The Impact of the Chinese Stock Market Crash on South Africa11th January 2016
South Africa’s economy edges closer to recession after having a rough 2015 that saw its economy contracted by 1% in the second quarter of 2015, the lowest level in six years. The outlook for South Africa’s economy could get worse this year, as the Rand, South Africa’s national currency, has reached its’ lowest level in 40 years at the start of the new year. South Africa has many internal and external challenges that need to be addressed; from lack of demand for its natural resources, to lower commodity prices, from an extremely devalued currency to political instability.
The super cycle in commodities has come to an end mainly due to the slowdown in the Chinese economy, which is trying to move from an export-lead engine of growth towards a more consumption-led oriented growth model. This shift in economic policy from China has a double impact on South Africa’s economy. On the one hand, it will continue to drive commodity prices lower and secondly, we’re going to see lackluster demand for South Africa’s goods.
The main source of concern this year will not come from the political instability nor from other internal factors but from external factors like the Chinese stock market, which has had a terrible start to the year and the prospect of higher interest rates in the US. The Chinese stock market crash is a great source of instability and the more the turmoil in the Chinese markets persists, the more pressure it will put on South Africa’s government to counteract the Chinese weakness by either cutting public spending or increase taxes.
The spill-over effect of China’s stock market crash is reverberating throughout the global markets, not just in the South Africa economy. The US stock indexes, the S&P 500 have suffered one of the worst opening day loss in the past century after closing down 2.4% in the first trading day of the new year and subsequently have fallen down almost 6% year to date.
The global market’s response to the events in China is straightforward and shows investor’s risk appetite diminishing and the lack of confidence among investors will accelerate the capital flow from the South Africa markets as usually investors cash in from emerging market first and foremost. The other source of instability is coming from the devaluation of the Chinese yuan, which has a significant implication, especially for South Africa which is highly dependent on trade with China. A devalued Yuan, coupled with a strong US Dollar makes it more expensive for Chinese buyers to buy African goods, which are mostly are priced in US Dollars. The competitive advantage that a weaker Rand would give is severely diminished, especially in an environment characterized by a lackluster global growth.
The Johannesburg Stock Exchange, which is the largest exchange in Africa has also felt the headwinds from China’s stock market crash as well, being down 5.1% year to date. This will make it harder for the South Africa’s Central Bank to hike interest rates again anytime soon as they will need a more balanced monetary policy in order to support economic growth.Share: