The economics of the US elections are complex. One just has to look at the how decisions made on US soil affect global markets.
Stocks rebounded to their highest levels in more than a month on the optimism of a $2,4-trillion stimulus package being ratified, but then faulted overnight after US president Donald Trump unexpectedly stopped negotiations.
So how are the upcoming US elections expected to influence the South African economy? The answer lies in the policy expectations says Dr Greg Cline, head of corporate accounts at Investec for Business, especially considering the contrasting views of this year’s candidates.
“Global geopolitical events will be definitive in the coming months,” says Cline. “The US elections in November is also likely to have a ripple effect on trade, which has seen a strong recovery, despite the trade war which has led to diversion of trade flows away from both China and the US and the lockdown ensued by Covid-19.”
While both Biden and Trump will remain tough on trade with China, Trump for the most part is likely to continue focusing heavily on tariffs and as such, we can likely expect further escalation in the trade war, should he be re-elected.
“The Biden administration don’t seem to be overly critical of some of the trade deals that have been put in place concerning China. More importantly, the African Growth and Opportunity Act (AGOA) – a centrepiece of economic trade partnership with South Africa and US – expires in 2025 – and while $9-billion worth of trade is estimated to transact between the two countries, of which there was a 2,1-billion surplus from South Africa exporting to the US, the Trump administration has reviewed the agreement and identified South Africa as being restrictive and as such, agreement renewal in its current form would not be guaranteed under a Trump administration,” adds Cline.
Despite the uncertainty, according to Cline we are now in a growth economy and while far off from pre-Covid levels, there is a slowdown in economic deterioration but significant changes to US policy could mean inherent risks to South Africa’s economic growth and trade.
“The foreign exchange risk appears to be contained at this time,” says Cline. “The Investec expected case for USD exchange rate forecast is R16.50 to the dollar for this quarter with a breakthrough of the R16 level by the end of the year. Considering that South Africa is a trillion Rand import economy, this may provide a level of comfort to those expecting the Rand to weaken considerably further. While export pricing has thus been attractive this year, the expectation is for the imports market to recover in line with the rand.”
The supply side of the curve is well on the way to recovery, but the economic pivot relies on assistance with the demand curve. Having said this however, market volatility has historically increased ahead of elections given knee-jerk reactions to election outcomes.
“We are always going to be passengers to market movements and forex fluctuations on the back of international relations and the strength of the Rand is a big determinant. While some may argue that South Africa is in a debt spiral, with the bond yield curve suggesting the potential for sovereign default at some point in the future, there is significant FDI potential that will be realised through political certainty and strong fiscal policy locally and globally.
“To this end, the prosperity of business locally is highly dependent on the ability to trade, coupled with a stable economic outlook, and it is our responsibility as busines leaders to look for the affirmation and build a vision of South Africa that is pragmatic while contemplating numerous global risks brought about by factors out of our control,” concludes Cline.