Could External Factors be the Cause of South Africa’s Economic bubble

South Africa may be experiencing an economic bubble similar to those that caused the downfall of Western economies in 2008.  This is according to Jesse Colombo, an economic analyst, who also indicated that South Africa’s is not the only market experiencing the bubble.

According to Colombo, “South Africa does not have one of the most extreme bubbles – there are ones that are much more precarious but, at the same time. I don’t view these individual countries’ bubbles in isolation, I view them as one part of a larger whole. It’s all part of the same bubble. It has a common denominator which is the central bank monetary largess of the past five years.”

Colombo also added, “There are numerous post-2009 economic bubbles that are inflating around the world and it has created what I call a ‘bubble covering’ or a bubble-driven economic recovery. This is happening in all emerging markets, in Canada, Australia, certain sectors within the United States economy so it’s not just South Africa.”

Colombo believes that South Africa’s growth is driven by a credit bubble due to the low interest rate environment experienced by the country in the past decade. This then led to rapid credit growth which exceeded the rate of economic growth.  “It was a flow of four trillion dollars worth of ‘hot money’ from 2009 until 2013 that floated to emerging market investments and inflated their prices, and reduced interest rates. Now I’m seeing the same phenomenon across most emerging markets, including South Africa,” he said.

Furthermore, he went on to say, “Low interest rates beget rapid credit growth and also rapid asset price increases, which then threaten the economy when the ‘hot money’ is removed, in this case, the Federal Reserve’s taper plan.”  He also made mention of the fact that, over the past decade, South Africa’s financial sector received a boost from the country’s low interest rates, rapid credit growth and rising asset prices.

However, he concluded, “My biggest concern is private credit growth which has been predicated on ultra-low interest rates in South Africa. The rand’s decline over the past year or so will bring about higher interest rates which will then slow the rate of credit growth as well as the rate of asset price inflation in both property and equity markets in South Africa.”

Source: CNBC Africa