The announcement in December 2013 that the US Federal government was going to begin its tapering programme shifted the timeline forward. The result was a year that began with further outflows from emerging markets, depreciating currencies and stagnating economic growth prospects – the case was set for South Africa.
So how did this all happen? Soon after the financial crisis in 2007 the United States started a stimulus programme known by many as quantitative easing (QE). The underlying economic theory is a system in which the Federal Reserve would buy mortgage backed securities of a certain amount every month thus increasing market liquidity. This in turn was meant to stimulate the economy through a system of chain events which would theoretically lead to increased spending ego, increased inflation, decreased unemployment and higher economic growth.
QE additionally lead to capital flows into emerging markets as investors targeted the higher interest rates and markets with stronger growth prospects as the USA tried to find its feet. The process continued unabated with Federal Reserve pumping US$ 85 b into the economy until the fateful day when former Federal Reserve chairperson announced that they would start tapering. The argument was simple - the American economy was releasing positive economic numbers and the Federal Reserve felt it was time to cut down on the excess liquidity. This shifted attention back to the US and capital flows were once again redirected to the USA (from emerging markets).
When tapering eventually started in January 2014, emerging markets felt the pinch as their currencies greatly depreciated against the dollar. Argentina, Brazil, Turkey, Indonesia and South Africa are some of the greatly affected countries as their current account deficits posed further problems to their currencies as large capital outflows exited their nations. South Africa unfortunately faces slightly more woes.
The Rand’s weakness is unfortunately a result of other structural problems within South Africa. The persistent low economic growth and worries about the current account and fiscal deficit will continue to weigh heavily on the Rand, unless positive trade balance numbers are produced. High consumer indebtedness and rising interest rates will reduce their discretionary spending power of businesses and consumers with looming fears that the SARB will continue to raise interest rates. Labour disputes in 2013 have not been fully resolved, and have spilled over into 2014. All of this coupled with cost push inflationary pressures presents a rather gloomy outlook for South Africa
Looking at a broader picture of the Rand verses overall GDP growth, it still appears that It’s going to get worse before it gets better. A 14 year historical line chart gives certain tell-tale signs that growth in S.A has been somewhat choked. The Rand depreciated by 85.17% against the dollar and Euro since 2004 while overall GDP growth during that period has also declined by 2 to 3 %.
The Rand has depreciated steadily over the past few years without the desired impact on the current account balance. The labour disputes and disgruntled indebted consumers has not helped the situation. For 2014 to be any different from the rest, South Africa will have to focus on leveraging growth in proactive sectors that open the economy to middle to lower income population whose unrest is a sign of listlessness.
What is also clear is that South Africa will have to redouble its efforts to present a nation that is sturdy in the eyes of investors and stable in the eyes of its residents. The worries of high unemployment and high inflation need to be mitigated immediately lest labour unrest turns into violence. Our remedy is simple, unless the frequency and duration of trade union power plays are corrected South Africa will face sluggish growth and a continuously dwindling currency. Political power plays within the nation also have to be managed carefully as election year roles out.
But let’s not give in to S.A.Dness. The current headwinds are unveiling the true value of our economies and are in line within general economic cycles of booms and slumps. The structural changes that will take effect this year and the year to come are necessary evils for any nation to be girded. For Namibia, the nation needs to prepare for certain spill-over impacts from South Africa. Economic growth will remain positive provided the labour market remains appeased.
The volatility of the Rand will have the usual double sided impact on Namibia with increased costs of imports but improved exports. So far it’s too early to tell which way the dice will roll in that regard. Namibia’s main concern will be the resulting pressures of the indebted consumer with possibility of rising interest rates. Consumers are going to have to take a second look at their finances before making rash decisions to take on more credit. PF