Global markets tumbled yesterday in what some are describing as “Black Wednesday”, due to the fallout from the oil price slump, as investors opted to pare back exposure to equities. This gives food for thought to world leaders meeting at the World Economic Forum in Davos to discuss the global economy.

The market slump follows the International Monetary Fund (IMF) cutting its global growth forecasts for the third time in less than a year on Tuesday, as new figures from Beijing showed that the Chinese economy, the second largest in the world, grew at its slowest rate in a quarter of a century in 2015, according to a report by Reuters.

The IMF also cut its economic growth forecast for South Africa by almost half to 0.7% , citing weak commodity prices and high borrowing costs. The IMF’s forecast is a full percentage point lower than the economic growth rate forecast by the National Treasury for 2016.

The impact this will have on the South African economy and the infrastructure sector in Africa is difficult to pinpoint immediately, although there will be a number of impacts, most of which will be negative, says Greg Benjamin, M&A Advisory Leader at Deloitte. “Investment takes place over the long term and, as such, is not directly influenced by daily changes in the market,” he explains.

Benjamin goes on to stress, “Emerging economies, such as many in Africa, are largely driven by commodities, and commodity price cycles. At the moment, we are experiencing a downswing, with low commodity prices for oil, platinum, gold and coal, among others. As prices are at significant lows, this lowers the revenue generating ability of a country, decreases its ability to generate forex and will also drive down valuations, as earnings will be under pressure in the future. Coupled with the weakening rand, the inflationary pressure and resultant interest rate increase cycle, the negative effects could manifest themselves in a number of ways in the economy, including through increased costs of required rates of returns (funding), job losses and business failures.”

Benjamin cautions, “The allocation of a country’s capital becomes even more imperative as increasingly scarce resources need to be allocated to where they generate the highest risk-adjusted return. This is what private sector capital does and will do. Markets are driven by sentiment and the global economy currently faces significant headwinds that have resulted in generally negative sentiment. South Africa and the African continent are not immune to this.”

DA MP David Maynier said in a statement on Tuesday that the downward revision is in part due to a failure of economic policy: structural constraints on economic growth and job creation, including policy uncertainty, electricity shortages and labour market reform remain.

“As the economy tanks, all eyes are on whether President Jacob Zuma will announce new measures to boost economic growth and job creation during his State of the Nation Address on 11 February 2016,” said Maynier.