East African economies and businesses are facing fresh shocks emanating from the Eurozone crisis which is wiping out millions of dollars in trade, aid and investments.

Last week, data showed the Eurozone’s $13 trillion economy was shrinking further, putting at risk the global economy. Economic activity in the euro region plummeted 0.7 per cent in the second quarter after stagnating in the first three months of 2012, the EU’s statistics body said.

Economists and analysts said export demand for EAC goods, deep financial links including trade finance, foreign direct investment and aid flows are already feeling the pinch of the Euro crisis, and could be hit more in the event of a worst case scenario in Europe.

The EU is the single largest market for EAC exports, absorbing 23.4 per cent of its exports in 2011 compared with 33.6 per cent exports to the rest of the world.

EAC received over $4.8 billion worth of imports from the EU — and around $3.18 billion of exports to the EU as per 2011 trade data.

A new report by Business Monitor International (BMI) says while the impact on the various countries will vary, each of the various regional economies faces a distinct risk based on its economic linkage to Europe.

“We believe that extensive trade ties to Europe, linked financial systems, a reliance on foreign direct investment, and dependence on foreign aid are the most important factors in raising a country’s exposure to a further crisis in the Eurozone,” BMI said in the report, Collateral Damage: The Eurozone Crisis In Africa.

According to data from the Overseas Development Institute (ODI) European banks account for just under 25 per cent of cross-border lending in Africa, but they dominate the market in some states, making up over half of the bank assets in Mozambique, Ghana, Cameroon, Tanzania and others.

“Deleveraging at home could cause European banks to abandon operations abroad to focus on meeting capital reserve requirements,” said BMI. The euro crisis has forced developed countries to reduce their aid to developing countries, with total aid falling 3 per cent last year.

“Crisis-hit Eurozone states cut their funding drastically; Spain has reduced overseas assistance by 33 per cent. Should additional European countries be sucked into the debt crisis, similar cuts could be made, crippling the EU’s aid budget,” it adds.

The possible further cuts in aid pose a challenge to regional economies, as donor funds make up a significant fraction of the country’s spending.

In Rwanda, for example, donor funds are estimated to make up nearly 50 per cent of the country’s projected government spending this year, while Burundi, according to the IMF, receives an estimated 30 per cent of GDP in aid each year.

Donors are estimated to fund about 5 per cent of Kenya’s budget and about 30 per cent of Tanzania’s national budget.

BMI cites Tanzania as one of the countries in Africa where  European banks dominate the market, making up over half of bank assets.

For Uganda, the euro crisis could hit project funding for infrastructure, BMI says. BMI also  predicts that risk-conscious firms are likely to focus on core assets, a development that could hit Uganda and Tanzania. Already, several large miners are responding to low metal prices by consolidating operations in their major projects and deferring new operations.

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Firms in the EU are also likely to cherry pick investment in natural resource rich countries rather than those in the exploration stage.

However, some analysts are optimistic Kenya can withstand the turmoil better than its neighbours. “Compared with many other African economies, Kenya is perhaps less directly impacted by mature economy risks,” said Razia Khan, the head of regional research, Africa.

“The total share of trade with the euro area is relatively small. Kenya has done increasing trade with regional economies in recent years. This does not mean that it will be resilient to slowdown in developed countries.  It is likely to be a little bit more resilient than other SSA countries” she said.

The EU represents 31 per cent of Kenya’s export market, for cut flowers, tea, vegetables and coffee.

“While exploration agreements already signed in Côte d’Ivoire and Uganda would be honoured, production would be set back. Hope of a new South Sudan pipeline could die, and investment-focused development plans would be unlikely to be realised,” adds the report.

Already foreign direct investment from the EU to Africa has fallen from $70 billion before the 2008-2009 economic crisis to about $50 billion today. It has yet to recover to pre-crisis levels.

A possible shortfall in mobilising funds for the next phase of exploiting natural resources in the region would be a big blow to efforts to start actual production in light of gas and oil discoveries in the region.

Tanzania has already discovered some 15 trillion cubic feet of gas, which the Financial Times in the UK estimates could be worth as much as $150 billion or about six times the country’s GDP.

But the country needs at least $10 billion to build the infrastructure needed to start production.

Kenya and South Sudan are planning to build a $3 billion pipeline to connect landlocked South Sudan to Kenya’s proposed Lamu port.

With work on the pipeline set to commence in June next year and funding programmes not yet sealed, expectation are that both governments could borrow from the international market or receive funding from friendly governments in Europe.

Any slight delay in resolving issues around the Eurozone would likely see firms and governments shy away from lending to countries abroad. And even when such funding is secured, it could be at a premium.

But the major risks resulting from a prolonged euro crisis could be earnings from diaspora remittances, horticulture and tourism — the three biggest sources of foreign currency for the region.

The EU is the biggest source of tourists visiting the EAC, and the biggest export market for the region’s horticulture products.

“The tourist numbers from Europe have not been significantly affected, more so because tourists from this market tend to plan months or even in some cases years in advance,” the Kenya Tourism Board said in a statement last week.

Though the three sources are doing well, there are risks that slow recovery in Europe could see lower remittances and export earnings.

“Though we are in the low season, we have not witnessed a drop in demand for cut flowers from the EU. However, we expect to get a clearly picture once the high season starts in November,” Jane Ngige the CEO of the Kenya Flower Council said.

Tanzania’s horticulture industry is under renewed pressure after a lull of nearly four years. In February, the Tanzania Horticulture Association trimmed the country’s 2012 earnings prospects from $380 million to $360 million, citing the eurozone crisis.

Ugandan flower export earnings are expected to drop as the debt crisis takes its toll.