Greece debt default may damage SA

2011-10-22 08:36

The contagion to other eurozone countries from debt-stricken Greece would devastate South Africa’s
economic recovery despite the dearth of economic connections between South Africa and Greece, it emerged this week.

The managing director of Plexus Asset Management, Paul Stewart, said this was attributable to the fact that a large base of wealthy European consumers purchased South African goods.

South Africa has strong economic connections with major European economies such as France and Germany.

Stewart said: “As eurozone governments cut back on expenditure, business conditions deteriorate globally and increase unemployment in trading partner countries.

“This will result in less demand from historically strong countries and dampen the levels of trade across the world as well as in South Africa.”

Stewart cited an example of an unidentified South African farmer who was exporting fruit to Europe. He said as the farmer experienced declining prices, volumes and demand, so profitability declined.

This in turn has affected the farmer’s ability to employ workers and might increase the rate of unemployment in South Africa, which has lost more than a million jobs since the beginning of 2009.

Dawie Roodt, an economist at Efficient Group, agreed that a seismic economic event in Europe could affect South Africa’s recovery badly because Europe is its biggest trading partner.

“If Greece defaults on its debt and the European banking systems collapse, South Africa’s economic recovery could be affected negatively. The world may have a Great Depression,” Roodt said.

“But I think what is going to happen for now is that there will be a managed default in Greece with stricter austerity measures. And this means the area will stay in debt for a while. This will affect South Africa but it will also be bad because we will be moving to a semi-crisis.”

But in a sign that holds positive sentiment about South Africa’s economic recovery during this impending crisis, Johann Els, an economist at Old Mutual Investment Group SA, this week said he expected South Africa’s growth to be about 3% this year and the next.

Els said: “I move from a position that the contagion in Europe will not be so bad. A solution to the problem will be found and there are also plans to sort out the problem.”

But this week, credit rating agency Standard & Poor’s said negative developments in the global economy could exert pressure on sub-Saharan Africa sovereigns over the coming months. This despite the fact that these economies have been expanding since the economic crisis hit.

For the region as a whole, a drop in global risk appetite could also erode the confidence that foreign ­investors have shown in the region since 2009.

Budgetary pressures in Europe and the US could also slow down aid flows, which are critical to sustain public investment in many countries, according to Standard and Poor’s.

On Finance Minister Pravin Gordhan’s recent statement about the possibility of using some of South Africa’s foreign reserves to provide aid to the European Union, Stewart said: “At the very least this illustrates our government’s concern about the contagion effect for South Africa if the eurozone enters a protracted recession.”

South Africa is the EU’s largest trading partner in Africa and by far the strongest of sub-Saharan Africa’s economies. South Africa’s primary exports to the EU are fuels and mining products (27%), machinery and transport equipment (18%), and other semi-manufactured goods (16%).

EU exports to South Africa are dominated by machinery and transport equipment (50%), chemicals (15%) and other semi-machinery (10%).

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