Yash Ramkolowan
Following a second bailout of Greece earlier this week, the likelihood of immediate default and contagion effects have diminished in the short-term, though the EU region’s structural debt problems along with the possibility of a future default remain. The Greek (and EU) debt crisis will have a significant impact on South Africa’s economic prospects through various different channels. Most directly, South African exports to Greece are likely to suffer. But does this really matter?
In absolute terms Greece is one of South Africa’s smaller trading partners, with South Africa exporting and importing more goods to and from New Zealand than with Greece. We import a few fridges, some tobacco and a container load of olive oil and export a fair amount of calamari and oranges, but most bilateral trade with Greece is explained by vehicles (and parts) and primary (mainly energy) commodities. Total trade (imports plus exports) between South Africa and Greece has averaged around R1 billion between 2007 and 2011, compared to South Africa’s average world (excluding SACU) exports of close to R600 billion per year for the same period.
Of far greater concern is the likely impact that Greece’s woes might have on the rest of Europe. The Euro area (consisting of 17 European nations) continues to be South Africa’s largest trading partner (despite the Greater China Region’s increasing prominence), accounting for 16% of South Africa’s total (extra-SACU) exports and 22% of total (extra-SACU) imports in 2011. The EU as a whole makes up over one-quarter of South Africa’s total (extra-SACU) trade.
A Greek default is likely to have significant effects on both the currency and on economic activity in the EU, with a much greater tragedy expected if Portugal, Ireland, Italy or Spain should also implode. The impact of weak global economic activity on South Africa’s trade is already clear to see. The sharp depreciation of the Rand in 2008 and overheating commodity prices propelled South Africa’s total exports to then-record levels, after which the combined exchange rate appreciation (South Africa’s exchange rate appreciated from roughly R12/Euro in 2008 to R9.70/Euro in 2010) and the slowdown in global economic activity saw South Africa’s exports fall drastically. Exports to the EU declined by close to 40% in Rand terms between 2008 and 2009 and by 2011 nominal exports to the EU had still not recovered to 2008 levels.
While China’s increasing prominence in South Africa’s (and Africa’s) trade profile and emerging market risk aversion (resulting in dollar appreciation) may alleviate some of the pain, a second round of economic decline, especially if it originates from South Africa’s largest trading partner, and a further deterioration in the Euro, would present South Africa’s exporters with a massive double whammy. Importers (who import mainly vehicles and automotive parts, machinery and electronics and pharmaceutical products from the EU) may benefit, but exporters to the EU (vehicles, machinery, precious commodities, primary products and mineral fuels) will suffer both lower price competitiveness (due to a weaker Euro) and falling demand for their products.
Even if we assume a more positive outcome – that the bailing out of Greece averts a wider European economic meltdown – there may not be any currency respite for South African exporters. The pumping of billions of Euros into Greece is likely keep the Euro weak. While commodity exporters (which often face US$ prices) may be insulated from fluctuations in the Euro, for all other exporters to Europe, and especially South Africa’s fragile manufacturing sector, it seems that Greece does indeed matter.