Egypt turmoil may ignite South Africa’s inflation

2011-02-05 14:58

Economists have warned that the ­turmoil in Egypt may have a negative effect on South Africa if oil prices ­remained high due to the unrest gripping the North African country.

While trade between South Africa and Egypt was tiny, there are concerns that high oil prices could lead to a spike in inflation, causing interest rates to go up at a time when the economy was still in the doldrums and yet to recover from the recession.

Eskom economist Mandla Maleka said: “Although Egypt is not a big trading partner of South Africa, it may be affected indirectly by the crisis in Egypt, seeing that oil is trading at more than $100 (about R730) per barrel due to the crisis.

He added: “This price is inflation­igniting.”

Maleka said the rand could be in the ­firing line if investors decided to pull their funds out of the emerging markets, which have been beneficiaries of massive foreign capital inflows from developed countries.

According to the Washington-based Institute of International Finance, as much as $825 billion flowed from rich nations last year – where interest rates are near zero – to emerging markets in search of higher yields.

This sparked appreciation of currencies of developing countries. About $581 billion in 2009 flowed into developing countries.

Maleka cautioned that currencies of emerging markets could take a beating if investors felt that it was too risky to put money in those markets as a result of the political crisis in Egypt.

“We will be in a fix if we get a cocktail of a depreciating rand and high crude oil prices,” Maleka warned.

He said Reserve Bank Governor Gill Marcus could be forced to hike interest rates if inflation spiralled out of control due to a weak currency and high oil prices.

But inflation has been relatively subdued, thanks to sluggish spending and a strong rand, which reduces the cost of imports, including crude oil.

According to figures released by Stats SA last month, consumer inflation slowed to 3.5% year-on-year in December from 3.6% in November.

On the trade front, South Africa is not expected to suffer as a result of the anti-government protests in Egypt, which aim to end President Hosni Mubarak’s 30-year rule. He is blamed for worsening poverty, unemployment and corruption in the North African nation.

“The crisis won’t affect South Africa that much because Egypt does not produce many products that we ­import,” said Paul Kruger, a researcher at Trade Law Centre for Southern Africa.

The value of trade between the two countries totalled R1.2 billion last year with South Africa enjoying a trade surplus of R683 million.

According to Steven Ntambi, an economist at the Industrial Development Corporation, trade between South Africa and Egypt has been growing at an average rate of 28% a year over the last 15 years.

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