural gas to make up for global shortfalls.

In the USA the Biden administration seems to be seesawing on their views around oil and natural gas. While its administration had been approving oil and gas leases on federal land at an extortionate rate, it also decided to cancel the Alaskan Oil and Gas lease in May. This was not a strategic move, however, as the primary motivation for this cancellation is a distinct lack of industry interest in leasing. The American Petroleum Institute is adamant that it is Biden himself who is creating this disinterest due to over-regulating the industry. Biden, however, places the blame solely at the feet of Russia’s President Vladimir Putin, going so far as coining a hashtag #PutinPriceHike.

The oddity of oil prices has always confounded the man on the street. Unlike other commodities, supply and demand aren’t the determining factors for oil prices. Oil prices are determined by futures contracts – legal agreements to buy or sell oil at a predetermined price and future date, and only authorised buyers and sellers. OPEC+ is considered the global cartel of crude oil with more than 50% of the global oil supply and 90% of proven oil reserves. ‘Reserves’, of course, is the key term here. For while ordinary people often assume there is a shortage of oil, the fact of the matter is that there isn’t and won’t be for years to come.

The OPEC+ countries strategically choose whether to increase or stifle supply in order to control prices. Countries use oil not merely to literally fuel their industries, but as a geopolitical tool to throttle the global economy and international relations in a strategic manner. The problem is that this tactic of increasing or decreasing output, or buying and selling reserves does not always have the desired effect on the economies that wield these powers.

The Ukraine crisis has prompted leading oil-producing nations to throttle oil output in order to drive up prices. While demand for oil plummeted organically due to the pandemic, demand has spiked dramatically since. The problem, of course, is that the major oil-producing nations are deliberately underproducing in order to prevent the oil price from plummeting.

In the US, private companies are reluctant to increase production as well. Their rationale is that increased supplies will push down prices and lead to lower profits. The irony is that while the US is the largest oil producer in the world, it hasn’t managed to push down gas prices even after selling reserves at an unprecedented one million barrels per day for six months.

In any other industry, such an action would necessarily see a massive financial gain – the more you sell the more money you make. In any other industry, the logic is also that if a country has more of a certain product the product should be more affordable. But this is oil, of course.

To add to this irony, while the USA as part of OPEC is party to artificially driving high oil prices for their own economic gain, Biden has rebuked US oil producers for not increasing their outputs in an effort to improve their profits. Such is his scorn that he is pushing Congress to penalise companies for not utilising oil wells on their leases.

It seems an oddity that OPEC is accepted as an authority in global oil trade while actions like these are, for instance, prohibited by law within South Africa – price fixing and throttling the primary targets for the Competition Commission. And yet South Africa has no sway in this regard  – we’re too far from most oil-producing nations to negotiate any alternate deals and as a non-OPEC nation we have no say in global oil prices.

Oil for human consumption

The Ukraine crisis has not merely affected crude oil, but also strangled the global supply of plant oils – in particular sunflower oil.

It’s not just that the oil is used on its own for cooking purposes, but that it constitutes a huge part of many other foodstuffs and products the world over.

The impact of the invasion has significant implications for industries who require sunflower oil across the world. While there are other alternatives, these are either more expensive or have different properties than sunflower oil so substitutes will have a significant impact on businesses.

The vegetable oil shortage is far outpacing other food inflation worldwide. To further exacerbate matters, certain nations are even resorting to banning their own exports to make up for local shortages, and the shortage is creating an upsurge of certain oil which has been deemed unsustainable, such as palm oil.

Blaming it all on Russia

While Russia’s actions have indeed caused irreparable harm in various ways the world over, consumers and ordinary folk are becoming increasingly fatigued by political grandstanding and public chastening.

South Africa knows better than most how absolutely futile those words and efforts of opposing political parties are who wish to discredit their opposition.

This is not to say that evildoers shouldn’t be called out for their actions, but these efforts are quite futile in informing corrective behaviour. The Trump phenomenon whereby a leader resorts to degrading spats and public vitriol has become so commonplace, it’s hard to imagine a time before – where parties to a debate or dispute would use logical reasoning and intelligence to argue their point.

Politicians in South Africa, France, the UK, Australia, South Korea and elsewhere have stooped to such a level that they fail to hold onto that moral high ground they claim to own. Criticising someone in a playground fisticufs on an international level doesn’t encourage the type of support against purported bullies that these people may have hoped.

The hypocrisy doesn’t end there, of course, Boris Johnson’s grand plan to box and ship asylum seekers to Rwanda is such an odd idea, it seems almost unfathomable that it gained any political traction – and yet it did.

What makes this such a laughable matter is the UK’s history and hand in creating the very refugees they don’t want to enter their shores. Rwanda would stand to gain, of course – not only will they be given £120 million per year for taking in approximately 28 000 refugees per year, but they will gain something the UK is in short supply of – genetic diversity.

