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Risks of geopolitical instability on South Africa’s open Economy

South Africa’s open economy is highly vulnerable to geopolitical instability, and this could have a significant impact on its economy and citizens. Political instability has been a major concern in many countries across the world, including South Africa, where the country is facing multiple challenges, including corruption, crime, and political turmoil. The impact of these issues can be felt by both local and foreign investors and it is imperative that the country takes measures to address them.

Introduction

Geopolitical Instability on South Africa’s Open Economy is a major risk to the open economy of South Africa. The country’s economy is heavily dependent on foreign investment and trade, and any disruption to these flows can have serious implications for economic growth.

 South Africa is particularly vulnerable to geopolitical instability due to its location in a volatile region, its reliance on commodities exports, and its limited access to global markets. This article will explore the risks of geopolitical instability on South Africa’s open economy, including the potential impacts on trade, investment and growth.

Impact on Trade

South Africa’s open economy is heavily reliant on international trade. In 2019, exports accounted for 28% of GDP while imports accounted for 22% of GDP. The country’s main export partners are China (17%), the United States (11%) and Germany (7%).

Geopolitical instability can have a significant impact on South Africa’s trade flows. For example, in 2018, the US imposed tariffs on steel and aluminium imports from South Africa in response to concerns over “unfair trading practices”. 

This had a direct impact on South African exports to the US, which fell by 8% in 2018 compared with 2017. Similarly, in 2019 China imposed tariffs of up to 25% on some South African exports such as wine and fruit due to concerns over food safety standards. This had an immediate impact on export volumes from South Africa to China, with exports falling by 11%.

Figure 1: Exports as % of GDP (2015-2019)
                              Figure 1: Exports as % of GDP (2015-2019)                                                                                    Source: World Bank

Figure 1 shows that exports as a percentage of GDP have declined since 2015 due largely to geopolitical instability in key export markets such as the US and China. This has had a negative impact on economic growth in South Africa as reduced export revenues mean less money available for investment and consumption within the economy.

Impact on Investment

Foreign direct investment (FDI) is an important source of capital for any open economy such as South Africa’s. FDI inflows into South Africa totalled $6 billion in 2019 according to UNCTAD data, making it one of the top 10 recipients of FDI globally.

However, geopolitical instability can have a detrimental effect on FDI flows into the country due to increased risk aversion among investors. For example, following Brexit there was an immediate drop in FDI inflows into South Africa from UK-based investors due to increased uncertainty about future trading relationships between the two countries.

Similarly, following Trump’s election victory in 2016 there was a sharp decline in FDI inflows from US-based investors due to concerns about protectionist policies being implemented by his administration.

Figure 2: Foreign Direct Investment Inflows (1990-2021)

 

Figure 2: Foreign Direct Investment Inflows (1990-2021)                                                                                                                    Source: UNCTAD

Figure 2 shows that FDI inflows into South Africa have been declining since 2015 due largely to geopolitical instability both domestically and abroad. This has had a negative impact on economic growth as reduced foreign investment means less money available for businesses within the country which can lead to job losses and lower wages for workers.

Impact On Growth

Geopolitical instability can have a significant impact on economic growth in any open economy such as that of South Africa’s.

As discussed above, geopolitical risks can lead to reduced trade flows which reduce export revenues and foreign investment which reduces capital available for businesses within the country leading ultimately to slower economic growth rates than would otherwise be expected without these risks present .

Figure 3: Real GDP Growth Rate (2015-2019)

 

Figure 3: Real GDP Growth Rate (2015-2019)                                                                                                            Source: World Bank

Figure 3 shows that real GDP growth rate has been declining since 2015 due largely to geopolitical risks both domestically and abroad which have had an adverse effect on both trade flows and foreign direct investment into the country . This has had serious implications for economic development within South Africa with unemployment rates remaining stubbornly high despite government efforts at stimulating economic activity .

Conclusion

Geopolitical instability poses significant risks for any open economy such as that of South Africa’s . The country’s reliance on international trade , foreign direct investment ,and commodities exports make it particularly vulnerable .

Geopolitical risks can lead directly or indirectly through reduced confidence levels among investors ,to lower levels of both exports revenues and foreign capital inflows leading ultimately slower rates of economic growth than would otherwise be expected without these risks present .

As such , it is essential that governments take steps towards mitigating these risks through improved regional cooperation , better diplomatic relations ,and more effective policy responses when geopolitical events occur .

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Picture of Armandt J. Viljoen

Armandt J. Viljoen

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