Global Courant 2023-05-31 13:22:59
The government’s geopolitical squabbles with the United States over its apparent support for Russia in the war against Ukraine have not only undermined the country’s reputation but also wreaked havoc on financial markets, Nedbank says.
This has driven the rand to new lows at a time when the country can least afford it – with the deepening electricity crisis already hurting economic activity and increasing inflationary pressures.
While the US and South Africa have taken action to ease tensions following recent allegations that South Africa is supplying arms to Russia, Nedbank noted that Western powers are still waiting for answers and investigations are ongoing.
Meanwhile, South Africa’s relationship with Russia will continue to be in the spotlight as the 15th BRICS Summit approaches in August.
As highlighted earlier, the summit – which is expected to host Russian President Vladimir Putin – has left South Africa in an incredibly tight position.
Despite granting diplomatic immunity to those attending the summit this week, South Africa – as a signatory to the International Criminal Court – remains obligated to arrest Putin for alleged war crimes.
According to Nedbank, this will put South Africa in the global hot seat and invariably keep the rand and local markets under pressure.
“All eyes will remain on SA’s relationship with Russia, and as a result risks of future economic setbacks remain high. Geopolitical risks will continue to weigh on the rim, with potentially damaging implications for inflation and interest rates.
South Africa declares diplomatic immunity for BRICS summit participants – but it’s not a panacea
Economic consequences
Nedbank said the potential economic and trade costs of damaging relations with the US would be significant. It may also extend to other US allies.
“If relations between the SA and the US are broken completely, the EU will probably follow the US. This would cost the country a lot of money, and most of the impact is expected to come through financial markets and world trade, with very negative consequences for economic growth and job creation.
“South Africa has strong trade ties with both the US and the EU. The EU as a bloc is our largest trading partner, while the US is our third largest trading partner by country after China and Germany.”
As it stands, about 25% (R59.2 billion) of South Africa’s exports to the US benefit from both the Africa Growth and Opportunity Act (AGOA) and the Generalized System of Preferences (SAP), while a significant 98 .7% (R429.2 billion) of exports to the EU benefit from the European Partnership Agreement (EPA).
The mining, manufacturing and agricultural sectors are the main beneficiaries of these trade agreements.
Should these agreements and benefits suffer in any way from South Africa’s ties to Russia, the costs could run into the billions of rand, Nedbank data showed.
In summary, these could be some of the costs:
Being kicked out of AGOA and SAP could remove exports worth R59.2 billion; A full trade ban or harsh US sanctions would cost R178 billion in export revenue; SA’s exports and imports with the US amount to 17.3% of total trade, making a significant contribution of 4.7% to GDP; Exclusion from the EPA would result in almost all SA exports to the EU (98.7%) being subject to stricter customs requirements; The total loss of EU export revenue will be equivalent to approximately R434.8 billion, 23.7% of SA’s total export revenue; If all European countries – except Russia – are taken into account, the possible loss rises to R550.3 billion; European trade contributes 15% to GDP, with the EU alone contributing 12.6%.
At worst, when both the US and EU pull out of their respective trade deals, R443 billion in exports will be at stake, Nedbank said.
“There is much more to lose in the possible severing of relations with the US and the EU,” Nedbank said.
In addition to the potential costs, South Africa has large twin deficits – current account and budget balance – equivalent to 0.5% and more than 4% of GDP respectively, Nedbank said.
“The country depends on foreign financing to cover these deficits. The current account deficit will widen as exports contract due to the effects of load shedding, increasing the need for more foreign financing.
“In this regard, it is also worth noting that the majority of government debt is financed by the West and Asian investors from countries aligned with the US. If our ties with the US and EU were severed, the ripple effects would stretch far and wide and threaten financial stability,” the report said.
“South Africa already has its plate full of problems; adding to that is not wise, not geopolitically and certainly not economically,” it said.
Government vs South Africa
Worryingly, Nedbank said the government appears to be acting against its own interests in many of the decisions made.
“The government has plunged the country into a damaging geopolitical situation with the US because of its ‘friendship’ with Russia, the aggressor behind the tragic war in Ukraine.
“Although SA has officially taken a non-aligned or neutral position on the conflict, it has compromised this position by actively cooperating with Russia, not only through diplomatic channels, but also through military involvement,” it said.
Pretoria allowed a sanctioned Russian cargo ship to dock at Simon’s Town Naval Base in December, took part in a joint naval exercise off the KZN coast in February, and allowed a military aircraft sanctioned for carrying weapons for the Russian paramilitary Wagner Group, to land in April at Waterkloof air base.
The plane landed in the middle of the night with the transponder deactivated.
South Africa has also taken a “baffling and often contradictory set of positions” about its membership in the ICC following the issuance of an arrest warrant against Vladimir Putin for war crimes committed in Ukraine, the bank said.
“The risk therefore remains that the US will take a harder line against SA. The US, the EU and their allies have imposed harsh and far-reaching sanctions on Russia for its unprovoked and brutal war against Ukraine.”
“The alleged government support for Russia has jeopardized SA’s neutral stance on the Russia-Ukraine conflict. It has already hurt the economy, and any further escalation could permanently break or sever relations with our largest trading partners, with potentially dire consequences,” the bank said.
Read: Rand Hits New Low After Announcing BRICS Summit Immunity
