South Africa has suffered 3 major market shocks since 1994 and pulled through – here’s why this time is different
South Africa has never escaped world recession or global financial market turmoil unscathed, and the latest market crash caused by the coronavirus and a drop in the oil price is unlikely to be different, Nedbank economists said in a research note published on Thursday (12 March).
This is because the South African economy is small and open, with low domestic savings – which means that the country is highly dependent on foreign capital inflows to sustain investment and therefore also vulnerable to abrupt changes in global investor sentiment and risk appetites, it said.
“Since the country’s reintegration into the world economy in 1994, the economy has been subjected to three localised currency crises:
- The emerging market crisis of 1997/98;
- The bursting of the dot.com bubble of 2000/01; and
- The global financial crisis of 2007/08.
“Each of these shocks were different in cause and effect. Domestic political, fiscal and economic conditions also differed in the period preceding the crisis.”
Nedbank noted that in 2007 and 2008 the domestic economy was booming, driven by strong consumer spending and fixed investment, underpinned by robust global growth and rising commodity prices.
“Rapid growth in bank credit and rising asset prices clouded the risks of mounting household debt burdens and overvalued house prices,” it said.
“However, government’s finances were healthy. Budget deficits were contained to well below 3% of GDP and gross government debt gradually fell to a low of 26% of GDP in 2009.
“All three major international rating agencies considered South Africa’s sovereign debt investment grade. These attractive fiscal metrics also disguised the lack of timely investment in key economic infrastructure, notably electricity, which came to the fore in the 2008 electricity crisis.”
Why 2020 is different
In sharp contrast to 2008, prior to the coronavirus outbreak the domestic economy not only remained stuck in the longest economic downswing since records began in 1945 but also entered its second technical recession in the space of two short years in the second half of 2019, Nedbank said.
It added that business confidence is largely absent, eroded by years of political turmoil, policy uncertainty, destructive legislation, electricity constraints, poor economic infrastructure, deeply entrenched public sector corruption and rising operating costs.
Household confidence is also fragile given the rise in unemployment rates, growing job insecurity, persistent pressure on incomes, high taxes, depressed asset prices and the erosion of public services, it said.
“Hopes of a meaningful recovery were dashed in early 2020 as Eskom continued load-shedding, which is now likely to persist for next 18 to 24 months.
“Government finances are weak, with budget deficits of over 6% of GDP and the gross debt burden already over 60% of GDP and projected to rise to well over 70% of GDP – excluding the bailout of Eskom and other struggling SOEs. SA is also on the brink of losing its last investment-grade sovereign risk rating.
“Given these realities, the outlook for 2020 was already bleak. GDP growth forecasts ranged from 0.5% to 0.9%. Our forecast was for growth of 0.7% prior to outbreak of the virus,” Nedbank said.
Read: South Africa’s super rich lose R14 billion in latest coronavirus market panic
Loading ...