As the world’s financial markets continue to stumble through what is arguably the worst financial crisis to have hit the global economy since the 1930s depression, there are fears in Africa about what effect the current tumult will have on developing economies.

What is South Africa’s role in the current turmoil, and can the banking crisis find its way to the domestic banking sector here? South Africa’s finance minister Trevor Manuel says not, adding that the country’s banking system remains relatively immune from the crisis.

“South Africa, through large measures of good luck rather than careful planning, has managed to avoid the excesses which have placed the world in such dire straights,” says Neville Chester, senior portfolio manager at Coronation Fund Managers.

As Nedbank economist Isaac Matshego also explains, the stability in South Africa’s banking sector can be largely attributed to prudent regulation by the supervision department of the South African Reserve Bank.

“Ironically, the stability can also to a certain extent be attributed to exchange control regulations, which have ensured that the regulators hold a tight grip on SA banking sector’s exposure in foreign markets,” Matshego adds.

However, South African banks can still expect to feel the pinch as the global liquidity crunch will likely affect the domestic banking sector’s ability to raise cash in international markets, while external financing of some key infrastructure projects could also be impacted.

The economy, which is already facing a slowdown due to high inflation and interest rates, is likely to slow even further as a result of the weak global growth, which is expected to result in a decline in demand for South Africa’s exports from developed nations .

“The continued infrastructure development and likely reduction in interest rates into 2009 should mean we will come through this period a lot stronger than many other regions" - Neville Chester

Coronation’s Chester remains positive however. “The continued infrastructure development and likely reduction in interest rates into 2009 should mean we will come through this period a lot stronger than many other regions, with a solid banking industry intact.”

Standard Bank economist Johan Botha also notes that the outlook remains positive for the South African economy, with growth of around 3% expected for 2008 and 2009, though he cautions there are still some dangers to growth forecasts.

“The major dangers to growth will be if the demand for commodities crashes, especially in emerging markets; and falling demand for exports due to weak developed economies” says Botha.

Exports more attractive as rand weakens

Recent International Monetary Fund (IMF) forecasts have suggested that while export volumes from advanced economies are expected to slow to 4.3% and 2.5% year-on-year in 2008 and 2009, those from emerging markets will slow less markedly to 6.3% this year to then recover slightly to 7.4% in 2009.

South Africa’s export volumes would likely slow to about 4% next year, from 9% in 2007, as around half of its total exports are sent to the US and the eurozone, according to a recent Standard Bank report. The same report, however, added that “South Africa may, in part, find support from still lively growth expected in emerging market economies.”

While the recent decline in the rand is bad news for consumers, it provide some support for South Africa’s exporters, with goods produced here now more attractive to international markets, a crucial factor in decision-making as global markets tighten their purse strings.

In fact, many analysts have noted that the US government’s reluctance to help appreciate the dollar as it weakened against other major currencies over the last six years was largely due to the government's desire to increase American exports abroad.

In addition, recent declines in oil and commodity prices, with the former now half the price from its peak above $140 a barrel in July, could also provide some small relief in costs for South African importers.

As the world economy slows, economists also say this should result in an eventual softening in food prices – a crucial development for the poorest margins in Africa. In fact, UNECA Secretary General Abdoulie Janneh says lower commodity prices could mean more affordable food stuffs in African shops.

Growing South-South trade relations

In the face of an impasse in free trade negotiations with the Western world the South African government, alongside many other developing nations, has already been strengthening trade relations with other emerging economies, particularly South-South trade relations.

South Africa has concluded a number of key trade agreements recently with Venezuela, as well as other SADC countries. The country has also embarked on increasing trilateral relations with Brazil and India, with the hosting of the third Ibsa summit in October.

Following the summit, Brazilian President Luiz Inacio Lula da Silva said the three countries should be bolder, adding that much greater trade flows should be established between emerging countries.

"There seems to be a desire to increase trade links with other countries in the South. This may be of benefit to the country because it reduces risk" - Johan Botha

“Certainly from government's utterances there seems to be a desire to increase trade links with other countries in the South. This may be of benefit to the country because it reduces risk and business cycles across countries could be different. There may also be niche markets to develop,” says Standard Bank’s Botha.

Investment flows affected

One crucial tie that South Africa – and other African economies – has to the developed world that cannot be ignored, however, is investment flows into the country.

FDI (foreign direct investment) is a crucial source of finance for many projects, and while investment into Africa from the likes of China and the UAE is increasing, more often than not such investment comes from the first world nations such as the US and Europe.

“Foreign direct investment flows, which are more of a long-term nature, are likely to remain positive but what could be observed in the short-term is a decline in these funds as investors postpone some projects or reduce the amounts to be invested,” says Nedbank’s Matshego.

However, Matshego notes that South Africa is also likely to experience net investment outflows as global investors pull out money due to elevated risk aversion, something he says has already been felt in financial markets in recent weeks. 

“With SA's relatively big current account deficit, it is crucial that inflows continue to materialise. If not, we may see a sharp decline in the value of the rand, which will push inflation up, resulting in higher interest rates and slower growth,” adds Standard Bank’s Botha.

Nedbank’s recently published October Guide to the economy stated that while South Africa’s economic growth has so far held up “reasonably well in the face of the global slowdown” the full effect in terms of trade and more uncertain capital inflows has still to be felt.

The IMF takes a slightly more positive stance however, noting that foreign investors keen to make a higher return on their investments, are still looking towards Africa, as it often provides better returns that the mature markets of the developed world.

“Interest in investing in the continent appears to continue, in part because rates of return there are high relative to those in mature markets and because sub-Saharan Africa offers unique diversification opportunities>," said the IMF in its October Regional Economic Outlook.

What next after the panic?

Undoubtedly, while South Africa has so far emerged relatively unscathed from the global credit crunch, the full impact of the crisis, and its consequences, are yet to be felt.

“The global panic has left the South African banks reasonably unaffected from a funding perspective. It will however reflect in the cost of bank capital and senior debt as equity prices and bond markets respond in sync with what is happening around the world,” says Coronation’s Chester.

“The trend to price credit appropriately will be felt here as much as it will be around the rest of the world,” Chester adds.

An unexpected consequence of the current financial tumult, however, could be that as developed nations emerge from the crisis, it may be to discover a new world, in which the major emerging markets of China, India, Brazil, UAE and South Africa will have developed closer trade relationships.

With trade between developing countries also growing around twice the rate of total world trade, a trend that is likely to increase in the near future as developed countries cut their consumption, the biggest developing nations could find themselves emerging from this crisis with more clout on the world stage.