Written by Jeffrey Cammack: Published: September 18, 2015
The Chinese economic slowdown continues to remain a considerable risk for the South Africa economy, with any further weakness expected to damage any potential recovery and inflict even more economic damage. South Africa is highly dependent on Chinese investments due to their 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. South Africa, as a major player in the mining industry, was hit by weaker Chinese demand for commodities like iron ore, copper, and coal. Current developments in China not only impact trade between the two countries but also causes turbulence in the exchange foreign exchange rates.
The 2015 Chinese stock market crash has been the main trigger for further Rand depreciation in 2015. As equity markets in China weaken, coupled with the commodity deflationary pressures, there will be pressure put on resource-heavy economies such as South Africa. (see Figure 2).
There is a strong affinity for risk aversion in financial markets and investors will always liquidate riskier assets like the South African Rand in uncertain economic times. In the face of further Rand devaluation, the only alternative and safe haven is the USD. In a time of crisis, and the USD 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 as a safe haven. When a currency is in a strong strengthening or weakening trend, it needs to outperform other major currencies and not just perform 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.
The USD is a safe alternative to the South African Rand, as all the data points towards a stronger USD in the coming years. Current global macro developments make the USD the only probable option for profit as a long-term investment.
The effect of the Chinese economic slowdown also being felt in other African countries, which have also grown strong economic ties with China over the past decade. 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 USD 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 your investments to ZAR devaluation forces and prevent the value of your portfolio diluting, the traditional USD safe haven investment could be the best option for the next few years.