South African Central Bank raises key interest rate

South African Central Bank raises key interest rate

The economic crisis in South Africa is being compared by some to the “financial bubble” which “burst” in 2008 in a number of Western economies

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The economic crisis in South Africa is being compared by some to the “financial bubble” which “burst” in 2008 in a number of Western economies.

Background

With the exception of Nigeria, South Africa has the largest economy in Africa, its GDP of $400 billion contributes 24% of Africa’s total GDP (Gross Domestic Product). When compared to other African countries the economy in South Africa is very diverse, including; mining, manufacturing, wholesale and retail trade, agriculture, real estate, business services and finance. Whilst mining and mineral processing have been on the decline since the 1970’s, it does however continue to be its major export, accounting for approximately 60% of their total.

South Africa is one of only four countries in Africa that the World Bank classifies as having an “upper-middle income economy”, however its economic growth continues to be stifled by a number of serious problems, including: high unemployment (which has more than doubled since the 1980’s), inconsistent access to education and electricity, income inequalities, high levels of crime, mounting public debt and a growing lack of confidence in the government.

The devaluation of the rand

The Rand has been in a free fall, down 15%, since President Jacob Zuma fired the Finance Minister in early December 2015, quickly followed by his replacement a few weeks later. Whilst this decision was greeted with much criticism from business leaders, there are a number of other factors contributing to the fall in the value of the Rand and the current economic crisis South Africa finds itself in.

Economic crisis

A continuing drop in global commodity prices, specifically coal, platinum and gold is having a serious effect on South Africa’s economy, along with a severe drought (the worst in 34 years) which is pushing up the price of food and water. In addition to these challenges because the Rand is the only currency in Africa that is used as a trade currency with China, South Africa is also suffering badly as a result of the current economic problems in China.

Intervention by the Central Bank

The Central Banks decision to increase the key interest rate to 6.75%, up ½ of a percentage point, was predicted by the majority of economists and is seen as an attempt to slow the free fall in the valuation of the Rand, along with resolve the current high inflation levels and deteriorating growth outlook.
The bank has also reduced its economic growth forecast for 2016 to 0.9%, down from 1.5%. This is the third year in succession to see reduced growth, resulting in approximately a third of the workforce (largely the younger population) currently being unemployed.

U.S. Federal Reserve

In January 2016 borrowing costs were increased, as a consequence some credit rating companies have since indicated that they may be about to reclassify South Africa’s existing debt as “junk”.
South Africa is one of the countries considered to be at significant risk of economic collapse in the coming year, due to its high levels of short-term debt.

Food and water shortages

South Africa is the primary producer of maize in the region however its output in 2015 dropped by 30% versus 2014, meaning that approximately 60 million tonnes is now expected to have to be imported to ensure demand can be met. The 2016 growing season has also started badly, with enforced delayed planting due to the dry soils.
Many feel that the ANC (African National Congress) need to make some immediate decisions in regards to water usage to ensure the quality and accessibility of drinking water can be safeguarded, this includes whether or not restrictions need to be placed on those industries that use large quantities in their manufacturing processes, such as coal power stations, mining and agriculture.

Civil unrest

The high levels of unemployment, along with a lack of confidence in the government is leading to growing civil unrest. Add to this increasing food prices and fears about a water shortage, there is no wonder that a large percentage of South Africa’s 53 million residents are fearful about whether or not the ANC are able to respond appropriately. The party is however confident that President Zuma is able to continue leading the country and as a consequence that they will be re-elected in the local elections later this year.

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