Why the South African Recession Matters to International Traders – Introduction
Nelson Mandela became the president of South Africa in 1994. His climb to the presidency marked the beginning of an era for South Africa, which had long-suffered from the oppressive apartheid regime. After serving for one term, he left the seat to Thabo Mbeki who was ousted by Jacob Zuma. This year, Jacob Zuma was replaced by Cyril Ramaphosa.
Jacob Zuma was known to be a corrupt leader, who embezzled vast amounts of public money. For example, he spent millions of dollars of South African taxpayers on renovating his home. At the end of his presidency, he was accused of working with a family of wealthy South Africans to loot.
Therefore, it was a sigh of relief when Jacob Zuma left the presidency. His predecessor, Cyril Ramaphosa was a highly-respected leader. He worked closely with Nelson Mandela to end apartheid. When Mandela left office, he recommended that Ramaphosa replace him. When this was not possible, he left public office and went ahead to start one of the biggest indigenous companies in the country. Today, he is one of the wealthiest South Africans with a fortune of more than $500 million. In all his business and public service work, he has never been accused of corruption.
His ascendance to the presidency brought hope to the Africa’s second biggest economy. Traders and observers coined the name Ramaphoria, which was an indication of the hope they had in him. Foreign Direct Investments increased as investors increased their bullishness on the economy.
Less than a year in his presidency, many investors have felt betrayed. Last week, data from the South African Bureau of Statistics showed that the country was in recession. This was after the country’s second quarter GDP fell for the second time. The South African rand has crashed against the dollar and more South Africans have lost hope in their government.
Some of the problems the country is facing are beyond his control. For example, the prices of commodities like gold and platinum that have long-supported the economy have crashed. This has led the miners to fire hundreds of thousands of people and close the mines. The same is true with the country’s manufacturing sector. Faced by high and unreliable power costs and other manufacturing-related costs, many companies have shifted manufacturing to less-expensive countries like Egypt and China.
This has been worsened by the ongoing political scene. The rising star of the young leader Julius Malema has brought more risks to the country as desperate youth move to align with him. He has advocated for nationalising of key entities and the forced takeover of white-owned farms. The latter is a risky proposition that was tried in neighbouring Zimbabwe with no success. When Mugabe’s government confiscated white-owned land, the country moved from being an exporter of agricultural produce to an importer. Cyril Ramaphosa has supported this confiscation.
For international traders, the South African crisis matters in many ways. First, South Africa is one of the two emerging market economies from Africa. It belongs to a group of countries known as BRICS, which includes Brazil, Russia, India, and China. These countries have received billions of dollars in international investor money and if one of them fails, the contagion can spread worldwide. Second, the country is the leading producer of gold, platinum, diamonds, and other precious metals. Therefore, problems there could lead to problems or opportunities worldwide.