South Africa would not be able to escape an escalated European crisis unscathed, Finance Minister Pravin Gordhan said on Thursday, adding its direct economic exposure to the countries affected was reasonably low.
The rand currency touched a near-two month low of 7.002 on Monday and government bonds have also fallen this week as investors dumped riskier assets on worries about debt problems besetting some eurozone countries.
“South Africa’s direct economic exposure to those countries affected by current market turmoil is reasonably low,” Gordhan said in an opinion piece published in <>Business Day.
“The greater risk for South Africa is the potential for contagion that results in a prolonged and expanding crisis in Europe and undermines global growth significantly.”
As a small, open economy, South Africa would be hit by troubles in Europe, Gordhan said, but the government had increased its foreign exchange reserves as protection against global shocks to the economy.
“In an extreme crisis, the government is in a position to use these funds, although the liquidity implications of doing so would also have to be considered,” he wrote.
South Africa fell into recession in 2009 as a sharp fall in global demand hit the key mining and manufacturing sectors.
The recovery remains sluggish, and for that reason, the majority of economists polled by Reuters expect the Reserve Bank to hold off increasing interest rates later on Thursday, despite rising inflation.
Past its peak
Meanwhile, BoE Private Bank said on Tuesday that the country may be past its growth peak for 2011 in the light of uncertainty about the global economy, nationalisation, and labour legislation.
“The continuing uncertainty over the health of the global economy, nationalisation and labour legislation has had a negative impact on local conditions,” the BoE’s statement quoted economist Mike Schussler as saying.
“Despite having the lowest interest rates for decades, we are already witnessing a decline in the demand for durable goods and property.”
According to the BoE Private Clients Domestic Overview for June, manufacturing production declined by 3.7%, more than the anticipated decline of 0.6%, while in rand terms, the JSE All-Share Index declined by 2%.
Gold mining declined by 9.5% and the media and household goods sectors dropped 5.2%. – Reuters, Sapa