The economy of South Africa must be in turmoil

This week has seen South Africa reach the headlines but it has not been about cricket or rugby. Instead the removal of its finance minister has led to a currency crisis being reported. However as we look deeper we see that the South Africa Rand has been “fallin”  in Alicia Keys terms for quite some time and is in fact a serial offender on this front. If we look back we see that five years ago just under 7 Rand purchased one US Dollar and this morning it takes some 15.5 of them. Over the past year the move has been accelerating as back then it took 11.6 Rand to buy a buck. In essence it has been singing along to Paul Simon for quite a while.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

This sort of situation is self-fulfilling as if you have funds available the sensible course is to park it abroad which only makes the currency fall further and encourages others to do the same in a repeating loop.

How well do financial markets work?

This is another view of the equilibriums of economic theory which invariably turn out to be something between a mirage and a chimera. Let us look at this from the point of view of an average house buyer in the UK who has according to official data some £286,000 to spend. Each of those UK Pounds will buy around 23 Rand at these levels. According to Knight Frank (h/t James Mackintosh) you could buy this in Cape Town.

This beautifully appointed well-loved family home offers great open plan living. With 3 reception areas consisting of formal lounge; open plan dining room leading to gourmet kitchen and family room; separate scullery;4 bedrooms (2 en-suite bathrooms);family bathroom; guest toilet and covered outside patio for easy entertaining, this house ticks all the boxes. – See more at:

That description misses out the swimming pool! For half the price you could pay this.

Valley View Lodge is a 120 Ha lifestyle lodge situated in the Swartberg Private Wildlife Estate, at the foot of the Swartberg Mountains in the Klein Karoo. The main house is a comfortable 4 bedroom, 3 bathroom family home with open plan living areas and beautiful views over the surrounding Swartberg Mountains. Two of the bedrooms lead to a patio with views over the terraced garden with pool. There is a separate one-bedroom cottage with a full en-suite bathroom and a fireplace in the lounge. – See more at:

The catch in Cape Town is the mention of a local security lodge as in the serious problem with crime there, but if we just stick to a bit of number crunching well it is hard to not mull this from Henry Pryor earlier.

Buying an average home in Victoria Road after next April as a 2nd home will cost £1,113,750 in Stamp Duty.

So one street in the Royal Borough of Kensington and Chelsea – admittedly the most expensive one – would give you enough money to buy both properties and maybe fill the swimming pool with notes with just the Stamp Duty. Even Einstein would have struggled with such a version of relativity as we consider the phrase, Go Figure!

The Reserve Bank of South Africa

It has applied conventional central banking methodology and done this in response to the currency decline. From its December Quarterly Bulletin.

Having raised the repurchase (repo) rate by 25 basis points to 6,0 per cent in July 2015, the Monetary Policy Committee  (MPC)  agreed on an unchanged rate in September, but at its meeting in November 2015 decided to raise the repo rate further to 6,25 per cent per annum.

Sobering in what we call a zero interest-rate world with negative tinges. Plainly a brake is being applied to the South African economy at what I will explain below is a bad time for it. But if we stick with interest-rates there are other problems as the ten-year bond yield has pushed above 10% meaning that any longer term borrowing is very expensive right now. In terms of its target this is what the Reserve Bank is aiming at.

the inflation target range of 3 to 6 per cent

Commodity Wars

The fall in commodity prices which is so welcome in many places is not welcome everywhere and South Africa is one of the latter.

In addition, mining production shrank for the second consecutive quarter, affected primarily by lower production of platinum and iron ore in the third quarter. Platinum production declined due to scheduled maintenance work at certain platinum furnaces as well as safety stoppages, while iron ore production was reduced in reaction to a global oversupply.

Something of a double whammy is at play here.

In general, mining production continued to be affected by declining international commodity prices and rising production costs.

Also we get a reminder of which commodities are in play.

the mining sector declined at an annualised rate of 9,8 per cent in the third quarter, largely brought about by decreases in the production of platinum, diamonds, iron ore and manganese ore. Production volumes of coal and gold mines, however, remained broadly unchanged over the period.

Precious metal prices have been in a bear market too and if Jon Stewart was right it is not a good time to be a musician right now.

People out there turnin’ music into gold
People out there turnin’ music into gold

Also agricultural output has been hit by a drought in an example of Shakespeares woes come in battalions and not single spies.


Yes but not as much as you might think.

Annual consumer price inflation was 4,8% in November 2015, up from 4,7% in October 2015

However there is goods price inflation of 3.8% which is quite an anti-achievement if you note all the commodity price falls leading to goods disinflation in so many other countries. Also the currency decline will mean that the heat is on in this area as we look into early 2016.

If we look for some perspective then the underlying index is at 116.5 where 2012=100.

Economic Growth

Actually a rebound in manufacturing means that South Africa has just had some.

. Following a contraction of 1,3 per cent in the second quarter of 2015, growth in real gross domestic product accelerated to an annualised rate of 0,7 per cent in the third quarter……. the level of real gross domestic production in the first three quarters of 2015 was still 1,0 per cent higher than in the corresponding period in 2014.

