July 21, 2011

Euro crisis to hit South Africa, minister warns

South Africa would not be able to escape an escalated European crisis unscathed, Finance Minister Pravin Gordhan said, adding its direct economic exposure to the countries affected was reasonably low. The rand currency touched a near-two month low of 7.002 and government bonds have also fallen 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, many economists expect the Reserve Bank to hold off increasing interest rates despite rising inflation. (Business Day)

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