South Africa Set to Lose AGOA Trade Benefits

Written by Jeffrey CammackPublished:  January 18, 2016

At the end of the first week of 2016, South Africa and the United States declared that a deal had been struck on a trade dispute over technical issues related to animal health standards. However, the US President Barack Obama issued an executive order which would remove the benefits of duty-free access to South Africa agricultural exports starting on March the 15th 2016 should South Africa not comply with the US meat and poultry imports regulations in accordance with AGOA (African Growth Opportunity Act). The South African Department of Trade and Industry is confident that the executive order will be lifted as soon as the first shipment of US poultry enters the South African markets.

South Africa Benefits from the US Trade Pact

South Africa Has Benefited Historically From AGOA

South Africa has benefited enormously from AGOA since it was adopted in 2000, as exports reached more than 7000 agriculture to manufactured products under a no import tax regime. One of the fastest-growing South African export products are vegetables which are now up 549.4% since 2010 and have been the main contributor to South Africa’s trade balance surplus.

Drought Has Decreased Production

A major issue that has South Africa is facing is the worst drought in more than two decades.  The cost of production is also rising which will heavily impact the triple-digit export growth rate of vegetable items. Agricultural goods under the AGOA act accounted for more than 14% of the total South African exports – about $154 million. Due to the Chinese slowdown, South African exports to its largest trading partner fell by almost 40% in 2015 according to China’s customs office.

South Africa Trading Partners - Source: Bloomberg

South Africa Trading Partners – Source: Bloomberg

The Chinese Slowdown Is Affecting South African Exports

China’s need for African oil, metals, and minerals has fallen considerably, which in part, accounts for the aggressive Rand depreciation as the deflationary pressures from lower commodity prices have hit many of the emerging market currencies like the ZAR.

A weaker Rand in normal circumstances would have made South Africa more competitive on the global market, as it boosts exports since it becomes more attractive to buy from an economy with a devalued currency. However, the subdued global growth and China’s economic slowdown, has made the advantage of a weaker currency less useful in boosting export growth.

Despite the many challenges the South African economy has to deal with, the exports of precious metals such as Gold and platinum has surged 52%.  This is because in times of geopolitical and financial instability the demand for gold surges. This made it possible for South Africa to post a trade surplus of $115 million, which will likely be short-lived as the commodity super-cycle is over, and the deflationary pressures still persist.  Even though the current account deficit has narrowed to 4.1% of GDP in 2015 from 5.4%.

However, based on market consensus, export volumes should remain under pressure due to sluggish global growth and lower commodity prices, while imports are expected to slow down due to a consumer spending slowdown and subdued credit growth.

South Africa Needs To Diversify Its Exports

In order for South Africa to maintain a balance of trade, it needs to diversify its exports away from China and focus more on growing trade relationship within the African continent, as well as countries like Australia or South Korea. South Africa already has a superior skilled workforce that it gives an advantage over the rest of Africa, but it needs to cut the cost of production and resolve its shortage of electricity in order to become more globally competitive.

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
+ +