China has downgraded its growth targets for 2012 to just 7.5%. This represents an eight-year low for the country. Because of this slowed growth, some have speculated that China will import fewer commodities.
China’s slowdown, coupled with a poor economic outlook for South Africa’s economy, could put SA in a tough position. First, many South African state-owned enterprises are continuing to borrow money but are not making good use of the funds.
Economist Mike Schussler argues that:
“Ratings agencies are looking deeper than they did before. Many South African state owned enterprises (SOEs) are borrowing money – much of it guaranteed by government – and these SOEs are not doing the things they should be doing with the money, so yes, in about three years’ time our ratings will slip.”
Schussler adds that SA’s debt to gross domestic profit ratio is rising and that it’s likely to exceed 40%.
Fortunately for South Africa, China’s Premier Wen Jiabao has said that his top priority is to improve policies that encourage consumption, and to boost consumer demand while keeping inflation stable and credit at an appropriate level. Hopefully, that will give SA the money it needs to keep things from getting out of hand, debt-wise.
China and South Africa have been major trading partners for just over seven years. The significance of the trade agreements was underlined in 2004 when bilateral trade nearly surpassed $6 billion. At that time, it represented an increase of 52.8% over 2003. While it is not completely dependent on China for all of its exports, SA relies heavily on these trade agreements, so concern regarding the current situation is understandable.
While China’s growth is definitely slowing, it’s not stopping. Last year, crude imports rose six per cent from 2010, while the economy expanded by 8.9% in December. What will China use all of that oil for? A lot of it will go towards production.
In order to continue the growth that China has been experiencing over the last few years, it will need to continue producing. So it’s likely that South Africa can continue to bank on iron ore and other mineral exports. That’s good, because China buys about 60% of SA’s iron ore.
But that’s not all. China purchased $602 million worth of coal from SA in 2011, along with $780 million worth of chrome, $393 million worth of manganese, and $115 million worth of lead.
Of course, none of last year’s imports mean anything for 2012. Even if the import business does soften, South Africa’s new best friend may be India.
India has recently raised tariffs on iron ore exports as well as many other goods it produces domestically. In some cases, India has outright banned the export of some of its goods, like cotton. Because of India’s desire to keep their goods close to home for now, South Africa may see the price for its goods and services rise.
If commodities prices rise, then SA may not need the volume of sales that it used. China could buy less, and SA would still benefit. If China continues to buy the same, or more, hoping to push its economy into some kind of recovery, then SA would just realize increased profits, which it needs right now.
According to a recent Reuter’s survey, China’s iron ore imports may only grow by 34 million tonnes in 2012. If this holds true, then it means South Africa could be safe for another year.
Post contributed by Elizabeth Goldman on behalf of Wonga South Africa
(Image by Peter Craven, CC by 2.0, via Flickr)