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SA economy and the Three Little Pigs

Jul 29 2018 09:35
Carin Smith

Global tensions are "the worst ever" and Africa's economy and the impact of something like the global trade war can be illustrated by means of three fairy tales, according to Ronak Gopaldas, a director at Signal Risk, an exclusively African risk advisory firm.

He was a guest speaker - via video link - at the launch of the latest SAVCA 2018 Private Equity Industry Survey in Cape Town on Thursday.

For Gopaldas the African economy in 2017 was like the fairy tale of Goldilocks. It was not too hot and not too cold.

"International financial markets largely ignored the political happenings in Africa in 2017 and there was a sense of stability," he said.

Regarding 2018, he said so far it reminds him of the fairy tale of Cinderella. There were humble beginnings in a "rags to riches" scenario where Cinderella ends up going to the ball and finds herself in demand. Yet, when she became complacent, her carriage turned back into a pumpkin.

"Beware of complacency. There are new risks of a global trade war, huge Brexit concerns and questions about how the interest rate cycle is developing in the world," said Gopaldas.

"In this environment we see a lot more anxiety coming up. That is never good for emerging markets, because it can quickly turn Cinderella's carriage into a pumpkin. Headwinds are growing, but nothing to be concerned about yet."

As for 2019, Gopaldas compared it to the fairy tale of the Three Little Pigs and the Big Bad Woolf. For him the Woolf could be something interest rate hikes.

"Whose house will remain standing?" he asked.

In his view, emerging market economies are currently a lot like the Little Pigs who built houses from straw and sticks.

Emerging market countries building houses of straw would be those dealing with challenges of balance of payments risks, corruption, uncertainty regarding policy and domestic deficiencies.

Countries building stick houses would be those with bad policies and political situations in Africa which were largely ignored by the international markets over the past 18 months could suddenly become very important risk factors, in his view, due to the upcoming elections in a number of these countries, including in SA.

African countries aspiring to build a brick house - like the only house in the fairy tale that withstood the Woolf's onslaught - would have to rule out corruption, have predictable policies and be investor friendly.

"In SA, for instance, there was initially Ramaphoria, but there are still questions about land reform and the Mining Charter," said Gopaldas.

"There are headwinds ahead and they could be substantial. Pressures are building on the macro-economic level. So, countries should get their 'house' in order."

At the same time, he said, there are always opportunities in a crisis and in the shifting of alliances in the world where China seems to be stepping in. In his view, African countries could gain from the "interplay" between the East and the West in the world and African business and policy makers stand to benefit from this "dance".

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africa  |  sa economy  |  trade war


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