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SA must cushion the blow

If South Africa is to cushion the blow of the collapse of Asian markets as a result of China’s economic slump, local investors must diversify without abandoning traditional markets in the US and UK, whose economies are among the few that are growing strongly, according to economists.

This comes as a further collapse in commodity prices is expected, and investor sentiment points to the slowdown in China’s economy having a “disruptive and negative” effect on South African growth forecasts.

China is a key importer of South African goods.

Prices for platinum, a major South African export, fell to a six-year low of below $900 an ounce on Monday as commodities took strain after the Chinese stock market fell 40% in recent weeks.

Jannie Rossouw, head of the Wits School of Economic and Business Sciences, said South Africa should focus on how the local economy was performing and work on its long-term vision contained in the National Development Plan (NDP).

“Diversification must remain the name of the international economic game so that South Africa minimises its exposure to any one economic region in its foreign trade policy.

“There is little or nothing we can do about economic trends abroad. Instead, we have an economic road map to 2030 – the NDP, a long-term vision of how the country can unlock its true economic potential to build a bigger, stronger and better economy by 2030,” said Rossouw.

To grow South Africa’s economy and boost employment, Rossouw suggests Finance Minister Nhlanhla Nene contain government spending when he tables his mini budget, the medium-term expenditure framework, this month.

Rossouw said Nene should practically demonstrate that government is implementing the NDP, including its growth and employment-enhancing infrastructure programme to reduce South Africa’s vulnerabilities and shift the country’s economic performance into a higher gear.

Raymond Parsons, economics professor at North-West University Business School, said Nene must deal with the global and domestic economic situation as a whole, and not just in relation to the outlook from China.

“We must not overreact to the Chinese economy setbacks. That is one reason South Africa has a flexible exchange rate – to help absorb external shocks,” he said.

“What is more important is for the mini budget to convey a clear message to the nation and the markets that South Africa has its public finances under control and that any possible further downgrading by the credit rating agencies has been avoided.”

Parsons added that the mini budget should boost investor and business confidence by improving the overall macroeconomic outlook.

Yu-Shan Wu, a researcher at theSA Institute of International Affairs, said South Africa should diversify and ensure foreign policy did not economically trump local imperatives.

“It’s clear China is an emerging power that is going to impact us, and it is important to look at South Africa’s own foreign policy and understand what we really need to get out of our relationship with China.

South Africa needs to build its own industries to compete internationally because there is a trade imbalance when dealing with an emerging power like China.

“For South Africa to compete, it has to have a balance between local and foreign policy, and ask whether South Africa is giving enough attention to all foreign partners and not just China,” he said.

In transition

City Press looks at two scenarios that could play out for South African investors as China’s economy shifts from one of industry and investment spending to household and services consumption

IF THE CHINESE ECONOMY IMPROVES: 

Rossouw believes that a stagnant Chinese economy might force South Africa to become the first country to approach the new Brics development bank for a credit facility, similar to a loan from the International Monetary Fund, for balance of payments stabilisation.

“Commodity prices will collapse even more, with declines in mining production leading to concomitant declines in employment. At the same time, the rand exchange rate will remain under pressure, as is already evident. At a lower level of the exchange rate, the rand value of South Africa’s external debt in foreign currency will increase. This might push South Africa back to the same kind of debt standstill the country had in 1985, owing to the decline at the time in the exchange rate,” said Rossouw.

South Africa would also face the danger of a recession because of two consecutive quarters of negative economic growth.

“If a recession indeed occurs, it will probably be a short and moderate one, but it will, unfortunately, be followed by sustained low economic growth. The recession would come from a level of low economic growth,” said Rossouw.

Parsons believes South Africa’s economy is already experiencing the early signs of a recession because there have been two successive quarters of negative growth and agrees with theSA Reserve Bank’s revised 2015 growth forecast of 1.5%.

“There are a number of red lights flashing in the economy at present. Adverse global economic developments have not caused South Africa’s economic weaknesses, but rather have exposed the country’s economic vulnerabilities.

“How we address these challenges in the short and long term will help decide the risks of a ‘low growth trap’, or of a recession,” said Parsons.


IF THE CHINESE MARKET NOSE-DIVES FURTHER:

This would mean less exports and higher unemployment in South Africa, resulting in fewer taxes collected by government.

Given the close ties that China has built with South Africa, economists say that if the Chinese slowdown continues, it will put government’s fiscal programme under pressure and push South Africa closer to a fiscal cliff.

The first step is therefore to contain government expenditure. A good start is to reduce the number of Cabinet ministers in the quest to reduce expenditure. Each department costs between R30 million and R50 million a year to maintain, with a minister, a deputy minister, office staff, security, housing and the like,” said Rossouw.

With the rand having lost nearly 8% of its value in the past few weeks because of uncertainties in China, companies listed on the JSE are also vulnerable to foreign traders, who may decide to withdraw their investments if they believe the risk in South African stocks is too high.

Do you feel that SA’s dependence on China is too high and that other markets should be explored?

SMS us on 35697 using the keyword CHINA and tell us what you think. Please include your name.
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