This morning the world woke up to what is being described as “all hell breaking loose”, as Britain decided to leave the European Union (EU). With a 52% to 48 % victory, the English powerhouse’s decision to cut ties with the EU, signals repercussions that are being felt globally. So what does this mean for South Africa?
For starters, the Rand is said to have experienced its biggest drop (8%)against the dollar in a one-day space in decades.This is an even bigger drop than the one experienced late last year at the news of the axing of ex-Minister of Finance, Nhlanhla Nene. It’s a drop that our already volatile currency can ill afford.
That being said, a few economists seem to agree that any market related activity as a result of the British Exit (Brexit) is temporary.
“Any shock to global capital flows would probably be short-lived, Capital Economics economists Neil Shearing and Liza Ermolenko said in a note.
“Even if the UK economy contracted by 5% and UK imports fell by 10%, the expected drop in emerging-market exports to the UK would be equivalent to just 0.1% of aggregate emerging markets’ gross domestic product (GDP), the Capital Economics economists estimated,” reported Business Day.
So although we can calm ourselves with the knowledge that the market fallout is temporary, this drop still has the potential to shave off 0.1 % from our GDP. While this is a small percentage, with all the activity and fuss around SA’s credit status and the numerous visits from ratings agencies in the last few months, it is something we can do without.
“The Rand has slumped 21%in the past year, the worst performance after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg, amid concerns that current political upheaval and deteriorating fiscal metrics could lead to a credit downgrade to junk, “ stated News24 Live feed.
This would see us facing further dreaded interest rate hikes, which could cripple those already struggling financially. In addition we could see an increase in the costs of imports as trading conditions will be made more difficult. Examples of this would be lower iron ore and coal prices, remarked economist Mike Schussler from economists.co.za.
“A vulnerable Rand impacts all South Africans, but those with high levels of debt will feel it most. In addition to currency volatility, SA would have to renegotiate its trade relations with the UK, which accounts for over 25% of SA’s total trade. While SA may get better terms down the line, in the short-term we could see a slow in foreign direct investment flows to SA. All these factors will have a knock on effect for a number of spheres of our economy, including tourism and agriculture,” stated Ian Wason, CEO of DebtBusters.
Another area where we would feel the pinch would be with regards to a further increase in the unemployment figures. This as we know usually has a direct effect on the prevalence of crime.
”If the Rand doesn’t show a recovery, the Reserve Bank may be under pressure when they meet next month (or sooner) to further increase the prime lending rate, meaning that all South Africans with vehicle finance, home loans, store accounts and any other debt linked to the prime lending rate, will be required to pay even more towards their debt, a consequence that many can ill afford at this time,” added Wason.
With this added pressure, comes the increase in the already evident trend of relying on credit for basics.
“Suddenly, purchasing basic essentials will become a struggle and will almost certainly force them to seek alternate sources of temporary income; the quickest being applying for or using more credit to get by on a day to day basis. The problem starts when living on credit becomes a way of life. Each time cash is tight, more credit is used and in the end, the amount of debt that has to be serviced increases to a point where consumers are left with little or no money to pay for everyday expenses,” stated Wason.
However, Minister of Finance, Pravin Gordhan was quick to make assurances following the British referendum results: “The South African public can be reassured that our banking and financial institutions are well positioned to withstand financial shocks, and this is what was demonstrated in the period leading up to the great recession in 2008, 2009 when the system demonstrated its resilience. Equally we are confident that our financial system including the banks and the regulatory framework we operate under are extremely resilient and reliable.”
Gordhan said National Treasury and the South African Reserve Bank (SARB) met this morning and will be monitoring the developments around Brexit and its subsequent implications for South Africa. He remained confident that the trade links between South African and the UK are strong and are based on solid agreements, and that any needed changes could and would be made in the next two years.
Markets are in a downward spiral and some currencies have depreciated following the widespread shock and disappointment from people globally at the decision. But now we go into unchartered territory and nobody knows where this decision will ultimately lead us. “This is a divorce after 40 years. It is a big change in direction and is like an earthquake. Nobody knows what happens from here and that uncertainty will bring many things we did not think of to the fore,” said Schussler.
For more on Gordhan’s statement, click here: http://www.justmoney.co.za/news/2016/06/24/south-africas-finance-minister-reacts-to-brexit/.
Handy savings tip: If you are worried about your financial situation, why not consider debt counselling: http://www.justmoney.co.za/debt/