Opinionista Mariam Isa 28 June 2016

Grim & Grimmer: Why Brexit is bad for SA

As if SA didn’t have enough troubles of its own, Brexit has crashed on to the country’s fragile political and economic landscape, shaking the foundations of its biggest overseas investor.

At this stage nobody really knows how things will pan out, but the near-term consequences for the UK do not look good and most analysts are predicting it will slide into recession in the second half of this year.

The fallout will inevitably slow the already plodding pace of global growth this year and keep financial markets volatile as the world waits to see how the UK extricates itself from its 40-year relationship with the European Union – which may be a prolonged and painful process. Sadly, SA is already teetering on the brink of a recession, with most analysts forecasting negligible or zero economic growth this year before the UK referendum. That means any nudge could push the economy over the edge.

Many point out that even though the UK is SA’s fifth largest single trade partner, it only takes 4% of the country’s exports. However, British imports account for 3% of SA’s total, meaning that the UK is one of the very few countries it has a trade surplus with – albeit a relatively small one of R6.8-billion last year. Demand for South African products in the UK will slacken, not only because of the country’s weakened economy, but due to the dwindling value of the pound, which is even depreciating against the rand.

Capital inflows to emerging markets such as South Africa are first to be affected by shock waves of the sort triggered by the UK referendum as global “risk aversion” spooks investors into selling shares worldwide. It also hammers currencies like the rand, which has slumped nearly as dramatically against the dollar as it did during the convulsions which followed Zuma’s firing of respected Finance Minister Nhlanhla Nene last December. The JSE fell in a knee-jerk sell-off which wiped 3.6% off its value on Friday, and another 3% on Monday. Overall, bad news for consumers as well as investors, as a weaker currency will keep inflation at the levels which are forcing the Reserve Bank to raise interest rates.

The uncertainty and volatility in financial markets globally will ensure that business confidence in SA remains mired at its lowest levels since the recession in 2009, which was triggered by the global financial crisis. Fallout from Brexit should be nowhere near as bad, in SA and elsewhere, although some are muttering that this could be the case.

However, the cost to SA’s economy will not be insignificant at a time when it is so vulnerable to a mix of policy uncertainty, political ructions, and falling global commodity prices. Private sector investment is declining at an ever increasing pace, and contracted by 6.8% in the first quarter of this year, according to the Reserve Bank. This is alarming as the private sector still accounts for two-thirds of overall investment in the country, despite a plethora of unfavourable policies for business.

What many people don’t know is that South African investors have a huge exposure to the UK, which amounted to a cumulative R1.23-trillion at the beginning of last year. Even more worryingly, foreign direct investment from the UK – which is more important to the economy than volatile “portfolio” inflows – amounted to R733-billion, or nearly half of the total. What is going to happen to British investment if the UK’s economy stutters over the next few years? British companies will repatriate staff, and presumably local jobs will be lost.

Another point often forgotten is that British tourists make up about a fifth of the total visiting SA from overseas each year – far more than from any other single country. Tourism is increasingly important to the economy, with Reserve Bank figures showing that travel receipts rose to R120.29-billion in the first quarter of this year – a record high – after some of the restrictions imposed in 2014 were lifted.

Last but not least, the delicate issue of credit rating downgrades must not be forgotten. Global rating agencies all gave SA the benefit of the doubt when they assessed the country’s economy in the past few weeks, giving Finance Minister Pravin Gordhan time to get results from his bid to unite business, labour and government in a drive to revive the economy.

Growth is the outcome which will ultimately determine whether SA gets downgraded to “junk” status and both Standard & Poor’s and Fitch are due to review their ratings of SA in December. With the country clinging to the lowest rung of their respective investment grade ladders, the repercussions of Brexit could seal a downgrade. DM


Support DAILY MAVERICK & get FREE UBER vouchers every month

An increasingly rare commodity, quality independent journalism costs money, though not nearly as much as its absence can cost global community. No country can live and prosper without truth - that's why it matters.

Every Daily Maverick article and every Scorpio exposé is proof of our dedication to this unshakeable mission. Investing in our news media is by far the most effective investment into South Africa's future.

You can support Independent and Investigative journalism by joining Maverick Insider. If you contribute R150 or more per month you will receive R100 back in UBER vouchers. EVERY MONTH until October 2019.

So, if you'd like to help and do something meaningful for yourself and your country, then sign up to become a Maverick Insider. Together we can Defend Truth.


Bosasa’s evidence ‘wiped out’ before SIU visit to gather corruption evidence

By Jessica Bezuidenhout

"Blue is the typical heavenly colour. The ultimate feeling it creates is one of rest. When it sinks to almost black it echoes grief that is hardly human." ~ Wassily Kandinsky