By Jesse Colombo
As Africa’s wealthiest major economy, South Africa has played a key symbolic role in the emerging markets boom that has transformed the global economy in the past decade. Unfortunately, like most other emerging economies now, South Africa is experiencing an economic bubble that shares many similarities to the bubbles that caused the downfall of Western economies in 2008. Though South Africa has received a significant amount of attention after its currency fell sharply in the past year, there is still very little awareness and understanding of the country’s economic bubble itself and its implications.
The emerging markets bubble began in 2009 after China embarked on an ambitious credit-driven, infrastructure-based growth plan to boost its economy during the Global Financial Crisis. China’s economy immediately rebounded due to the surge of construction activity, which drove a global raw materials boom that benefited commodities exporting countries such as Australia and emerging markets. Emerging markets’ improving fortunes attracted the attention of international investors who were looking to diversify away from the heavily-indebted Western economies that were at the heart of the financial crisis.
Record low interest rates in the U.S., Europe, and Japan, along with the U.S. Federal Reserve’s multi-trillion dollar quantitative easing programs, caused $4 trillion of speculative “hot money” to flow into emerging market investments over the last several years. A global carry trade arose in which investors borrowed cheaply from the U.S. and Japan, invested the funds in high-yielding emerging market assets, and earned the interest rate differential orspread. Soaring demand for emerging market investments led to a bond bubble and ultra-low borrowing costs, which resulted in government-driven infrastructure booms, dangerously rapid credit growth, and property bubbles in countless developing nations across the globe.
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H/t Justin Stanford
