It’s no news that the South African economy has experienced its first recession since the exit of Zuma and it's second since the global economic meltdown. This event unfolded barely six months into the tenure of Cyril Ramaphosa, the chairman of a booming but currently disturbed telecoms business –MTN. Despite rejigging the ministerial cabinet, reforming state-owned enterprises, pursuing an investment-driven economy and launching a similar youth empowerment scheme within his first 100 days in office, the South African economy still receded seven months later.
This consecutive decline for two quarters in growth of the Gross Domestic Product means that the economy has encountered a recession. The GDP measures the market value of goods and services at a particular point in time. This metric (GDP) is calculated by the Statistical Agency in a nation and released quarterly. On the other hand, recession is a slowdown in the economic activities of a country. Such a situation is characterized by fall in spending, boom in unemployment, rising inflation and decline in corporate profits. Recession is usually corrected by expansionary fiscal or monetary policies such as reducing interest rates, reducing taxes, increase in government spending e.g. bailout funds to critical sectors of the economy.
The economy of SA initially contracted by a revised 2.6% downslide in the first quarter of 2018 (compared to the first quarter of 2017) before recording another decline in output by 0.7% quarter on quarter in the second quarter of 2018. The recession was led by a decline in Agriculture (which fell by 29.2%), transport industry (which dipped by 4.9%) and Trade (which went south by 1.9%). These declines were caused by harsh environmental conditions affecting agriculture, industrial action in the transport sector, fall in government and household expenditures due to the reformist polices of Ramaphosa and lesser manufacturing output. Although, the mining sector soared by 4.9% and the Construction sector recorded a positive growth of 2.3%, they were not sufficient to drive growth figures northward. It seems that the upsurge in the South African markets following the election of Ramaphosa waned due to the knock-on effects of the looming trade war and sell-offs that overwhelmed efforts of the private and public sectors.
Recently, the Nigerian GDP report for the second quarter was released showing a lower but positive growth rate of 1.50%, 45 basis points lower than the 1.95% growth figure recorded in the first quarter. This growth was driven by the non-oil sector which grew by 2.05% (from 1.29% in Q1 2018) – Construction, Agriculture, Transportation, Storage and Other Services. The oil sector relapsed by -3.95% despite the oil price rally from about $69 at the beginning of 2018 to about $78 dollars currently due to fall in oil volume caused by frequent repairs carried out on oil installations. This saw oil output sliding from 2 million barrels per day (mbpd) to 1.8 mbpd.
From the above analysis, we see that both African economies experienced a lower growth in output. This coincided with a period of turmoil for emerging market and frontier economies. An emerging market is a country that’s progressing towards becoming a developed economy e.g. Argentina, Turkey, Mexico etc. while frontier economies are countries that are experiencing a slower rate of transformation into a developed one e.g. Nigeria, Ghana, Kenya etc. Emerging and frontier markets experience faster rates of growth than advanced economies. Advanced countries grow at a steady rate and possess developed infrastructure, institutions and system for running its economy.
Though the Buhari Administration came under fire for not taking similar steps as his South African Counterpart when he assumed office, yet the current economic sphere has taken its toll on both economies. As both economies jostle to win over investors and sign memoranda of understanding, the thick black cloud of the looming trade wars seem to settle down on both economies.
Earlier this year, the Chinese and US economies have exchanged banters over an alleged breach of trust in handling US exports resulting in tariff impositions on critical import items of the Chinese economy. While the war of words and trade go on, as they say the green grass bears the brunt. The grass in this case are frontier economies like South Africa and Nigeria. This is because of the dependence of these nations on bigwigs like China and the US. Following the hike in Fed rates (the rate at which money is lent to US banks), many foreign investors sold off their securities in these markets and opted for a safer dollar haven.
Still on the trade war, Nigeria has been experiencing a recession in trade sub sector prior to this time while the South African nation has lagged recently in the same sector. This becomes worrisome at a time when the Continental Free Trade Agreement is on its way. Just as the benefit of the agreement is to African economies, the cost of a trade war can dampen the sustainability of the agreement due to the huge dependence on the dollar especially when China is yet to retaliate intensely.
The dollar has recently strengthened following the exit of dollars from emerging markets all over the world upon the raise in the Fed rates. The European bank and Bank of England are also set to increase their monetary policy rates, hereby attracting investors that had invested in emerging economies upon the quantitative easing policies of advanced economies in correcting the global credit crunch of 2009.
In retrospect, virtually most analysts got their forecasts wrong about these two economies this year due to the unfavourable international climate and some local issues. In Nigeria, the impact of the herdsmen crises is yet to be felt due to the lag period in agricultural production however resurgence of such activities could dampen non-oil growth and drag growth figures further in the mud. Even as legal issues constrain investments in the oil sector, the government should not rest on its oars in revamping the ailing sector. Following the listing of 40% of shares of the NNPC on the exchange, more transparency is needed to attract the much-needed investment.
As both economies draw towards an electioneering season in 2019, wavering investor confidence may continue. The rand closed lower by 1.5% on Wednesday while the Naira appreciated by 9 basis points (0.09%) at the Investors Exporters Window but closed 8 basis points lower at the parallel market on the same day. This shows the cautious steps taken by foreign investors in emerging economies. Had the Investors/Exporters Window not been established in 2017, Nigeria might have experienced another recession this year. The market-driven forex platform seems to boost investor confidence in the economy. While some risk takers are taking advantage of undervalued high-quality stocks in these economies, others have chosen to seek refuge in the dollar.
Looking forward, it is expected that African economies begin to plug in economic policies that boost private sector involvement, reduce dependence on the state and attract funds that will be used in revamping the economy at large.