Weekly Shots: South Africa, El Salvador, China, Nigeria

Can SA reach a Fiscal Pendulum with the BIG?

Image by Michael Longmire- Unsplash


The South African unemployment rate increased by 1.8 percentage points to 34.4% in Q2:2021 compared to Q1:2021 leaving South Africa as having the highest unemployment rate in the world. With the number of employed persons sitting at 14.9 million, South Africa has more people dependent on grants than those receiving salaries. Dr. Francois Stofberg, a senior economist at Efficient group estimates due to the 1.5 million job losses as a result of COVID-19, 20.5 million people receive grants. South Africa suffers from persistently high inequality which it tackles through high social spending, targeted government transfers, and a slightly progressive tax system. However, hard economic decisions need to be made amidst the call for a Universal Basic Income Grant due to the high debt levels constraining the government’s scope to further leverage fiscal policy as a redistributive tool as well as economic growth which is too low to effectively reduce the rate of unemployment.


The “Bitcoin” trade-off in El-Salvador

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On 7 September, El Salvador President Nayib Bukele announced that the country would adopt the use of Bitcoin as a legal tender, alongside the US dollar, making it the first country in the world to do so. This week, however, has continued to see demonstrations by citizens against this move.


What are the costs and benefits attached to this policy move?

Benefits

  • The cryptocurrency will help Salvadorans working abroad to send money back home.

  • It will serve as a way to boost economic development and jobs.

Costs

  • The currency will result in price instability, given the price volatility of the currency.

  • Can lead to hyperinflation, which will not only affect domestic consumption and welfare of the poorest in the country but will also negatively affect the country’s exports competitiveness.

  • This will negatively affect any prospects of foreign direct investment, thus defeating the potential benefits proposed.


Evergrande, The New Lehman Brothers?

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Chinese property giant, Evergrande, expanded rapidly as China’s economy boomed becoming the single largest high-yield dollar bond issuer in China, accounting for 16% of all outstanding notes. Evergrande is now the world’s most indebted property developer and has warned investors that it could default on its $300 billion debt. The firm’s problems intensified in 2020 when China introduced rules to reign in the borrowing costs of developers. The developer’s property sales have been declining for months and property sales are expected to drop significantly in September further exacerbating its liquidity woes which have resulted in the downgrading of the firm by rating agencies. Its share price plunged by nearly 80% this year and the trading of its bonds was repeatedly halted by the Chinese stock exchange in the past weeks.


Due to its market size, the potential fallout is expected to have implications not only for China’s banks, suppliers, home-buyers, and investors but for other markets outside China’s borders. If Evergrande cannot repay its debt, it may lead to a situation of “cross-default” where a default triggered in one situation may spread to other obligations, leading to broader contagion. According to Reuters, on Monday, approximately 100 investors turned up at Evergrande’s headquarters in Shenzhen, demanding repayment of loans on overdue financial products. Chinese state-media Global Times’ editor has said the firm should use market means to save itself and should not bet on a government bailout as it deems itself “too big to fail”.


Who will catch the slipping Oil Jar in Nigeria?

Image by Charlie Hang on Unsplash

For years Shell has been selling its onshore assets in Nigeria due to legal battles with local communities as a result of pollution caused by ruptured pipelines. The call for reduced emissions and clean energy by the firm’s investors has led to Shell pledging to achieve net-zero carbon emissions by 2050. The company's Chief Executive Officer, Ben van Beurden, told investors "The balance of risks and rewards associated with our onshore portfolio is no longer compatible with our strategic ambitions. We cannot solve community problems in the Niger Delta and the company has started discussions with the government on how to move forward". Guaranty Trust Bank Plc has however indicated that Nigeria’s lenders do not have the capacity to fund clients seeking to acquire the oil assets. The lack of dollar liquidity is mainly due to the slump in crude oil prices and low foreign currency flows resulting from the pandemic-induced global economic downturn. The Nigerian government is in talks with the oil company to discourage divesting which could have negative implications on the economy.

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