TRADE WAR

The past four days saw tariffs flying around; by the stroke of a pen, President Trump rewrote the global trade order. Reciprocal tariffs from China on US products into the mainland (34 per cent), the two biggest economies in the world going tit-for-tat, surely the whole world will feel the tremor of these seismic shifts.

The Chines Renminbi and the Japanese Yuan are showing signs of devaluation against the Dollar to cushion the blow. The trade war has begun, but the question to ask is the magnitude of the impact which will be determined by the level of retaliation across global economies. At least Europe at present is hoping for a negotiated solution proposing 0-0 tariffs on US imports and EU exports into the US, hoping President Trump takes the bait and makes a deal. Eswatini has been slapped with a 10 per cent tariff on all exports into the US market, what does all of this mean for the domestic economy?

Seven trillion

The past four weeks have not been kind to wall street, London, Paris, Frankfurt, Tokyo and Johannesburg. Global stock markets have been on a free fall, with wall street lost approximately US$7 trillion in the past four days post the tariffs. If a semblance of predictability and some clear policy direction on the tariffs is not established, we are headed to a sell off in proportions last seen during the financial melt down of 2008. At the stroke of a pen, markets turned from a bullish stance to a bearing market within a matter of days. President Trump’s actions have escalated fears of a global recession; Brent Crude crashed from US$72 in the past four days to US$62 in Monday’s trade. Market sentiment is usually a leading indicator of the predicted trajectory of economic activity.

Domestic economy

At the onset of the worries on tariffs, the local stock exchange lost some 1.31 per cent, which could be an indicator that domestic markets are also bracing for impact. Also, without a clear direction on the 10 per cent tariff imposed on Eswatini products into the US,  African Growth and Opportunity Act (AGOA) has practically bit the dust. The loss of AGOA would have impact on the textiles sector, sugar industry and citrus exporters. The immediate impact will be a loss of market as Eswatini commodities will have to compete at an equal footing with the global south. This will bring to the fore the efficacy of our input markets, as they will be a major determining factor into the country’s export competitiveness in global markets.

A loss of markets will translate into a loss of jobs as a result of shrinking demand. If the worst-case scenario of these tariffs pushing the global economy into a recession, the country will struggle finding markets to diversify our export market. Albeit the fact that finding new markets and setting up the logistics will take time, shrinking global demand will make diversification efforts slow.
Furthermore, the exchange rate will be as volatile until we get a bit of stability and direction into the markets. A weaker Lilangeni will make imports relatively expensive while making exports cheaper in destination countries. The question is, will the weakening exchange rate be our saving grace?

Temporary reprieve

Given our poor or non-existent input market, this will be a temporary relief. It will only benefit producers and exporters who had stock pilled inputs while the Lilangeni was relatively strong. Eventually, these will run out and the exporters and producers will have to import inputs at a higher price because of the exchange rate weakness. Essentially, in a month or two, if there haven’t been any changes in President Trump’s tariff stance, Eswatini will begin to import inflation from abroad. One would argue that we get 70 per cent of our imports from South Africa; bear in mind that South Africa also imports inputs into the production process, hence the exchange rate related inflation will be imported into the kingdom. We can however, look at longer term reprieve through the interest rate conduit.

Medium-term reprieve

As the globe braces for a recession, central banks may be forced to lower the interest rate with the hope of kick-starting demand. We will likely see this in the domestic economy; we still have scope as inflation currently stands at 4.0 per cent below the upper bound of 6 per cent of the inflation target. Also, we have the harvest coming in a few weeks and it will put breaks on food inflation. We can afford a 50-basis point cut in interest rate if push came to shove. These occurrences underscore the need to develop efficient forecasting models so that, as an economy, we can plan better.

Forecasting models

The university of Eswatini Economics Think Tank is in the process of developing such models based on traditional methods, novel artificial intelligence and machine learning algorithms. Machine learning models enable the integration of news and internet information in the predictions. We need robust methods to help us predict shocks and also to simulate the impact of intervention. It is imperative to invest in data analytics and methodologies to aid the country’s economic response on the dynamic economic spectrum.

Post your comment

Your name:

Your e-mail address:

Add your comments:

Please enter the code you see in the image:

Image:

Code: