15 May 2019

South Africa: China-U.S. Trade Spat Hinders Local Growth Prospects

THE outcome of elections in South Africa is poised to culminate in major economic reforms but the renewed trade war between China and the United States Ameria (USA), as well as insufficient power supplies, are feared to scuttle growth prospects.

South Africa, the continent's most advanced economy, recently held general elections that saw the African National Congress (ANC) retain power on a campaign premised on addressing economic imbalances and addressing widespread corruption.

President Cyril Ramaphosa's ANC retained its majority, with 57,51 percent of the vote - down from 62,15 percent in 2014.

Main opposition Democratic Alliance's support declined to 20,76 percent from 22,23 percent, while the Economic Freedom Fighters' share increased to 10,79 percent from 6,35 percent.

The markets responded positively to the outcome, with the volatile Rand currency strengthening. It strengthened by 1,3 percent against the US Dollar to close Friday at 14,16 percent.

"With a weakened majority, it goes without saying that President Ramaphosa has his work cut out for him," said Mpho Tsebe, economist at the Rand Merchant Bank.

Tsebe noted Ramaphosa was consistent in his previous speeches and State of the Nation addresses that he wanted his term in office to be about growth and job creation.

"His first major test will the cabinet announcement, having promised to reduce the executives and align government departments to the economic needs of the country," Tsebe said.

The economist nonetheless pointed out Ramaphosa's government was confronted with a weak economy, with data released last week by Stats SA showing that first quarter 2019 gross domestic product (GDP) likely to contract by between 1,5 percent and 2 percent.

Thanda Sithole, Standard Bank economist, said the election outcome supported the company's view of imminent economic reform.

"This would boost confidence and employment, with economic growth seen modestly increasing. However, the US-China trade war as well as domestic power supply constraints present downside risks," Sithole said.

The Nedbank Economic Unit stated the poll results from elections showed the ANC had retained a parliamentary majority at levels that implied that Ramaphosa would have a sufficient mandate to continue with reforms to support the economy and fight corruption.

Nedbank stated the next key test around policy direction would be the composition of the new cabinet after the presidential inauguration on May 25.

"Business and markets are hoping that those implicated in wrong doing will be removed from considerations, that the numbers of dependants will be reduced and that competent ministers will be appointed to key portfolios," the bank stated.

A number of cabinet ministers have been implicated in the Gupta-linked state capture.

Nedbank noted earlier last week, the Rand was pressured by emerging market selloff following reports that the trade war between the US and China had re-started after the two countries failed to reach a deal.

China and the US have been engaged in a trade war involving the mutual placement of tariffs since 2018.

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