South Africa heading for econo

South Africa heading for economic crash, expert warns

A controversial report warns that South Africans should prepare for a future financial crisis, as foreign investments shy away and market speculation decreases

South Africa heading for econo

explosive rand

SOUTH Africa may be on the cusp of an economic bust with a substantial unemployment trend, according to a report published by a prominent economic analyst last week.

Jesse Colombo warns that numerous economic bubbles, which had grown in emerging markets across the world (including South Africa) as a result of the 2008 credit crunch, were in imminent danger of inflating beyond control and imploding in the foreseeable future.

Among the reasons for his predictions published in FORBES Magazine, Colombo names a measurable decrease in investment in SA, not just in hard assets but also in market speculation, as the rand remains weak and the Reserve Bank continues to struggle to stabilise the South African economy. He also stresses that while much attention has been given to the ongoing issue of the rand’s devaluation, there would appear to be a lack of understanding of the underlying causes of the economic challenges in SA, which might lead to a major financial and economic crisis.

While Colombo’s analysis is focused on financial problems unique to elements within South Africa’s economy – from escalating government debt to irresponsible personal borrowing – the report also challenges a number of current political developments stifling growth and thus weakening the rand. These include the recent hike in interest rates and other government-mandated trends, which would dishearten investors from coming to South Africa, following a five-year period of relative liquidity based on more encouraging lending practices and welcoming ventures based on the illusion of easy credit.

Colombo adds that over $1 trillion on average has annually been flowing into emerging market economies from the United States, China, Japan and beyond over the past four years – more than twice the annual Gross Domestic Product (GDP) of South Africa. Especially with construction projects from China being drawn to southern Africa, the infrastructures for growth were laid rapidly at an inflating rate after the 2008 financial crisis. SA’s all-time low interest-rates at the time further attracted such investment, encouraging the creation of this credit bubble and leading to the financial sector becoming one fifth of South Africa’s entire GDP.

But with political and economic trends in South Africa stifling further such developments in an already massively inflated financial sector, Colombo reckons that the country may be in for a rude awakening, as emerging markets around the globe are finding themselves forced to come up with creative solutions to keep their respective economies afloat. If one of these bubbles were to burst, Colombo warns, the rest will likely follow suit.

He reports in particular on the housing market, which might be in for a major crash after years of record-breaking prize inflation and its associated reckless lending practices. Colombo adds that he does not want to cause panic with his analysis but to empower people to take action and take appropriate measures now.

“As you know, the United States’ credit housing bubble last decade inflated due to low interest rates and now I’m seeing the same phenomenon across most emerging markets including South Africa.”

Adding to the problem of low mortgage rates is a growing number of unsecured loans, which are authorised by South African banks since the National Credit Act of 2007, as well as a growing underground ‘loan shark’ movement (so-called mashonisas), who can charge up to 60 per cent interest for personal loans for South Africa’s struggling working class.

Most township households are now in one way or another connected to debt and are struggling to keep up with their repayments, which is then used as a political bargaining tool by trade unions to push for higher wages, trying to help the victims of debt while effectively further stifling the country’s economy with ongoing strikes and subsequent shortcomings in productivity.

All these factors combined, Colombo warns of the creation of a bubble, which cannot sustain itself nor contribute much in terms of confidence to the South African dream.

By Sertan Sanderson, 2014