The other oddity, of course, is that research by the OECD and UN indicates that most refugees contribute positively towards nations’ economies. The rationale is that those who take the effort to enter a new country and leave everything behind do so with the intent of bettering their situation –  and this rationale is supported by statistics. The correspondent indicates that 85% of refugees are hopeful about finding work and improving their lives. Converting the World Happiness Report scorecard from 10 to 100, the positive outlook of refugees is nearly 10% higher than the outlook of the happiest nation in the world (Finland). And it is more than 30% higher than your average South African’s outlook on life.

The perpetual redistribution of refugees does nothing to stem refugee inflows – redistributing destitute peoples merely redistributes poverty and economic woes. There is a certain logic behind protecting ‘what is yours’. Border controls function much the same way as capitalism – by enforcing disparities there will forever be supply and demand. It is odd, though – to live in a time where people rant and rave about displaced peoples but simultaneously restrict their entry by enforcing a vetting process which values individuals as assets on a risk profile. It is, quite abstractly, a form of human stock trading. And who wants junk stock? Certainly not the UK. This is the very basis of immigration vetting of course – those who are better, smarter and more affluent are welcomed more readily. As statistical entries they are more likely to indicate positive financial growth.

Such actions undermine the ideas of benevolence the world was made to believe in during Covid-19, of course. The UK will not have strategised this plan unless their analyses pointed out that it is economically sound. The implications are that they’re exploiting the need of another nation by offering financial incentive for something which, by their own risk assessments, will have a dire financial impact. The long-term upshot for the UK is that they will simultaneously increase the need for financial support from Rwanda. This is a given: part of the Rwanda refugee agreement includes that these refugees become wholly Rwanda’s problem. In willingly accepting these people, Rwanda cannot rightfully withhold human rights and will have to grant them rights to resettling. The implications, of course, is that Rwanda cannot merely use their budget for harbouring refugees to accommodate such people, but will have to include and incorporate them into national censuses and provide for them as they do other citizens. 

The choice to ship refugees off to a nation which it has previously sanctioned for human rights violations which saw the slaughter of 800 000+ people in 1994 alone, which scores below the global average in terms of human rights and freedoms, is by far the most controversial part of it all. Given the – the agreement even violates Geneva conventions.

And who knows if they’ll stop there? Perhaps they’ll ship off the next batch to Turkey, Colombia or Ghana – the three nations with the highest number of refugees in the world.

South Africa has long benefited financially from taking in other nations’ nuclear waste and dumping it in the Northern Cape. It is the same principle. And yet it’s not always about financial incentive. UN statistics indicate that 85% of the world’s refugees are hosted by developing nations. One may infer that there is more empathy and humanity in places which see more suffering.

Or perhaps the UK’s long term plan is specific for other reasons…

A battle of new resources…

In an effort to move to clean energy and achieve their climate goals, many governments, industries and companies have focused away from crude oil.

Another irony of this article is that cleaner energy, such as electric cars and batteries, requires different resources than we conventionally use in energy production. One of the primary requirements is Lithium.

Though not necessarily indicative of causation, high Lithium stores were coincidentally unearthed in Ukraine in 2021. Similarly, Rwanda has discovered a wealth of Lithium in 2019 – all they need, of course, are the workforce to excavate this. 

Lithium has, to date, been restricted to certain regions – given its rarity. The highest producers being Australia, Brazil, China and Portugal. Rwanda’s Mines, Petroleum and Gas Board indicated in 2019 that their explorations have indicated stores which will see them compete with current highest producers in the world. Rwanda was even dubbed the ‘New Frontier’ for ‘technology metals by Standard & Poor’s in 2020.

This is not merely significant for how Lithium is used, but also relevant in the projects of the world’s richest man – Elon Musk. With the type of wealth which allows one to legitimately just buy over one of the largest social media platforms, Musk’s investment is also required for governments: if one of his organisations takes a hold, the rationale is that this would lead to massive growth.

Just this week Musk stated succinctly on his Twitter feed that he is willing to buy any  mining companies for their lithium, nickel, tantalum, copper and other stores. None of this is in any way definitive. Nor can we assume that any of these things are connected.  If the highest-earning person in the world is interested in investing and buying entire mines for lithium stores, and if prospective mines are merely not developed due to a lacking workforce and international investment…then one can’t help but consider possible implications.

Boom and bust

The sheer number of global catastrophes in the past few years has contributed to the perpetual boom and bust cycles we see in different markets. When access is restricted to certain resources, this creates swift policy change on a local level – either restricting or forcing production and distribution. These local changes each contribute to a global stop-start, with some countries overplaying their hand in respect of resources requirements and price. In many ways this becomes and inadvertent tug-o-war which repeats time and again as the markets seek swift stabilisation measures. 

Plan well and get in touch…

We’re in for tough times ahead, but Rand Rescue has a thorough grasp of world economies and understand the ins and outs of local economies and cross-border financial matters.

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