SA Economic Watch 2019
Following the announcement from Statistics South Africa in September 2018 that South Africa is officially in a recession, many South Africans, both local and abroad, may be wondering what 2019 has in store for their pockets.
Rand Rescue takes a look at some of the most popular opinions and statistics for the Rainbow Nation’s economy in 2019.
Not all recessions are equal
Firstly, perhaps it is important to note that the recession faced by President Cyril Ramaphosa in his first six months at the wheel is not completely unexpected. In fact, it’s exactly the same type of recession his predecessor had faced during his first six months. Of course, South Africans had no inkling at that point in time how far the economy would suffer under the steer of Jacob Zuma. All we know for sure is that—on paper at least—President Ramaphosa has a better track record than his predecessor.
A recession is therefore not necessarily a train crash, but it’s something to watch out for nonetheless. In fact, in September 2018 George Saravelos, global co-head of FX research at Deutsche Bank, had indicated that South Africa’s recession could see the Rand fall to R24 to the dollar in 2019. He did state, however, that the weak rand could not be totally blamed on the recession as it mirrors economic behaviour in other emerging markets.
The VAT issue
Another factor affecting South Africa’s economy is the VAT hike earlier this year which saw a Value Added Tax increase to 15% to address the country’s budget deficit.
Though the government had aimed to target mainly high income spenders in South Africa, many analysts believe that this is partly to blame for the recession, given that it has cut spending.
And now many analysts believe a second VAT hike may be on the books for SA in 2019—an unprecedented move which could well keep us in a recession indefinitely. A spokesperson for Global Tax and Advisory company Mazars had warned that the technical recession of 2018 had seen a significant drop in tax collection which may push the government to consider even greater VAT hikes early in 2019.
A problem of Eskomogical proportions
Speaking to South Africans across the country at present, one could not ignore the pervasive narrative of fears over electricity.
Yes, as with the recession this is nothing new, and the energy regulator has blamed low coal supplies for the energy crisis. The country has faced load shedding in past during high-usage (such as winter months) and when suffering drawbacks (like coal station catastrophes), but many people believe the current “coal crisis” is just another strategy to squeeze money out of taxpayers and save a buck or two. Load shedding had been implemented throughout the country since 29 November 2018 in an attempt to avert total collapse of the grid, and yet no one is quite sure why the grid would suddenly face collapse.
Though the energy regulator had called a stop to load shedding in the interim, former Eskom CEO Matshela Koko had admitted earlier this year that load shedding is a diversion more than an attempt to regulate energy usage.
This is worrying news, given that—according to energy expert Chris Yelland—10 hours of stage 1 load shedding imposed for 20 days as month costs the economy R20 billion per month, whereas stage 2 load shedding for the same period costs R40 billion per month and stage 3 R80 billion. And these estimates were for 2015.
Oil price low: the good and the bad
As most readers will be aware, at the time of writing this article, crude oil prices were hovering around $50 per barrel. For emerging markets like South Africa this is generally a good thing… in the short term at least.
The problem with the latest drop in oil prices is that, according to Bloomberg senior editor, Michael Regan, it’s an indication of overall low economic growth worldwide. Not only are individual countries like Germany and the US seeing low growth compared to previous years, but there is an unmistakable stock market decline which, given international trade tensions, is cause or concern.
Another cause for concern is the fact that America has now become the largest crude oil producer in the world (for the first time since 1973). This could very well lead to an oil-tiff between the USA, Saudi Arabia and Russia. Such a tiff could see the respective nations resort to strong-arm tactics with their other trading partners to confirm their trade loyalties.
The US has already announced their new Africa Strategy which is aimed, deliberately, at bolstering US-Africa relations and ousting Africa’s partnerships with Russia and China. US national security advisor, John Bolton had stated in a speech on 14 December 2018 that, “Americans are a generous people, but we insist that our money is put to good use…”
which, in the minds of many analysts, means that the US will invest, provided African countries not accept investment from their competitors. For a country like South Africa which has strong ties with both Russia and China, this could be disastrous.
Consider, for instance, that at the end of 2017 South Africa’s biggest trade partners by export sales were China (taking 9.6% of our total exports) and the USA (taking 7.5% of our total exports). Should South Africa be forced to choose between one or the other of our biggest export partners, it would have devastating economic consequences.
US sanctions to South African trade-partners
Early in December 2018 it was announced that South Africa is China’s largest trade partner for nine years running. With the US already having sanctioned more sanctions on China this year over armed weaponry (planes), on top of investment sanctions imposed earlier this year (to a total of $60 billion), South Africa will have to treat lightly in our dealings with both powerhouses.
Consider that the US had imposed sanctions on Russia earlier in 2018 as well, and that any and all sanctions placed on Russia since 2014 have been ignored by Beijing, and it’s hard not to believe that something untoward is a-brewing. In fact, the trade war between the US and China is still in full swing, with both parties throwing shade at the opposition, so further strife seems like par for the course.
South Africa has managed to balance on that political tightrope for a while now. Earlier in 2018, for instance, we remained tight-lipped on the US treatment of Russia while our other Brics partners voiced their concerns. Should a trade war ensue, however, we may not be able to maintain our neutrality for much longer. And should a worst-case-scenario ensue, a real war may be on the cards given that the US congress had already considered how they may fare in such a war.
The Brexit debacle
Another worldwide occurrence which affects South Africa’s economy is Brexit.
Though it doesn’t have a direct impact on South Africa, there are several reasons why Europe’s hyperfocus on the UK-EU deals is harmful to our purse.
The main problem, of course, is that many South African companies currently have their EU headquarters in the UK. Should the no-deal be the only deal, those companies will need to consider whether they relocated to other regions, or keep their UK alliances at the risk of suffering EU losses.
Secondly, with Europe and Britain focused on trade deals in the area, there is a waning interest in foreign spending as countries consider how Brexit will impact them first.
A looming election
Perhaps the most crucial indicator of South Africa’s economy in 2019 is that it is an election year. Though the ANC had saved some face by replacing former president Zuma with President Cyril Ramaphosa, the heat is on in the party polls.
Not only does an economic recession affect electoral support but we have come to see how investor sentiment changes during such politically charged times, with most foreign investors opting for safer places to stow their funds.
Though the ANC has lost some footing, it’s probable that the main opposition, the DA had not won significant enough footing in the country to see the ANC pack its bags as. Within ANC ranks, however, Ramaphosa has his work cut out for him. For although most supporters were happy to see Zuma leave, there are die-hard fans within his ranks who are likely to stir up some trouble for him.
Since the ruling party will try to woo its followers in 2019, it will also face difficulty in imposing measures to stabilise South Africa’s economy, such as further interest or rate hikes. Should they not manage to prove economic stability and growth, however, they may face further disinterest or withdrawal from foreign countries.
So what’s the verdict?
It’s hard to say for sure which way the economic wind will blow, but it is clear that SA is in for some rough seas ahead. In the midst of a recession with trade spats across the globe and an election in our future, it’s unlikely that we’ll be seeing calm and stability in the foreseeable future.
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