Some have argued that South Africa and other countries on the continent are now paying the price for an over-reliance on China. South Africa exports huge portions of its coal, precious metals and steel, among other minerals, to China. But the reality, analysts said, is that commodity-exporting countries have had little choice as the Chinese import market expanded.
“It’s not really avoidable by diversification because (China) really is the market,” said Dennis Dykes, chief economist at South Africa's NedBank.
The impact of Chinese volatility comes as South Africa is reeling from its own internal problems. Last month, President Jacob Zuma fired the finance minister, Nhanhla Nene, but then struggled to replace him, first choosing the relatively unknown David van Rooyen and then removing him just days later, after the rand crashed. Zuma then settled on former finance minister Pravin Gordhan, but investors were already unsettled by the confusion.
Bond ratings agency Fitch downgraded the country’s rating to BBB-, as the turmoil sparked concern among investors that the ruling ANC party was not up to the task of managing the economy, including such challenges as limiting the country’s deficit, alleviating electricity shortages, and raising spending on transport and education.
“The event was seen by markets as a move towards less fiscal discipline,” said Dykes.
Most emerging economies have seen their currencies weaken since 2011, as investors have shifted funds back to more developed countries. But South Africa has been among the hardest hit. And during 2015, the rand lost a quarter of its value.
The rand has seen dramatic declines twice in the last two decades — in 2001 and 2008 — but both times it rebounded quickly thanks to an increase in Chinese demand and the growth of commodity prices. This time, analysts say, such a recovery is not as likely, placing more emphasis on the South African government to improve fiscal policy.
“This time, it’s absolutely to do with the policy,” said Dykes. “ The government needs to recommit itself to strong fiscal discipline."
The timing of the economic slowdown and the currency dive could have drastic consequences for food security in South Africa. The country has faced a major drought recently and will likely have to import more food than it usually does — but a less valuable rand will make those imports very expensive in some cases, analysts said.
Kevin Sieff reported from Nairobi.