Johannesburg - South Africa’s already troubled economic outlook is poised to get worse after the release of a World Bank report that projects further declines in major commodity indices this year.
The prices of commodities are forecast to drop due to oversupply, according to the World Ban report, out yesterday.
This spells bad news for South Africa, which is a major producer of coal, platinum, gold, ferrochrome and other natural resources.
The World Bank said demand for commodities had weakened in recent years, in large part owing to China’s slowdown, and this had contributed largely to the weakening of South Africa’s economy.
It said the global economy remained in a fragile state and growth had slowed to an estimated 2.4 percent last year from 2.6 percent in 2014.
Also hit hard by the collapse of commodity prices are oil-rich countries such as Angola and Nigeria.
‘Canary in the mine’
While South Africa has a relatively well-developed manufacturing sector, a meaningful percentage of the economy still revolves around commodities.
Mining made up about 60 percent of South Africa’s exports, and it and agriculture together accounted for about 10 percent of gross domestic product in 2013. However, that was in the past and the country had become a harbinger for battered economies.
CNBC said last year: “South Africa, one of the emerging markets’ biggest success stories in recent years, is rapidly becoming a canary in the coal mine, known as the commodities washout.”
The World Bank said non-energy commodity prices fell by 4 percent in the fourth quarter of 2015 to a level almost 40 percent below their early 2011 highs, on continued large inventories and ample supplies.
It said that of the five Brics economies (Brazil, China, India, Russia and South Africa) four slowed or shrank in 2015.
“China’s economy continued to slow, and its rebalancing away from commodity-intensive activities towards services has weighed on global trade and commodity prices.”
It said Brazil and Russia, two large commodity exporters, were in deep contractions accompanied by currency depreciation, above target inflation and deteriorating finances.
“In South Africa, chronic power supply bottlenecks are a major factor behind weak growth. In contrast to the other four Brics, growth in India remained robust, buoyed by strong investor sentiment and the positive effect on real incomes of falling oil prices.”
The World Bank said adverse external developments had hit commodity-exporting economies particularly hard.
It said growth in Brazil, Colombia, Nigeria, Peru and South Africa had “weakened considerably in 2015 as the impact of deteriorating terms of trade on exports was compounded by tightening macroeconomic policy and softening investor confidence”.
It said governments had responded with spending cuts, while central banks had raised interest rates to lift pressure on exchange or inflation rates.
It warned that metal prices might drop by 10 percent, after last year’s 21 percent drop due to weaker demand prospects and new capacity.
The largest decline is expected in iron ore, which has fallen by 25 percent.
BUSINESS REPORT