Although global financial markets have recovered from the sell-off due to fears around the Wuhan coronavirus, the negative impact on South Africa’s real economy has not been seen yet.
This is the view of Nedbank economist Walter de Wet, who said that the threat of a negative impact grows daily, and that the free movement of people, goods and services is inhibited by travel restrictions within, from and to China.
“The real impact of negative Chinese growth will not be felt immediately in places like South Africa,” he said.
“But if China’s economic growth slows, its demand for exports (mostly commodities) from South Africa is also likely to decline.
“As a result, the flow of goods and services between South Africa and China would be the main transmission channel through which South Africa’s real economy will be affected.”
Reports out on Monday (10 January), showed that Wuhan coronavirus chas claimed in excess of 900 lives, making it a bigger killer than the severe acute respiratory syndrome (SARS) outbreak of 2003.
The number of confirmed coronavirus cases in mainland China has climbed to in excess of 40,000 infections, and globally, more than 40,710 cases have been confirmed.
To get an idea of this impact, Nedbank simulated the impact of a 10% decline in South African exports to China over a period of a year before a slow recovery starts.
The graph shows that:
- South Africa’s GDP growth declines by 38bps relative to the baseline. Given that Nedbank expects South Africa’s GDP growth to average 0.8% in 2020, a 38bps decline in growth is substantial;
- The budget deficit widens by almost 30bps on the back of weaker growth and lower tax revenue;
- Short- and long-dated interest rates rise but only marginally, largely because weaker Chinese growth results in lower global interest rates that act to offset the pressure of higher interest rates in South Africa (due to marginally higher inflation and a wider budget deficit);
- The rand weakens by around 2% relative to our baseline forecast. Lower exports are rand-negative, while the higher short- and longer-dated bond yields provide some stability to the currency.
“A decline in Chinese exports should result in a weaker rand than what may otherwise have been the case,” said de Wet.
However, he said that the decline in the rand because of lower Chinese growth may not be as substantial as some expect, and certainly requires no need for panic.
“Our analysis and developments around the coronavirus outbreak do reinforce our view that the bias lies towards a weaker rand in the coming months. Our target of R16.00 against the dollar remains in place,” said de Wet.
The rand was trading at the following values against the major currencies at 10h55 on Monday:
- R15.03/dollar (-0.20%)
- R19.37/pound (-0.21%)
- R16.45/euro (-0.23%)