by Thandi Mavela

THE BIRTH OF A POPULIST-LED ERA

The effect of a Donald Trump administration on the South African economy

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While the world has, since its infant days, made huge strides in promoting social and economic equality in the name of transformation, there is now widespread fear and concern that international events such as the recent election of Donald Trump as American president will undo progress made in terms of equality and transformation. Though, of bigger concern, is what implications a Trump presidency will hold for South Africa.

According to Professor André Heymans from the School of Economic and Business Sciences at the North-West University, the consequences may be dire.

“When the news broke, the rand lost approximately 3.7% of its worth, but since then it has stabilised a bit. Although Trump has mentioned that the US wants to do business with other countries, his focus will be on his country’s fledging middle class by bringing jobs back to the US and keeping them there. That means that the US will want to be more self-sustaining, resulting in less manufactured goods being imported to the US from other countries—including South Africa. The main concern is that Trump will want to accomplish this by raising import costs as to make it cheaper for Americans to buy locally produced goods in comparisons to imported ones.

“The US is one of South Africa’s single biggest export destinations and to implement such a hike in import costs will severely hurt South Africa’s economy,” says Heymans.

There is, however, a flipside to the coin, should government decide to exploit it. According to Professor Melville Saayman, director of the research unit TREES (Tourism Research in Economic Environs and Society), the former reality television star’s abrasive attitude may hold a benefit for this country’s tourism sector.

“When one looks at what Trump has proposed during his campaign, then it seems that travelling to the United States will become a lot more difficult now that he is president. He is a proponent of stricter measures of control and in the past South Africa has been able to exploit such situations. I think with some creative marketing we will be able to do so again because we are still one of the best value for money destinations. I think that until he does some positive things over an extended period of time the country’s reputation and image will suffer. He will need to foster a sense of trust and confidence and that will be hard to do seeing that a lot of the mainstream media will focus on the more negative aspects of his speeches and his actions,” says Saayman.

Looking ahead at 2017, Shannon Butler, Credit Analyst at the International Trade Credit Insurance Company, says the effect the recent rise in populist sentiment globally will have on the African market remains to be seen. In the run-up to the US presidential election Trump offered economic proposals that would have a possible long-term impact on African trade with the United States.

A continual theme throughout the Republican’s campaign has been that the United States had entered into numerous trade agreements, which he feels are unfavourable.

“Whether the newly elected president sticks to his promise remains to be seen. However, it is likely that African countries will face further out-of-cycle reviews of the Africa Growth and Opportunity Act (AGOA). Over 40 eligible Sub-Sahara African countries have been a boon to the region,” says Butler. According to the report titled Beyond AGOA from the Office of the US Trade Representative, non-oil total goods trade has grown from $13 billion a year to nearly $30 billion since AGOA was enacted.

“That increased out-of-cycle reviews will be likely and has been further evidenced by the July 2015 out-of-cycle review regarding South Africa’s eligibility and Burundi’s ejection due to crackdowns in the country on political opposition. The threat of an out-of-cycle review with Sub-Saharan Africa’s leading country, South Africa, as again resurfaced with the South African Poultry Association (SAPA) and South African Pork Producers Organisation (SAPPO) looking to obtain a court injunction to block US chicken imports,” says Butler.

Lesotho’s inclusion is likely to face scrutiny as a result of the on-going political crises facing the country. Lesotho has to an extent been one of the largest beneficiaries of AGOA with around 80% of its textile and garment exports going to the US.

“The increased populist sentiment is expected to have longer-term effects on Sub-Saharan Africa’s relationship with the world. Nevertheless, in the short-term these moves are expected to reduce capital flows into the higher risk Sub-Sahara African region with jittery investors looking to safer markets for generating returns. There is however a silver lining to the rise of populist sentiment in the form of increased opposition to austerity. Of late, there have been numerous pronouncements regarding the reintroduction of fiscal stimulus measures,” says Butler.

She highlights the fact that in the run-up to the election, the newly elected US president has pledged to make use of various infrastructure spend initiatives. Japan has announced a 28.1 trillion yen stimulus programme, Canada has also announced a further increase of 60 billion Canadian dollars in new infrastructure spend and China has also released their 1.6 trillion yuan Northeast Revitalisation Plan 2.0. These will optimistically have the effect of boosting demand for Sub-Saharan African commodity exports, increasing commodity prices and leading to increased levels of growth in Sub-Saharan Africa.”

