Impact of External Factors on South Africa

PESA Editorial – South Africa - 1Q2017/18

The African Growth and Opportunity Act (AGOA) is an Act from the United States (US) that was passed on 18 May 2000 as Public Law 106 of the 200th Congress and has been renewed to last until 2025. Its primary aim is to strengthen market access for sub-Saharan African (SSA) countries that qualify to be a part of this Act. Qualification is based on a set of conditions which are clearly stated in the AGOA legislation1.

 

In January 2016, South Africa was at risk of losing its duty-free benefits for goods exported to the US, as part of the AGOA agreement. This was due to US exporters demanding better quotas for their chicken exports to South Africa. Meanwhile the local industry concerns about dumping of poultry in South Africa placed the government in a dilemma that almost jeopardised the AGOA agreement. Eventually, in June 2016, both parties resolved technical issues that had blocked US meat exporters access to the South African.

 

The South African poultry industry is in crisis and rapid policy interventions are needed to prevent a further loss of jobs. Trade and Industry Minister Rob Davies, raised the poultry import tariffs by an average 8.75%, saying the higher duties were much needed in order to bolster local production and save jobs in the industry. However, raising tariffs alone is not enough to save the poultry industry due to the threat of import substitution from cheaper sources which defeats the main purpose of protection. Some of the longer term solutions he suggested are that the government has to focus on increasing the production of maize and soya as feed for poultry production.

 

The Trade, Development and Co-operation Agreement (TDCA) is an agreement between South Africa (SA) and the European Union (EU) which governs their trade relations and has come up with a free trade area which covers 90% of bilateral trade between South Africa and EU. South Africa is the EU’s largest trading partner in SSA, and it is by far the strongest economy in the region2. The South African economy will be directly and indirectly affected by the Brexit issue. It is expected that Brexit will negatively affect the global economy due to the increased in the levels of uncertainty. As a relatively open economy, SA’s own growth performance could be adversely affected by unfavorable global conditions.

 

In terms of SA’s trade, the implications of Brexit are still uncertain, but there will surely be adjustments. By leaving the EU, the UK will no longer be a part of EU trade agreements. Exporters from South Africa have always had special access to UK markets thanks to two trade agreements: namely the TDCA and the SADC-EU Economic Partnership Agreement (EPA). The trade adjustment process will take time to unfold and will not happen quickly. The UK will now have to come up with an entirely new trade and tariff regime and enter into new deals with many countries, including South Africa as a member of SACU. However, in the initial phase, it may be reasonable to expect the enactment of enabling legislation that will provide for a temporary autonomous and transitional tariff regime that could mirror the EPA, at least until permanent arrangements are made3. Trade with the UK has expanded in the last three years, and there is a small surplus in South Africa’s favour.

 

The EPA forms the basis on which the relations between South Africa and UK continue. Within this agreement, there are a number of quotas that apply across the EU, therefore a decision has to be reached as to how a partner arrangement with the UK alone will work4.

 

SA Government debt is now R2.2 trillion (approx. USD 172.05 billion) or 50.7% of GDP, and interest payments are growing at a fast pace. In order to be able to meet commitments and also stabilise this high debt, the government has proposed to increase tax revenues which total R28 million (approx. USD 2.2 million). As a way of managing maturing debt, the bond-switch programme, which basically exchanges bonds with shorter maturities for longer-dated bonds, will still take place. On the other hand, foreign currency borrowing will amount to about USD2 billion per year. In 2016, the current account deficit was stable. In the third quarter of 2016, the current account deficit was 4.1%, down from 4.3% in 2015. This current account deficit is a reflection of the insufficient levels of domestic savings to fund domestic investment and the high reliance on foreign savings. This increases the chances of South Africa experiencing capital outflows5.

 

Global growth is expected to grow from 3.4% in 2017 to 3.6% in 20186. SA’s performance is highly sensitive to the global economic environment, while the recent credit-rating downgrades, political unrest, and the depreciation of the Rand, all present a negative outlook for South Africa in 2017. The recent cabinet reshuffle by President Zuma on 30 March 2017, in which Pravin Gordhan was removed as the Finance Minister, and the subsequent downgrade of South Africa’s investment rating by Standards & Poor’s (S&P) to “junk status”, have created considerable political unrest and public outrage within the country.

