Features

South Africa slips into recession

South Africa's economy fell into recession in the second quarter of 2018, contracting by 0.7% after a decline in GDP between January and March.

913_MW_P06_Markets

Emerging-market stocks have slipped into a bear market, falling by 20% from their latest peak. But this "should not be regarded as evidence of a systemic crisis", says Lex in the Financial Times. Keep the big picture in mind. Developing economies should still manage to grow by 5% this year and they have gradually reduced their vulnerability to crises by keeping a lid on inflation and public and foreign-currency debt in recent years. Debtmaturities have become longer too.

A strong dollar has "marked a dividing line between the US and the rest of the world". But the emerging countries whose currencies and stockmarkets have been worst hit are those whose problems were self-inflicted. Investors have therefore been especially worried about Turkey and Argentina in the past few weeks. Their latest headache, however, is South Africa.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

From Ramaphoria to recession

We learnt last week that the economy fell into recession in the second quarter of 2018, contracting by 0.7% after a decline in GDP between January and March. Agriculture, transport and retail were the chief culprits, according to Reuters. The picture was gloomy all round, says The Economist, especially in farming, which was badly hit by drought. "The rand, already roiled by a sell-off of emerging-market currencies, plunged to depths not seen since the worst moments of former president Jacob Zuma's tenure." Unemployment has ballooned to a frightening 37.2%. This dismal data might make it harder for the South African Reserve Bank to raise interest rates to squeeze out inflation, which has now reached 5.1%.

The "Ramaphoria" that surrounded South African president Cyril Ramaphosa's election six months ago has waned. The ruling African National Congress (ANC) is still destined for election victory next year, says Ed Cropley on Breakingviews, "but without asolid win Ramaphosa's grip on the party, and his ability to push through growth-boosting economic reforms, will be in doubt". Investors' hopes may have been too high when he took over.

Advertisement
Advertisement - Article continues below

A long uphill struggle

After nine years of corruption and overspending, it was never going to be easy to rein in spending and turn around bloated state firms. For now, however, the government doesn't seem to be doing itself any favours. It is pushing a spending package that includes infrastructure projects and subsidies for farmers, according to The Economist. "How the government would pay for this is amystery." Tax collection slumped andtax evasion soared under Zuma. Tohelp narrow a yawning budget deficit, Ramaphosa increased value-added tax earlier this year. But that has hurt consumer spending.

Meanwhile, another headache looms: areview of the country's credit rating is due in October. "If Moody's cuts [it] to junk, South African bonds would be thrown out of global indices, prompting a sell-off. That implies higher borrowing costs and yet more pressure on the economy."

Advertisement

Recommended

Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019
Visit/514936/emerging-markets-bounce-back-after-a-miserable-few-months
Features

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020