Also referring to the current US situation, Dave Mohr, Old Mutual Multi-Managers’ Chief Investment Strategist, says monetary policy in the US, as in South Africa, is run independently of the executive and legislative branches of Government, and unlikely to be influenced by the outcome of the election. The Federal Reserve’s recent monetary policy meeting set the stage for an interest rate hike in December. The Fed said that it was waiting for “some” further evidence of continued progress toward its goals of 2% inflation and full employment. Inflation has been creeping up in the past few months, and the Fed expects it to be on target by 2018. Unemployment remains low.

“Other economic data—on retail sales, manufacturing and housing—have been mixed but generally point to continued moderate growth. So barring an extremely negative data point or severe market meltdown, a hike next month is likely. Future markets are pricing in an 80% probability, while US long-bond yields have risen to the highest level since March (though at 1.8%, the yield on the 10-year is still well below the 2.25% starting level for the year).

What does this mean for us in South Africa? Mohr is of the opinion that a stronger dollar will put pressure on the rand. “The key issue is not whether there is a hike now, but how many hikes there will be after December. If the Fed overreacts, the dollar could surge, placing the rand under tremendous pressure. However, a dollar that is too strong works against the Fed’s objectives and it is therefore unlikely that they will increase rates by too much.”

Taking a closer look at our currency and inflation outlook, Mohr says at current levels around R13.50 per US dollar (at the time of going to print), the rand is more or less where it was last year. This level is probably weak enough to support exports and tourism, but it creates a bit of a problem for investors. Global equity markets moved sideways in US dollars over the past two years, but local investors benefited from persistent depreciation in the rand to boost offshore returns. No more. Similarly, the large rand-hedge component of the JSE benefited from a weaker rand.

“The rand tends to overshoot on the upside and downside, but at the moment the rand-dollar exchange rate is well below the average of R14.50 for the second half of 2015 and the first half of 2016. This is positive for the inflation and interest rate outlook. The rand has also gained 15% against the Chinese yuan this year, which is quite notable, given how many consumer goods South Africa is importing from China.

"Government’s Crop Estimates Committee recently projected that farmers would plant 2.4 million hectares of maize for the next growing season, a 26% year-on-year increase. This points to a rebound in agricultural production and downward pressure on food inflation. The oil price has also given back some of its recent gains as it appears less and less likely that oil producers will stick to agreed production cuts.

“Lower inflation is positive for consumers, who are currently clearly under pressure. For instance, new passenger car sales were down 9.5% year-on-year in October, according to Naamsa. However, there are signs that the worst is over. From a low of 26 014 units in April, sales have rebounded somewhat to 32 739 in October. Exports of new vehicles remain strong at 32 800 units."

According to Prof. Raymond Parsons of the NWU School of Business and Governance the first consequence of a Trump Presidency, which has not been anticipated by most markets, is significantly heightened global economic uncertainty. The economic impact on an emerging economy like South Africa of a Trump Presidency will ultimately generate cross currents the strength of which cannot yet be predicted with accuracy. He says we must also take into account the new composition of the US Congress in assessing which parts of Trump’s agenda will indeed be implemented.

“In the short term the uncertainty arising from a Trump victory is good for the gold price. The gold price has already strengthened. The rand will benefit from a weaker dollar and vice-versa, as there is a well-known reciprocal relationship between the dollar and the SA currency. It will inevitably be a period of renewed high volatility for rand. All this will no doubt feature in the MPC’s next decision on interest rates when it meets again.

"The course of US economic data and interest rates over the next few months will be significant for both global economic trends and for South Africa’s growth prospects," according to Prof. Parsons. There will be both risks and opportunities. Once things have settled down a Trump fiscal policy may even promote US economic growth.

“In the longer-term what becomes really important is whether Donald Trump's strongly protectionist and inward looking attitudes will be damaging to world trade growth and hence to a small open economy like South Africa.

"We must also assess what new geopolitical risks may arise in the event of a more confrontational Trump foreign policy towards countries like among others China or Russia, with whom South Africa has important economic commitments. It is however also likely that the specific trade preferences which South Africa enjoys in the US market under AGOA will remain intact until their sunset date in 2025, as they are enshrined in legislation and not under threat.

“The latest developments in US politics emphasises again why South Africa must do what is necessary to get its house in order and avert a credit rating downgrade at the end of the year. A bigger, stronger and better economy is what South Africa must now be secured by addressing its vulnerabilities. Junk status will complicate the new challenges faced by South Africa. Given the heightened uncertainties in the global economic outlook strengthens the need for South Africa to reduce domestic policy uncertainty by urgently implementing the necessary structural reforms and improving its growth prospects as soon as possible,” says Prof. Parsons.

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