The Chinese economic slowdown continues to remain a considerable risk for the South Africa economy with any further weakness in the expected to damage any potential recovery and inflict more damage. South Africa is highly dependent on Chinese investments due to the interlinked economies and economic ties that have been built since 2002. Having surpassed the USA in 2010, China was South Africa’s largest trading partner and countries that are dependent on Chinese economic growth, especially raw materials suppliers like South Africa, will need to accommodate for this in their economic policies.
Over the past few years, China has been the main source of economic growth in the world; hence the current slowdown is heavily impacting trade with South Africa. South Africa, as a major player in the mining industry, was hit hard by a weaker Chinese economy as the demand for commodities like iron ore, copper and coal continued to fall. Current developments in China not only impact trade between the two countries but also cause turbulence in the exchange foreign exchange rates.
The 2015 Chinese stock market crash has been the main trigger for further Rand depreciation. As equity markets in China weaken, coupled with the commodity deflationary pressures, there will be pressure put on resource-heavy currencies such as the South African Rand (see Figure 2).
There is a strong affinity for risk aversion in financial markets and investors will always liquidate risky assets – like the South African Rand. In face of further Rand devaluation, the only alternative and safe haven remains the US Dollar. In a time of crisis, the US Dollar has always been perceived as the ultimate safe haven currency.
The ZAR performance relative to other emerging markets currencies (see Figure 3) confirms the deflationary pressure and the dollar status of a safe haven. When you’re in a definite and a strong trend you need your currency to weaken/strengthen against all other major currencies; not just in isolation. The macro theme behind the current weaker Rand trend is not just ephemeral conditions, but long lasting forces that are reinforcing the trend.
If you’re looking for an alternative to the South African Rand, the US Dollar is a safe bet as all the data points towards a stronger US Dollar in the coming years. Current global macro developments make the US Dollar the only option worthy of the long-term investment.
The effect of the Chinese economic slowdown is felt in many other African countries, which have also grown strong economic relationships with China over the past decade. In this regard, their currencies are also under pressure and a continuing slide in the oil price presents other major challenges for oil-based economies like Nigeria and Angola. The broad-based dollar strength has also had an effect on the Zambian kwacha and the Ugandan shilling, which are both at a record low.
If you don’t want to expose yourself to the ZAR devaluation forces and prevent the value of your portfolio diluting, the USD safe have could be the traditional one for the next few years.