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.

READ MORE: World watches US-China trade spat

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.

READ MORE: Flailing Eskom out of options

“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

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Tebogo Tshwane
Tebogo Tshwane

Tebogo Tshwane is an Adamela Trust financial journalism trainee at the Mail & Guardian. She was previously a general news intern at Eyewitness News and a current affairs show presenter at the Voice of Wits FM. Tshwane is passionate about socioeconomic issues and understanding how macroeconomic activities affect ordinary people. She holds a journalism honours degree from Wits University. 

Your M&G

Hi , To manage your account please click here.

You can access your digital copy of this week’s paper here.

Advertising

READ IT IN FULL: Ramaphosa’s address on the extension of...

This is the full address given by President Cyril Ramaphosa on April 9

Meet the doctor leading Africa’s fight to contain the coronavirus...

Dr Matshidiso Moeti’s father helped to eliminate smallpox. Now she’s leading Africa’s efforts against the coronavirus

Stella set to retain her perks

Communication minister will keep Cabinet perks during her two months of special leave

Covid-19 grounds Nigeria’s medical tourists

The country’s elites, including the president, travelled abroad for treatment but now they must use the country’s neglected health system
Advertising

Press Releases

Rahima Moosa Hospital nursing college introduces no-touch facial recognition access system

The new system allows the hospital to enrol people’s faces immediately, using artificial intelligence, and integrates easily with existing access control infrastructure, including card readers and biometrics

Everyone’s talking about it. Even Kentucky

Earlier this year South African fried chicken fast-food chain, Chicken Licken®, launched a campaign for their wallet-friendly EasyBucks® meals, based on the idea of ‘Everyone’s talking about it.’

New energy mix on the cards

REI4P already has and will continue to yield thousands of employment opportunities

The online value of executive education in a Covid-19 world

Executive education courses further develop the skills of leaders in the workplace

Sisa Ntshona urges everyone to stay home, and consider travelling later

Sisa Ntshona has urged everyone to limit their movements in line with government’s request

SAB Zenzele’s special AGM postponed until further notice

An arrangement has been announced for shareholders and retailers to receive a 77.5% cash payout

20th Edition of the National Teaching Awards

Teachers are seldom recognised but they are indispensable to the country's education system

Awards affirm the vital work that teachers do

Government is committed to empowering South Africa’s teachers with skills, knowledge and techniques for a changing world