Global tailwinds should be banked

South Africa is a small and very open economy subject to the ebbs and flows of global economic activity and capital movements.

Fortunes from elsewhere in the world have a particular bearing on South Africa’s economic outcomes. At the moment the country is benefitting from a series of tailwinds.

A view among peers

In the second quarter, South Africa’s current account deficit improved to 3.1% of GDP, down from 5.3% previously. This has made a positive contribution to how South Africa is viewed among its peers.

Previously it was classified as one of the Fragile-Five which included Turkey, Brazil, India and Indonesia.

These emerging countries have large current account and budget deficits, which have increased their vulnerability related to investor risk appetite. Although South Africa has seen a waning demand for imports, which helps the trade balance, it has also seen strong export growth supported, inter alia, by trade-weighted rand depreciation and improved economic activity elsewhere.

The linked economy

Earlier this year, in a special research note on South Africa, the International Monetary Fund (IMF) detailed an outcome where South Africa’s economic fortunes were linked to those of the European Union.

But now South Africa is exhibiting a much closer tie to China. China’s growth outcomes have shown a recent improvement. Electricity production and rail freight volumes have shown positive growth and bank lending has been robust.

It appears the Chinese authorities may have engineered a soft landing. Growth in bank lending is attributable to the aggressive stimulus by Chinese monetary authorities for much of the first half of the year and its effect could fade into the latter part of the year. However, the better economic outcomes from the second largest economy in the world are having marginal positive effects on South Africa.

Supporting local

At the same time, sub-Saharan Africa (SSA), a region with which South Africa enjoys a trade surplus, continues to support local exports, although its growth rate has moderated.

The Western side of the Sahara is feeling significant negative effects from the oil price more than halving and growth has moderated substantially in countries such as Nigeria. However, much of the rest of the continent continues to exhibit healthy growth. South Africa exports high-end value-added products to this region, such as cars, beverages, fertilisers, cellphones and plastics, among others.

Positive contributors

The favorable attitude held by investors towards emerging market (EM) countries is also having a positive contribution.

Global investors have expressed their approval of the improving growth prospects in EMs by purchasing both equities and bonds. This has resulted in a surge in capital inflows, especially with such a substantial increase in the stock of global bonds delivering negative interest rates. Consequently, investors continue to search for yield and EM assets have found renewed favor, with South Africa potentially being a major beneficiary of this sentiment.

At this stage of recovery after the 2008 crisis, global economic frameworks present South Africa with an opportunity to at best muddle-through, but not implode. While it may prove transitory, South Africa’s improved trade account has secured a better outcome for the country when assessed on risk - measured relative to South Africa’s peers.

The next Brazil

Ratings agencies are expected to deliver, on a balance-of-risks, a review of South Africa’s credit quality in December.

Barring political risks, it looks unlikely that the domestic economy will become a Brazil. Brazil has been in recession for more than two years. There are few indications that the incumbent Brazilian authorities have the wherewithal to engineer a recovery, despite the recent impeachment of Brazilian President Dilma Rousseff.

South Africa’s current economic trajectory is very different to the outcome seen in Brazil. The destiny of South Africa’s economic fortunes resides within the country and the global picture is not severe enough to stall South Africa’s progress.