African economy at risk over Greece’s exit from EMU – StanChart

[MrVan]

By CHINEDU IBEABUCHI

Greek's exit from European Monetary Union, EMU, could spell doom for Africa's economy if the exit leads to a more pronounced recession in the euro zone, says a report by Standard Chartered Group.

Though the continent's GDP growth is likely to remain positive on average, the report said the risk is due to the fact that Africa's growth is correlated with Europe's, adding that the impact would depend on how the contagion is contained.

Assessing the effects of a Greek exit from the European Monetary Union (EMU) on its footprint markets of Asia, Africa and the Middle East, the report said if contagion is contained by European Central Bank's (ECB) liquidity injections, any negative impact on emerging-market (EM) growth is likely to be limited and temporary.

"We also expect EM central banks and governments to take the necessary action to stimulate their economies. If the European authorities fail to contain the fallout from Greece's exit, leading to exits by other EMU members, the economic and financial impact on emerging markets could be comparable to the 2008-09 global financial crises," it said.

The report documented by its Regional Head of Research, Greater China, Stephen Green, revealed that a Greek exit from the euro area would leave financial flows at risk.

"In the case of a financial crisis, however, the effect may be transmitted more rapidly. This was seen during the 2008-09 global crises, when reduced availability of trade finance triggered an almost immediate collapse in global trade, and demand for Africa's exports plummeted. This time, a large number of European financial institutions are likely to face pressure to recapitalise.

"Anecdotally, there is already evidence of asset disposals by European banks and of a general pullback in new lending to Africa. Trade finance is likely become increasingly expensive; project finance will slow, but probably not on a scale that will threaten Africa's positive overall growth.

"The key lesson from the 2008-09 crises is that Africa is vulnerable to global events, even if it tends to be impacted with a lag. A Greek EMU exit leading to a more pronounced recession in the euro area would result in slower growth in Africa, but the continent's GDP growth is likely to remain positive on average. Our chart shows that Africa's growth is correlated with Europe's."

Also, the research showed that while the importance of the euro area as an export destination has been declining (largely due to gains by Asia), the region remains Africa's largest trading partner by far, representing 25.6% of African exports in 2010.

The research further disclosed that countries that have significant trade with Europe are most at risk. "In many countries for example, Cameroon, Côte d'Ivoire, Ghana, Mozambique and Sierra Leone, the euro area represents more than 30% of exports, leaving them particularly exposed to a crisis via the trade channel.

"Other countries, such as Angola and Zambia, sell only a small fraction of their exports to the euro area and appear less vulnerable. However, there are others channels of contagion that can affect countries with fewer direct trade links to Europe.

The research predicts that even if trade as a share of GDP is typically small in Sub-Saharan Africa, averaging around 30%, Africa's exports are also dominated by commodities.

"If commodity prices are supported by tight supply and continued demand from elsewhere, the impact of a European recession alone may not be huge, but in the event of a decline in commodity prices, commodity exporters would be affected. Factor in the tendency of African countries to react to global economic slowdowns with a significant lag, and the case for an immediate slowdown in African GDP growth is less clear still."

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