Apparently if you exclude the sectors which are shrinking then the outlook is brighter.

Excluding the contribution of the usually more volatile primary sector, growth in GDP would have bounced back from negative growth of 0,4 per cent in the second quarter of 2015 to positive growth of 2,2 per cent in the third quarter.


There is much to consider here as we see how a crisis in the financial sector impacts on the real one. Economic growth has slowed and remember this is the Africa which was supposed to be “boom,boom,boom” according to the mainstream media. If we look at this in terms of what you can buy from abroad then (h/t Renaissance Capital) GDP per capita has dropped from over US $8000 in 2011 to more like US $5700 now or back to 2009 levels.

There are of course other issues such as the endemic corruption and the presumably related energy crisis which is so bad there are regular black-outs. It even makes UK energy policy look a little better that is how bad it is! The political crisis and further falls in commodity prices have seen the Rand fall further whilst I have been typing this article and it has reached 16 to the US Dollar. Peak currency crisis? Maybe, but I am reminded of the relative house prices displayed today compared to my home country of the UK.

There should be a flow of money in to buy such things waiting and hoping for better days. In an individual sense this is good as it will support the Rand and maybe reestablish some sort of equilibrium. But also it comes with dangers as the fastest movers are likely to be vulture style hedge funds as we fear an outbreak of asset stripping. Time perhaps for some Freddie Mercury.

Are you ready, hey, are you ready for this?
Are you hanging on the edge of your seat?
Out of the doorway the bullets rip
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust

But let us end on a more hopeful note with Florence and the Machine.

It’s always darkest before the dawn





12 thoughts on “The economy of South Africa must be in turmoil

  1. Great column, Shaun, as usual.
    David Fenwick, who used to be responsible for the consumer price indices program for the Office of National Statistics, conducted a one-man peer review of the South African CPI:
    One of its recommendations was that the South African CPI switch from a rental equivalence approach to a net acquisitions approach to OOH. It’s dubious that this would provide a better measure of price change for uprating purposes, but it would certainly be a sounder measure for the Reserve Bank of South Africa to use for the inflation targeting that you mention in your blog. Unfortunately, Statistics South Africa seems to have the same “one index to rule them all” mindset as Paul Johnson, and doesn’t seem to believe it can have two consumer price series, one for upratings and one for use by the RBSA. I presume that Statistics South Africa finally decided against making a change, but I am just guessing. You would almost think that the people running their pilot survey wandered off onto the veldt and got devoured by lions, as it has just disappeared online.

  2. Shaun,

    It’s always interesting when you do an article on a country that is normally left alone by the MSM.

    For me personally,it coincides with my wife and I looking at buying a house in SA.

    They’ve had a massive bubble and are still near the top of it,but in terms of sterling it’s nearly a 50% off peak crash.

    Worth cautioning that it’s still a long way from local salaries and with all the news in the mining sector and SA’s relaitvely high costs of production,I fear the situation will worsen before it improves.Although mining is a smaller proportion of the economy than 10/15 years ago.

    As you say thought,security issues are a big consdieration.

    • Hi Dutch

      Good luck to the two of you in your search. There is often something of a conundrum between domestic developments and the change in the currency. For example Russians may have thought London prices were expensive but of course the currency move has doubled their position valued in Roubles in the last 12 months. Or back in the days when I worked in the UK Gilt market the main foreign investors were trading the currency mostly and hoping to also get some yield.

      Oh and since I posted the blog the two of you have a little extra help in your search as we have gone from 23 Rand to the UK Pound £ to more like 24.

  3. Just to add,my wife is a Saffer and has a longing to have a place there.

    Have a reliable source of local intelligence before putting any of your capital in there.The Cape is nice but a lot of people are shifting from Joburg

    This is not advice etc.etc.

  4. So, a currency which has tanked, inflation well above our target, and yet, even dismissing the fall in commodity prices, no discernible growth?

    How I’d love to ask Carney to explain.

    • Hi therrawbuzzin

      You make a good point. As they have the 4% inflation (plus a little bit) so beloved of those who want that surely they should be in an economic nirvana! The economy should be about to lift off and surge right? Try telling that to South African workers and consumers.

      • There’s more; since SA produces so many commodities, the drop in the Rand’s value will have less effect on the cost of raw materials/food.


    Economist on cheerful form…
    ‘THE warning shot across South Africa’s bows could not have been clearer. Its response could not have been more foolish. On December 4th Fitch, a rating agency, cut its assessment of South African public debt to just one notch above “junk”
    Instead of heeding the warning, President Jacob Zuma compounded the damage by firing Nhlanhla Nene, his respected finance minister, on December 9th.’

    Been working nights,and am well behind the curve.

  6. I was scratching around the other day trying to understand why the whole of Anglo American was valued at less than the 80% of DeBeers and fell upon news in Botswana (the other part of the diamond industry) They have just signed up with the Chinese to build their first modern power station (coal fired!) and become a little less dependent on ESCOM. How ironic in the face of the barrage from Climate Change conferences. Greenhouse gases are forever?

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