Dawie Roodt on SA arms-to-Russia impact – Higher interest rates, inflation, no GDP growth

The recent dispute known as #LadyRussiaGate between South Africa and the United States over claims from the U.S. Ambassador to South Africa that South Africa had supplied weapons and ammunition to the Russian government would harm South Africa’s economy. That’s according to Efficient Group Economist Dawie Roodt who anticipated some recovery in the Rand’s value, but he told Biznews that the currency would remain weak, resulting in inflationary pressure. Roodt said that a fifty base point hike in interest rates in response to the situation is likely and that the South African economy is probably not going to grow this year. – Linda van Tilburg 

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Dawie Roodt on arms-to-Russia
Dawie Roodt

Weaker rand unlikely to recover to previous levels 

What is interesting about the South African currency is whenever there’s some sort of crisis, or a negative thing happening, then you see a sudden weakness in the currency. The rand really bombs out, exactly what we saw the last two days or so and then after a while, it does seem to settle down a little bit and the rand becomes gradually just a little bit stronger and I think that is what we’re going to see again. So, I won’t be surprised if we see more volatility over the next couple of days and then the rand stabilising and gradually appreciating a little bit to 18.5 maybe even better than R18 to the US dollar. 

Depending on what politicians are going to say or do over the next couple of days or weeks will determine whether we will see the currency remaining at these very weak levels or gradually drifting a bit stronger. But I don’t expect the currency to go back to R16 or R17 to the US dollar, that is quite unlikely. 

Read more: Rand hits all-time low of R19.27/$ after US says SA is supplying arms to Russia.

Higher inflation, another interest rate hike, South Africans are poorer 

The consequences of this obviously will be that it will be inflationary. It means that we as South Africans are poorer because the rand is basically the share price of South Africa. It means that the Reserve Bank is likely to increase interest rates again. Previously, I thought we could have been at the end of the rising cycle in interest rates or that they [The South African Reserve Bank} were going to go for 25 basis points. I’m afraid I think they’re now going to go for the 50-basis points increase and that in itself will be bad for economic growth as well. So, I’m afraid we are in for some really, really difficult times for South Africa. 

Read more: Cyril’s Rubicon? RW Johnson on arms-to-Russia torpedo for SA’s motor industry, AGOA, ARV supplies.

South African economy is probably not going to grow at all this year

If South Africa is excluded from AGOA, it will be bad for us. Total trade with the US is in excess of R400 billion. We are currently running a trade surplus with the Americans. So it’s going to affect us much more than the Americans. We’re going to be the big losers here. But it doesn’t mean that we’re going to stop trading with America. So, we will continue to trade with the Americans but  it’s going to become more expensive. It’s going to become more difficult to trade with the Americans and it certainly will impact the economy. But we are not talking about one or 2% negative economic growth. We are probably talking about small percentages like 0.1%, 0.2%, to point 0.3% negative effect on the South African growth potential. But having said that, we can’t lose anything because the South African economy is probably not going to grow at all this year. We could be in an annual recession, we could be in a so-called technical recession already. We have exceptionally high levels of unemployment and poverty and everything that goes with that, and we can’t lose anything. So although the impact is not necessarily going to be that large on the South African economy, every time we shoot ourselves in the foot, it  is bad for the economy and this is another example of that. 

Read more: SA a failing state on the cusp, stirring analysis from Dr Edward Mienie

West is just more important in terms of size as trading partners 

Look at the numbers. It is true that China is a significant trading partner of South Africa, the biggest trading partner of South Africa, but China is significantly smaller compared to the United States and Europe. Those are far more important trading partners combined than China. Russia is a tiny trading partner to South Africa. Russian trade with South Africa is about $2 billion or so, significantly less than the United States as an example. When it comes to investments, the Europeans and Americans are much, much bigger investors in South Africa than the Chinese. So I’m not suggesting that the Chinese and the other countries are not important. Everybody’s important. But in terms of size, the Europeans and Americans are just far more important to South Africa from an economic point of view.

Investors could increasingly turn to other African countries

Many of the other African countries are going out of their way to make life as easy as possible for foreigners to invest.South Africa is still a very attractive investment destination. We’ve got an amazing, well-developed capital markets and financial markets, it is well regulated, very liquid and all of that. But the other African countries are catching up with us as well, and I think the other African countries are eating our lunch in many instances. If our political politicians don’t pull up their socks, South Africa will keep on losing relatively to the rest of Africa. 

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