China rumbles spell tough 2016 for SA
Last year ended on a bad note. If it wasn’t the relentless heat weighing on South Africa’s mood, it was the game of musical chairs being played with finance ministers. The coming year is set to be just as tough.
Almost as soon as the year began, Chinese markets were rocked by more volatility, in part thanks to the release of weak manufacturing data, reinforcing concerns about weakening growth in the world’s second-largest economy.
China halted trade in equities again on Thursday, spooking international markets. The rand, meanwhile, breached R16 to the dollar, according to Bloomberg.
South Africa has already been seriously hurt by the drop in China’s growth and the declining need for minerals and other natural resources. But it is the changing nature of China’s economy rather than its level of growth that has had enormous ramifications for South Africa, analysts argue.
Martyn Davies, managing director for emerging markets and Africa at Frontier Advisory Deloitte, said overinvestment has characterised China’s economy in recent decades. Capital was directed to resource-devouring megaprojects, such as airports and superhighways, driving unprecedented but ultimately unsustainable economic growth.
This was compounded by China’s overreaction to the financial crisis in 2008, which pumped more money into major infrastructure programmes, resulting in a “last hurrah for the Chinese growth miracle”, Davies said.
China’s economy is now “recalibrating”, moving to more normal levels of consumption-led growth and the growth of services-driven sectors.
“This unprecedented resource growth model that China has engineered over the last two decades and the last hurrah after 2009 has been incredibly enabling for resource-driven economies,” he said. “Now it’s the opposite. China’s growth and demand for commodities, its inflationary impact on commodities [has] masked the structural flaws in export-driven economies and we deluded ourselves to thinking that this was somehow a state of permanency.”
Mohammed Nalla, the head of strategic research for global markets at Nedbank Corporate and Investment Bank said: “South Africa has not properly caught on to this massive structural shift in the Chinese economy. We should be less concerned with the slowing growth rate in China and more concerned with the changing mix of the Chinese economy.”
According to statistics released by the South African Revenue Service, during 2015, about 60% of South Africa’s exports to China were mineral products, followed by iron and steel products at slightly less than 24%, wood, pulp and paper at more than 4% and precious metals at 3%.
But it is services that have come to dominate China’s gross domestic product, Nalla said.
“When we fixate on [China’s] growth rate, we are missing the point. The point we should be focusing on is what is the China of tomorrow going to require?”
The negative implications of this structural shift in China’s economy are complicated by other factors, which also bode ill for South Africa.
The country’s currency, the renminbi, is under pressure, Davies said. As the currency becomes increasingly convertible and Chinese authorities ease efforts to prop it up, it becomes a significant competitive force against other nations, particularly other emerging markets, he said.
On Wednesday, Bloomberg reported that Chinese authorities had set the renminbi’s reference rate at an unexpectedly weak level, signalling an increased tolerance of currency depreciation.
The greater integration of China into international financial markets and the weakening of the currency may entrench China’s old business model and boost its exports in the short-term Nalla said.
“But it does not change the long-term view that the Chinese are looking at getting more endogenous rather than exogenous growth.” South Africa also faces a tough year on the domestic front. Long-running constraints such as electricity shortages and rising prices have been joined by more recent obstacles, not least of which is the question of the government’s integrity.
Following the juggling of finance ministers, the state will have to work very hard to rebuild its credibility, said Bart Stemmet, an analyst at NKC African Economics.
If it fails, credit ratings downgrades will follow, which will push up the government’s debt servicing costs and put the rand under further pressure, he said. A weaker currency will present inflation risks and lead to accelerated interest rate hikes.
The country’s ongoing drought further complicates this picture. According to Omri van Zyl, the executive director of Agri SA, preliminary estimates suggest that only 40% to 50% of the country’s maize-growing capacity has been used this season.
The drought is being driven by an El Niño weather pattern and there is unlikely to be enough groundwater to irrigate crops, and continued heatwaves are accelerating the evaporation of surface water.
South Africa will probably have to import between 2-million and 5-million tonnes of white maize, a staple food for many South Africans.
Other products will also become more expensive as the price of yellow maize, used to feed livestock and poultry, has risen. If imports of yellow maize are required, there will be a further escalation of food prices.
Maintaining the nucleus of active food producers is a key concern, said Van Zyl. Should the drought see more farmers go out of business, this will have long-term ramifications for South Africa’s balance of payments, its food security and the food security of neighbouring countries.
State aid has been set aside for small farmers, who were the first to be hit by the drought and have fewer resources to cope with it, he said. But large-scale commercial farmers, who produce 95% of the country’s food and employ about one million people, are beginning to buckle as well. It is crucial for the government to step in to support them.
Where this money could be found remains a question, said Stemmet. This year’s budget will be watched closely because the government is “looking everywhere for resources”, leading to expectations of income tax increases and hikes in the fuel levy.
How the government plans to provide further support for ailing public enterprises such as SAA and to fund the controversial nuclear programme will also be focal points this year.