SA trade not much exposed to eurozone PIIGS

South African trade and exports might not suffer irreparable damage if the eurozone breaks up.

Although South Africa is exposed to the risks of a severe eurozone meltdown, the risk lies more in the financial markets than in trade and exports.

According the Department of Trade and Industry the European Union accounted for more than 25% of South African exports in the first nine months of the year.

The eurozone alone accounted for about 20% of South African exports, making it South Africa's biggest regional export destination.

But exports to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries was only 4.1% of South Africa's total exports for the year to September.

"The 2009 economic slowdown in South Africa was mainly the result of the deterioration of business conditions in South Africa's traditional trading partners following the financial crisis," said Jean-Philippe Stijns, an economist at the Development Centre of the Organisation for Economic Co-operation and Development.

Italy, which is currently the biggest risk factor in the eurozone, received 2.2% of South African exports in the first nine months of the year, making it South Africa's 14th-largest export destination.

Stijns said the good news is that Italy represents such a small portion of South Africa's exports and no other eurozone country that is directly under pressure represents a remotely significant share of the country's exports.

"The bad news is that a general slowdown in the world economy should not be without effect on commodity prices and this would drive down the value of South African exports on top of the effect a global slowdown would have on demand volume for commodities," Stijns said. China, a major importer of South African commodities, accounted for 13.2% of South African exports in the year to September, making it the largest single-country export destination for South Africa.

Michael Keenan, head of forex research at Standard Bank, said as Europe is yet to fall formally into recession, the effect of the deterioration in the eurozone is still more visible on the financial channels than the trade channel.

"Exports will suffer in the coming quarters, but in the more immediate future the rand will continue to weaken as Europeans de-leverage their balance sheets to get liquidity, and that means de-leveraging their emerging-market exposure."

The rand this week depreciated to its lowest level in more than two years to the US dollar.

However, Keenan said the current weaker exchange rate will make South African exports cheaper and can thus be stimulating for the economy as a whole.

"The Reserve Bank is in a difficult position with rising inflation, so it cannot cut interest rates aggressively to stimulate growth, but the economy will get a boost through the exchange rate depreciation and it can make our exports more competitive," he said.

The downside of the weaker exchange rate is higher imported inflation. Stats SA said this week CPI inflation rose to 6% in October, the highest level since last January.

But Keenan said inflation should be contained because domestic demand is so lacklustre.

A weaker exchange rate also makes the import of capital goods more expensive. Such imports are essential in tackling the logistical bottlenecks and infrastructure shortfalls, which are the fundamental problems behind South Africa's competitiveness problem.