Stock market volatility in China may present bigger risks to the South African economy than Greece’s possible exit from the eurozone, according to Barclays Plc’s Africa unit.
“Unlike Greece, China is a very important country directly to South Africa,” Peter Worthington, an economist at Barclays Africa Group Ltd.’s investment banking division, told reporters in Johannesburg on Thursday. “It’s the main market for export of iron ore, it’s also a key source for global demand of commodities generally, so a very important underpinning for commodity prices.”
China is South Africa’s biggest trading partner with exports and imports between the two nations amounting to $61.6 billion last year, exceeding trade with the European Union, which stood at $55.2 billion, according to data from the International Monetary Fund.
Chinese shares erased $3.9 trillion in less than a month, raising concerns that it may hurt growth in the world’s second-largest economy and curb global demand for commodities such as copper, coal and iron ore. South Africa is the world’s largest producer of platinum and also exports gold, coal, iron ore and chrome.
The effect of Chinese market volatility “on the real economy remains to be seen, and therefore the impact on the global economy and on South Africa in particular remains to be seen, but very clearly it’s not helpful,” Worthington said.
The rand has slumped 7.2 percent against the dollar this year and was trading at 12.4676 as of 3:45 p.m. in Johannesburg on Thursday.
Slower Growth
Possible contagion from the Greek debt crisis may affect South African assets if investors become more averse to risk, Worthington said.
Barclays Africa kept its 2015 growth forecast for South Africa at 2 percent, while lowering its estimate for next year to 2.2 percent from 2.4 percent, as rolling power blackouts continue.
“Electricity is a major constraint on growth,” Worthington said. “We think the potential growth rate at the moment is not higher than 2 percent.”
Rising inflation risks may prompt the central bank to increase its benchmark interest rate by 25 basis points on July 23 and another 100 basis points by the end of 2016 despite subdued growth, he said. The inflation rate will probably exceed the Reserve Bank’s 3 percent to 6 percent target band from the fourth quarter of this year until the third quarter of 2016, according to Barclays Africa.