 

Immediately after the downgrade by S&P, on 7 April 2017, Fitch downgraded government’s long-term foreign and local currency debt to ‘BB+’ from ‘BBB-‘, a non-investment grade rating. Fitch’s view is that these political events will result in weakened standards of governance and public finances. The cabinet reshuffle is expected to lead to a change in economic policy, and undermine the progress made with state-owned enterprises (SOEs). A downgrade to junk status implies that South Africa will likely not be able to repay its foreign currency denominated debt. The downgrades have led to a weaker Rand, and a weaker Rand means that petrol prices are likely to go up and when petrol prices rise then food prices will also rise. The downgrade will negatively affect the pocket of the average citizen and the poor are the likely to be hit hardest. Unless there is a change of events during the course of the year, South Africa is faced with a crisis that will severely damage its economy, with expectations of significant capital outflows and decreases in FDI inflows, due to the environment not being conducive for investment.

 

Current Affairs Update

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South Africa reaffirmed as Junk Status

The recent downgrade of South Africa’s investment status by Standards & Poor’s (S&P) to “junk status” has created considerable political unrest and public outrage in the country, where it led to a national march by citizens asking President Zuma to step down7. Immediately after the downgrade by S&P, on 7 April 2017, Fitch also downgraded government’s long-term foreign and local currency debt to ‘BB+’ from ‘BBB-‘ with a stable outlook, a non-investment grade rating. It is Fitch’s view that the recent political events, which include a major cabinet reshuffle by the president, will result in weak standards of governance and public finance. The cabinet reshuffle is expected to change the direction of economic policy and undermine the progress made with state-owned enterprises (SOEs)8. A downgrade to junk status means that South Africa seems unlikely to be able to repay its foreign currency denominated debt. The further downgrades have led to a weaker rand, leading to petrol price increases which will likely result in a rise in food prices. The downgrade will adversely affect the pocket of the average citizens and the poor are likely to be hardest hit by the downgrades.

 

National Treasury Denies Eskom the Right of Reply

On 8 April 2017, the Board of Eskom released a media statement in which they expressed grave concern with a report released by the National Treasury. The report, titled Report on the verification of compliance with SCM legal framework – appointment of Tegeta Exploration and Resources (Pty) Ltd, was released before giving Eskom the opportunity to comment on the document. The Finance Minister gave Eskom an opportunity to comment on the investigation in a letter dated 31 January 2017, Eskom did not respond however9. When suspicions regarding out of specification coal stock piles arose in July/August 2015, Tegeta was placed on suspension on 31 August 2015 following investigations by Eskom with regards to the quality of coal supplied. After the investigation was concluded, it was revealed that the coal which was received was in fact within the contractual specifications and the suspension had to be lifted10. Tegeta Exploration and Resources (Pty) Ltd is a company that is partly owned by the controversial Gupta family that is believed to have captured South Africa through its close relationship with the Zuma family.

 

South African Monetary Policy Review

Scope for cutting interest rates in South Africa is said to be limited, despite the fact that the policy-tightening trajectory may be over. The current monetary policy settings by the South African Reserve Bank (SARB) seem to be enough to return inflation to within its target range of 3-6%. However, the price-growth expectations have remained uncomfortably close to 6%, which then limits the scope for rate cuts11. The exchange rate proves to be a huge risk to the inflation-forecast trajectory, the central bank said. It is expected that it will depreciate because of the recent political uncertainty, and as such could potentially increase inflation, which will hurt the pockets of citizens, particularly the poor. Currently, a generally negative outlook for South Africa can be expected, due to the ratings downgrades that have taken place with more expected. The recent uncertainty could lead to an increase in the rate of inflation and negative economic growth, as capital outflows are expected due to the unconducive investment environment.

 

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1 AGOA.info
2 European Commission
3 Independent Development Corporation
4 tralac.org
5 South African National Treasury
6 International Monetary Fund
7 South African National Treasury
8 South African National Treasury
9-10 Eskom
11 South African Reserve Bank


 

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