Why South Africa’s economic tremors may shake Kenya

What you need to know:

  • What was South Africa to gain from being a member of the exclusive group? Besides being the voice of the continent at various international forums, the country would serve as a gateway for investment from the Brics countries to the continent.

On December 24, 2010 South Africa made a triumphant entry into the group of major emerging markets called BRICS, which includes Brazil, Russia, India and China. The move bolstered its position as Africa’s champion. 

At the centre of South Africa’s bullish economy were its vast natural resources such as gold, diamonds and platinum. There were also a host of factors that made the country a powerhouse, including its excellent infrastructure, established corporate footprints, a culture of innovation, easy access to finance for business, a stable macro and micro financial climate, an advanced banking system, and functioning regulatory frameworks. All these played a role in its admission to the exclusive club of nations.

What was South Africa to gain from being a member of the exclusive group? Besides being the voice of the continent at various international forums, the country would serve as a gateway for investment from the Brics countries to the continent.

Certainly South Africa’s prospects looked rosy, until several months ago. And last week things reached a boiling point when the country’s finance minister Pravin Gordhan declared that the South African economy is “in crisis”.

The situation has dramatically turned from rosy to bleak just in a span of six years in the African economy that rating agencies have threatened to downgrade it to junk status. The ramifications of such a move will be far-reaching with borrowing costs bound to shoot up instantly.

The International Monetary Fund and the World Bank predict South Africa’s growth this year will slide to less than one per cent — far below levels needed to resolve unemployment running at 25 per cent. The runaway unemployment has been the reason for mounting social unrest.

In his Budget speech, Mr Gordhan cut the country’s growth forecast for 2016 to 0.9 per cent, down from 1.7 per cent. Mr Gordhan also announced measures aimed at stopping the country falling into recession and to appease the rating agencies.

But how did Africa’s most developed economy drive into such staggering headwinds?

Analysts blame a number of factors for South Africa’s seemingly intractable challenges, but the most poignant are a series of policy missteps and sliding commodity prices thanks to reduced demand by China. Its agricultural sector has also been substantially hobbled by the worst drought in more than a century.

But what do the problems emanating from down South have anything to Kenya? Apparently, according to analysts, there are disconcerting similarities between the two countries. The analyst have even warned that failure by Kenya to adopt prudent economic policies could set the country on the ominous South African path.

University of Nairobi economics lecturer Prof Michael Chege told Smart Company what is now happening to the South Africa’s long term sovereign bond — the fear of it being classified as a “junk bond” (a bond with high default risk) – will only come as a surprise to those who have not followed closely “the tragic history of the South African economy” especially since 2008.

“South Africa’s economy even in the best of times after apartheid (2004- 2007) was growing at 5.2 per cent annually compared to more than 10 per cent in China and over 7 per cent in India,” he said.

The lecturer further noted that South Africa has not managed to restructure its economy to compete globally in the export sector in manufacturing as has China and the East Asian tigers. The growth sectors have been in the “non-tradables” like construction and domestic trade – very much like Kenya,” explained Prof Chege.

Kenya has faced similar calls to diversify its economy too. The IMF Kenya representative Armando Morales has for instance cited the need to enhance agricultural production, saying it holds great potential for development.

“Kenya is less affected by the slump in (global) commodity prices compared to other African countries. But the fact that export growth has been minimal for several years now makes the need for diversification also pressing,” Mr Morales said.

Prof Chege said South Africa is also paying the price of bad borrowing decisions.

“GDP growth has been sluggish since 2008 and is expected to be just 1 per cent in 2015. Public debt in South Africa (again like Kenya) incurred for good reasons like reversing the 2009 slump after the global economic crisis is now 50 per cent of GDP and has to be settled at interest rates of about 9 per cent, and the rand has been sliding against the rand which means paying foreign debts will be even more expensive in rand terms,” he says.

In equal measure, Kenya’s National Treasury has been on the spot for its borrowing decision.

Analyst Aly Khan Satchu says bad economic management characterised by politics of patronage and corruption under President Jacob Zuma are punishing South Africa’s economy.

PERFECT STORM

“South Africa has been struck by a perfect storm. There is no escaping the fact that a President who was lord and master of his domestic domain via a very effective patronage machine and a policy of high velocity rotation has reached his limits in terms of the markets in particular,” he says.

“The markets are the message and they are voting on a continuous basis against the ‘Zupta’ economy. The Rand has crashed, SA is headed to ‘junk’ status and the point is that the model is broken and the Pilot out of his depth. This policy making Failure is compounding the problem.”

He however also linked South Africa’s woes to the slowdown in China. Metals and mining contribute more than 50 per cent of exports.

On Friday last week mining giant Anglo American Platinum said it planned to cut at least 2,000 jobs at two mines in South Africa as the firm reels from sharply falling prices.

The job losses are the latest in a series of cutbacks by the company. South Africa’s mining sector has shed thousands of jobs in the wake of falling demand due to China’s declining economic growth, as well as enduring debilitating strikes over wages and poor energy supplies.

South Africa produces 70 per cent of the world’s platinum, which has fallen in price by almost a half in five years.

“South Africa has a very high correlation with China and therefore at the sharp-end of the Africa China related slow-down. I am afraid like Barclays (who are effecting a stop-loss) that this going to get worse. The Rand is going lower, inflation is going higher as are interest rates and GDP is going to contract,” Mr Satchu told Smart Company.