This year’s risks, chances
EMERGING MARKETS: POLITICAL FIGHTS HAVE PRICE
Eight days into 2020 and the economic mood is sombre.
Perusing a list of things that have already affected the global economy, two stand out: the tension between the US and Iran and the raging fires in Australia. The severity of just these two will easily convince you that this is not a good start to a new year.
I wonder, from an economic point of view, what you would consider the issues that will subject the South African economy to either more punishment or a reprieve from pressure.
Short of a biblical miracle, I don’t see any good economic news on the rainbow nation horizon.
The South African economy will be negatively affected by the unending Eskom load shedding crisis, and drought. The former has a direct bearing on Finance Minister Tito Mboweni’s budget for the year: will the government carry on maintaining the utility? In turn, will that be sufficient to avoid a ratings downgrade?
Second, drought reduces crop yield, with the result that supply falls and food prices rise. Whichever way these two scenarios turn out, they will have bearing on the rand – good or bad.
Consider the damaging consequences of Eskom’s inability to meet demand on the mining sector, with power outages forcing the closure of underground operations. This affects productivity and employment.
Irony
It is ironic that the discussion about mining is always dominated by investor caution brought on by legislature ambiguities, yet it is the power supply crisis that is dealing a death blow to an already struggling sector.
The longer load shedding continues, and the more frequently it occurs, the more likely it is that mining companies will try to minimise their exposure to such risk. Shareholders are going to demand action and management will be told to either exit SA and invest elsewhere, or reduce the wage bill.
It is not difficult to understand the ripple effects of a mining sector that does not have enough electricity to carry out its work. Two stand out – job losses and a decline in mining’s contribution to GDP and foreign direct investment. Economically and socially, SA cannot afford either.
Here are a few reasons … Glimmer of hope
When it comes to emerging market volatility, however, there is a glimmer of hope. It lies amid the geopolitical risks posed by advanced economies.
For one, it is clear that emerging market currencies are going to have continuous on-and-off periods of volatility, similar to the past year. This will mostly be driven by the dollar along with domestic idiosyncrasies that could weaken the performance of an emerging market currency at any given point.
However, on the positive side, the current political bickering and the upcoming US presidential elections could see investors turn to emerging markets, shifting capital until after the elections.
Possibly the most significant positive aspect of this is that it can longer be said that emerging markets alone pose a geopolitical risk.
Opportunity … and obstinacy
These developments, coupled with geopolitical uncertainties and a mixture of unpredictable policy certainties by some of the world’s leading economies, can potentially shift capital to emerging markets.
This is an opportunity that any country must be ready for.
But the reality is that SA, potentially so attractive to investors, seems determined to march straight to its ruin.