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The riple effects of US slowdown on SA Economy

31 January 2008 Coface executive director, Michael Creighton

2008 – The Knock-On Effect of a US Recession

The looming recession in the US is of concern. A recession in the US will have a negative effect on economies throughout the world including South Africa.

The US government is frantically trying to put together a recovery plan to avoid such a recession, lowering interest rates late January by 0,75 basis points, amongst other measures.

However, the US economy is facing fundamental problems which may not be saved by any recovery plan. As a result, it is therefore impossible to predict what will happen to the business environment in 2008.

The issues affecting SA are changing on a daily basis. What is definite, is that 2008 will be a challenging year and will bring complexities previously long forgotten.

Recent downturns in the first-world economies have not had too much negative effect on South Africa. Our economy has been strong and, as a result, we were not significantly affected by the European and US downturn of 2001 and 2002.

This time it may be very different. There are a number of differences within the South African environment which leads one to believe a slowdown in the world’s economies will this time affect South Africa.

Rising interest rates locally are hurting individuals and businesses. There have been four percentage point rate increases in 20 months. This pressure did not exist during the last international slowdown.

New challenges such as the recent power cuts are hurting businesses both big and small. As a result, consumer trade is being negatively affected through lost sales, and mining, manufacturing and servicing entities are being negatively affected through lost productivity. The power cuts have added to traffic congestion which is further exacerbating productivity and confidence levels.

In addition, consumers are spending less as a result of complications around the National Credit Act.

There are other concerns around the South African economy. South Africa’s current account deficit is extremely large - 6,8% of GDP in Q1 2007; 6,4% of GDP Q2 2007 and 8,1% in Q3 2007.

There is the potential for this to increase further as a result of the power cuts negatively effecting exports, particularly in the manufacturing and mining sectors. To some extent, the potential damaging effect of the deficit has been offset by financial inflows from abroad. SA’s current account deficit widened to a record R162,6bn in the third quarter of 2007, boosting the country’s reliance on foreign capital.

However, can we rely on increased foreign capital inflows in 2008, given possible international concerns around South Africa’s current power problems, together with overseas countries experiencing their own economic problems?

In conclusion a US recession and the resulting international slowdown comes at a time when South Africa is experiencing high interest rates, power cuts, restricted credit approval and a large current account deficit.

What is clear is that businesses are in for a tough time and one can only conclude that insolvencies will significantly increase in 2008.

As things currently stand, companies and individuals are advised to be cautious, analyse the current environment and to urgently implement strategies to minimise the negative effect of both a local and an international slowdown.

Companies need to be aware that a number of their clients may not be equipped to handle the current environment and may in fact go insolvent. In the implementation of strategies required to function in the evolving environment of 2008, businesses need to ensure that they do not allow the insolvency of a customer to effect their own survival
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