South Africa entered a recession earlier this week for the first time since 2009. According to a report from CNBC, the country’s financial data, which was made available Tuesday, showed the South African economy shrink 0.7 percent in the second quarter of 2018.
The recession, due in large part to losses in several of the country’s vital economic sectors, dealt a severe blow to the South African rand, which dropped by more than two percent against the dollar by the end of the day.
“There is no way to sugar coat the numbers, the growth picture in the first half of 2018 is ugly and it shows in this economy that there is broad based weakness across the primary and tertiary sectors of the economy,” said BNP senior economist Paribas Jeffrey Schultz during an interview with CNBC.
The abysmal number came as a shock to some, as projections had predicted South Africa’s economy to grow in the second quarter. The surprise recession added to investors’ fears, which hurt both the South African markets as well as global emerging markets. According to Bloomberg, emerging markets were already facing a selloff, and South Africa’s announcement on Tuesday further damaged the weakened currencies of Indonesia, Turkey, and Argentina.
“It is spooking the market it wasn’t an expected print, a lot of analysts and ourselves were expecting a very modest second quarter print, but we certainly weren’t expecting a negative,” Schultz said.
While emerging markets continue to wilt, the dollar is up for the fourth straight day. Despite ongoing economic tensions between the U.S and China, the dollar is remaining one of the strongest traded currencies, due in large part to the general uncertainty facing the global currency markets.
“There’s not much to make me think the dollar should be going up, but there’s plenty to make me nervous about other currencies,” said Kit Juckes, a global strategist at Societe Generale SA during an interview with Bloomberg. “The dollar is very strong and lacking rate support, but other currencies are worse.”
The recession is sure to put additional pressure on South African president Cyril Ramaphosa, who took office earlier this year. Ramaphosa promised to bring economic prosperity upon his election, and early in his presidency he cracked down on government waste and corruption. However, according to the Financial Times, Ramaphosa has failed to steady the country’s economy and has yet to secure any foreign investors.
“Today’s data will further dent hopes that Cyril Ramaphosa’s presidency would lead to a marked turnaround in South Africa’s economic fortunes,” said senior emerging markets economist at Capital Economics, Jason Tuvey, during an interview with Market Insider.
Ramaphosa isn’t wholly to blame, however. Critical South African industries such as manufacturing and agriculture recorded slumps in the second quarter. Agriculture, in particular, saw a massive 11% reduction as the result of a drought in the Western Cape, according to Market Insider.
Not every industry in South Africa is stagnating. According to CNBC, mining in the country was up by 4.9 percent, which will hopefully attract foreign investors looking for access to minerals.