South Africa and the Perfect Economic Storm

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Andrew Stiles

South Africa’s economy is hurting. The former British Colony depends heavily on manufacturing and mining for economic growth – so much that these two industries alone make up roughly 50% of the nation’s GDP. Unfortunately, the volatile global economic climate has reduced demand for manufactured goods, and made commodities unstable. In result, South Africa’s two largest industries are contracting, which is causing problems for the government and the private sector.

Output from manufacturing fell by 2.5% over the course of 2015, and output from mining fell by 4.5% that year. The South African treasury said that they are expecting 0.9% growth in the economy - that is down from their estimate of 1.3% in 2015. These growth numbers are at an all time low since the great recession, and are causing investors to pull their money out of South Africa.

In addition to its problems with industry, South Africa is experiencing a severe drought due to, among many meteorological factors, the El-Nino effect. El Nino is caused from changes in wind patterns over the Pacific Ocean, which affects the direction in which seawater evaporates into the atmosphere and is redistributed via rainfall to other areas of the world. The drought in South Africa is causing mass crop failures, and forcing the country to import supplies from foreign sources. Food prices in the country are rising, and so is the rate of inflation.

The recent troubles across manufacturing, mining, and food production is putting stress on the revenues that South Africa’s government receives from these industries, and is creating budgetary problems for the government. The credit-rating agency Moody’s Investors Service recently announced that it is considering downgrading South Africa’s bond rating from investment grade to junk. If this happens, then South Africa’s already bad situation worsens as more investors flee, and consumers lose confidence.

Last week, South Africa’s Finance Minister Pravin Gordhan visited the UK to ease concerns about the economy. He hoped to prevent Moody’s from downgrading South Africa, and also prevent international investors from withdrawing; however, Moody’s has insisted on sending a team of economists to the country from March 16th until March 18th. They will analyze the economic situation and decide in June whether to downgrade South Africa to junk, or not. This year, South Africa experienced the perfect economic storm - but the storm may have only just begun.