The Potential Impact of the Global Financial Crisis on South Africa

by MOOLA, N & GORDON, S., 2009
Research Report. Centre for Poverty Employment and Growth, Human Sciences Research Council

The 2008 economic and financial crisis was more global than any financial turmoil during the past 60 years. Even though most emerging markets still have relatively healthy banking systems, they felt the effect of the global credit crisis far more acutely than they would have in the past. This paper was prepared as part of a series on the economic and employment impacts on SA of the 2008 global financial crisis. The direct risks to small open economies include: slowing exports as both prices and volumes fall; expanding current account deficits; greater difficulty in financing the current account deficit; lower growth and increasing job losses; growing fiscal deficit as growth slows; tighter credit conditions, making it difficult for governments to roll over external debt and finance budget deficits; and companies and banks having difficulty accessing international credit markets. However, crises often have second-round effects that affect small open economies in unexpected ways. Some of the indirect risks include: transmission of the credit crisis to local market, causing a credit crunch despite relatively healthy balance sheets at local banks; withdrawal of funds from the banking system as parent banks withdraw funds from local subsidiaries; marked deterioration in neighbouring countries’ finances, where fiscal dependence on commodities or exports is high; a sharp rise in public debt as government seeks to mitigate the effect of the credit crisis, potentially hampering infrastructure investment programmes; a slump in stock markets, leading to underfunded pension funds in both the private and public sectors; and protectionist politics.