How will the South African economy weather recent challenges?

Dukascopy TV recently produced a piece covering economic developments in South Africa as labor strikes and power outages, which have plagued the country over the last year, have had a significant negative impact on its economy. Low oil prices thus far in 2015 that should have positively affected the economy under normal circumstances were offset by the aforementioned power supply shortages, which have hurt manufacturing production. Business confidence is also down, hitting a three month low in the month of March. On top of it all, the recent xenophobic violence that was captured on camera and shared across the globe has not helped matters. Economist Dirina Mançellari spoke with Dukascopy to provide analysis on the situation.

The South African economy has proven to be resilient in the face of recent developments, posting much better than expected results of late. Retail sales in South Africa grew a better than expected 4.2% over the same month last year in February. This marked a considerable improvement over the 1.9% increase in sales growth in January.

When asked what this might mean for the South African rand, Dirina said that, “while the recent positive news regarding retail sales can help the currency in the short term, there needs to be improvements in other fundamental areas of the economy to see a strengthening of the currency in the long term.”

Poorer than expected trade figures from China were released in mid-April as declining exports and weak imports sent ripples through world markets, especially South Africa. “South Africa’s currency hit a nearly two-week low against the dollar on Monday this was right after China, which is a major trade partner of South Africa, released its weak trade figures,” Dirina said.

However, despite the decrease in value of the rand as a result of China’s poor showing, Dirina stated that FocusEconomics expected the currency to bounce back in the mid-term. “In the three-month horizon FocusEconomics Consensus Forecast expects the currency to gain some ground and trade a 11.93 against the U.S. dollar and this is an expectation that the economy will improve in the following quarter.”

Dirina asserted that this trend will more than likely continue in the long-term and end the year at a very ambitious 11.57 rand to the USD. However, she did warn that the currency’s future is still surrounded by uncertainty, as the country still has a lot to do regarding much maligned power deficiency issues and labor strikes.

“For 2015 our panel expects the currency to gain some ground and end the year at 11.57 rand to the dollar, however, we can say that the currency remains highly exposed to swings in risk sentiment mainly due to the country’s external imbalances and risk of more labor strikes and power supply shortages."

Check out the video below to see the full interview:   

Author: Brian Dowd, Marketing Coordinator

Date: May 6, 2015