Emerging markets in trade war crossfire
The rand took a beating this week as it reached lows last seen six months ago and edged dangerously close to the R14-to-the-dollar mark. Experts believe this could only get worse because global and local markets are forecast to remain volatile.
The market positivity that ushered South Africa into 2018 after the ascendance of President Cyril Ramaphosa now seems like a distant memory, with foreign investors pulling their money out and increasing market anxiety about the further escalation of a trade war between the world’s two largest economies, the United States and China.
Economist Mike Schussler said the effects on the rand were not isolated but were part of a broader emerging markets issue on the back of a strengthening dollar and risk aversion from foreign investors who are moving their investments back to the US, where interest rates are rising.
After the 2008 global financial crisis, foreign investors pumped investment into emerging markets, where interests rates were much higher than in the US. But as US interest rates have begun to normalise, capital outflows have increased, noted Investec economist Annabel Bishop.
In May and June, foreign investors dumped R74.5-billion worth of their South African portfolio assets, compared to the R32.3-billion from January to April, said Bishop.
The pressure has intensified with the increased probability of a trade war between the US and China.
US President Donald Trump threatened to impose 10% tariffs on another $200-billion worth of Chinese imports, soon after slapping 25% tariffs on $50-billion in Chinese imports. China quickly retaliated by raising import duties on $34‑billion worth of US goods.
This has left emerging markets in the crossfire. After “Ramaphoria” there was a pullback, but these trade issues between the US and Europe and China are going to hurt South Africa, said Schussler. “We sell to China, who is our biggest trade partner, so if China gets hurt we’ll get hurt.”
Bishop said American tariffs would also negatively affect South Africa. The Steel and Engineering Industries Federation of Southern Africa calculated that the tariffs on steel imported to the United States would cost South Africa R3-billion and tariffs levied against South African aluminium would cost R500-million, putting 7 500 jobs at risk.
South Africa still has some competitive strengths, such as a prudent monetary policy, a sound financial system and a well-managed stock exchange. However, “the markets are overlooking these as they prove insufficient in the heightened global risk-averse environment,” said Bishop.
Although the rand recovered slightly to R13.50 after an announcement by Statistics South Africa that consumer inflation numbers had slowed down to 4.4% in May from 4.5% in April, Schussler said he doesn’t think this is a sign of an imminent recovery.
“I expect inflation to rise back above the 5% level. I think we are nearing the end of lower inflation for a little while; we are probably going to see the petrol price dominate inflation in June and July,” he said.
At the same time, electricity tariffs are expected to rise by more than the 5% increase that was determined for the year after National Energy Regulator approved Eskom’s application to claw back an additional R32.6-billion in expenses over the next three years. Schussler said the most immediate impact for consumers is going to be on energy prices (petrol, diesel and paraffin), which will indirectly start affecting the maize price.
“I don’t think it’s necessarily going to go up but it might start impacting a little on [the maize price] and that’s a staple food. The other fact is that maize is eaten by chickens, which is our biggest protein source in South Africa, and 60% of the price is feed for the chicken,” he said.
Tebogo Tshwane is an Adamela Trust financial reporter at the Mail & Guardian