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Jan 27, 2012

The global financial and economic storm is engulfing everyone

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Standard & Poor|Europe|North America|Austria|Brazil|Britain|China|Cyprus|France|India|Indonesia|Italy|Malta|Mexico|Portugal|Slovakia|Slovenia|South Africa|South Korea|Spain|Turkey|United States|European Financial Stability Facility|Andrew Burns
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Well, 2012 had hardly started before global ratings agency Standard & Poor’s downgraded France’s credit rating from AAA to AA+ and issued a nega- tive outlook for the country. Italy, Spain, Austria, Portugal, Slovakia, Slovenia, Cyprus and Malta were also downgraded. A couple of days later, the agency downgraded the European Union’s (EU’s) bail-out fund, the European Financial Stability Facility (EFSF), as well, also from AAA to AA+. These downgrades mean that it will make it more expensive for France, the other countries and the EFSF to borrow money.

Of the other leading ratings agencies, Moody’s currently rates France as AAA with stable outlook, while Fitch (which is apparently French-owned) rates the country as AAA with negative outlook. But Moody’s has warned that its rating of France is under pressure and that it will be assessing it during the first quarter.

All this, of course, is the result of the far-from-resolved euro crisis. Alas, this is not a private European matter of mere academic interest to everyone else. On the contrary, it affects everyone, directly and indirectly.

It was interesting to note that, last year, the initial reactions of some South African commentators to the crisis in the EU was that it would have little effect on this country, as China was now our largest export market. More recently, however, the penny has dropped. China takes South African raw materials. It doesn’t take South African manu- factured goods in any quantity. The main export markets for South African manufactures are the EU and North America. (The US is doing much better than Europe, but its performance is still weak.)

The obvious answer is – find new markets! (Or, more accurately, increase manufactured exports to markets that have hitherto been minor customers for South Africa.) This is, however, easier said than done. Firstly, everyone is doing it. And countries like Britain (right next to the eurozone) are doing it far more urgently and with much more vigorous and higher-level political support than South Africa.

Secondly, everyone wants to expand their exports to the major emerging economies – China, India, Brazil, South Korea, Mexico, Turkey, Indonesia and so on. But these countries are being hurt by the euro-centred global economic storm as well. They are still growing, and much more strongly than the EU countries or the US, but their growth is decelerating.

Brazil’s gross domestic product (GDP) growth rate for the third quarter of last year was 0% , compared with the second quarter. The Brazilian government expects that the country’s growth figure for the whole of 2011 will be 3.5% – a sharp drop from the 2010 figure of 7.5%. But Brazilian financial analysts forecast that their country’s 2011 growth rate will be 2.97% while Fitch is predicting it will come out at 2.8%. For this year, Brazil’s National Confederation of Industries expects the country to grow by about 3%.

India’s Finance Minister recently warned that his country’s growth during the current (2011/12) finan- cial year could fall below 7%, compared with 8.5% in the previous financial year, and that the coming months could prove very difficult for the Indian economy. The United Nations expects the Indian economy to grow at 7.7% during this calendar year and 7.9% next year. For India, these are not good figures.

On top of all this, last week, the World Bank warned that it had cut its previous forecast (issued in June last year) for global economic growth during this year from 3.6% to 2.5%. Its forecast for 2013 is now 3.1% instead of the previous prediction of 3.6%. “The motor of the global economy – developing nations – is slower at the same time as the world’s largest economic area – the EU – is in recession and these could feed on each other,” said World Bank macro- economics head Andrew Burns. He warned that, should the crisis get worse, it “would spare no one” and that “developing countries should hope for the best and prepare for the worst”.

In short, 2012 is going to be a rough ride for everyone, including South Africa – and within South Africa, especially for the export-dependent manufacturing sector. Batten down the hatches.

Edited by: Martin Zhuwakinyu
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