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Economies and financial markets were battered in September on account of several events. Some of these incidents – which already caused declines in share markets, increases in bond yields and changes in exchange rates – are to continue in coming months, when its current effects will show up in slowing economic growth, employment and inflation numbers. Although almost all economies were negatively affected, but emerging markets felt the contagion pain disproportionately more than other countries.
These events mostly arose from China and the United States (US). It includes rising geopolitical tensions between China and the US; increasing infections from the COVID-19 Delta variant in China and the US; supply chain disruptions contributing to stubbornly high inflation in many regions including Europe, the US and China; shortages of labour in consumer-facing industries in especially the US; indications of bond purchase tapering by the European and US central banks; debt defaults by Evergrande, a large property developer in China; and a shortage of electricity in China. Some context is appropriate.
Geopolitical tensions arose from the US and the UK providing Australia with “nuclear-powered stealth technology” which will allow their submarines “unnoticed” entrance in “South Sea China” and challenge China’s military expansion. However, immediately after the “deal”, China applied to join a Asia-Pacific trade agreement from which the US withdrew in 2017. China’s application is an attempt to compete with US trade in the region. However, China doesn’t seem to comply with several membership rules such as protection of intellectual property rights, and if membership is denied, it may cause a fall-out between China and these countries, affecting future bilateral trade and economic growth.
Staying with China, the “Evergrande loan default” contributed to a massive rise in its four-year bond yields from about 12% to almost 60%, contributing to capital flight from emerging markets and currency depreciation. Evergrande’s problems arose when the Chinese authorities announced rules (debt to assets cannot exceed 70%; debt to equity cannot exceed 100%; and cash holdings must be equal to short-term borrowing). Evergrande could not meet two of the three and was disqualified access to funds from banks, causing the company to default on loan repayments. As the impact on the financial sector is unknown, it contributed to contagion risks throughout international financial markets.
Furthermore, electricity shortages are now spreading to more provinces in China. A surge in demand for Chinese products and efforts to reduce carbon emissions contributed to power outages, negatively affecting production. Consequently, China’s economic growth forecasts were adjusted downward, while it will contribute to additional supply chain disruptions as the country may not be able to meet import orders. On top of this, Chinese authorities implemented strict rules to deal with the outbreak of the COVID-19 Delta variant, further affecting Chinese production.
In the US, the Fed signalled its intentions to start bond purchase tapering. Fed chair Jerome Powell also expressed frustration with sticky inflation, driven by supply chain disruptions caused by COVID-19 disruptions. Nevertheless, markets now expect tapering to occur in December. A growing choir is emerging for rate increases in the US to start in the second half of 2022, but this is too early to call.
The South African economy’s challenges seem to pale compared to that of China. Although the exchange rate plummeted, share prices declined and bond yields increased on the back of the above events, the good news is the SARB kept interest rates unchanged, inflation seems to be “soft” albeit rising, the trade surplus continued to increase, tax collections are overshooting, while the country was moved to COVID-19 level 1. Still, the economy continue to lose jobs, signaling a policy fault line.
Multivest Economic Division