SA's external debt bubble - when will it burst?

Last month we had a look at one of the major risks to the South African economy and the rand – a twin deficit that has grown from zero in 2000 to 11% of GDP for 2013. This is an alarming picture on its own, but what is more concerning is – what lies behind these increasing ‘cashflow shortfalls’ on the current and fiscal accounts? The accompanying chart, reflecting South Africa’s external debt, gives some indication of what has been happening – massive offshore borrowing to shore up our shortfalls. This paints an alarming picture if ever there was one, with external debt (red line) having grown exponentially, and totalling R1.44 trillion in December 2013 in 1990. To put this in perspective: º It has increased 24 times (2405%) since 1990 levels of R59.6bn – an average growth of 15% p.a. y-o-y. º Since 2004, it has increased 5.7 times (at 21% p.a. y-oy) and more than doubled since 2008. º External Debt now represents 42% of GDP compared with 18% in 2004 and 21% in 1990. Admittedly, the current external debt level of 42% (as a percentage of GDP) is not nearly as bad as the US and other heavily indebted countries, but what is extremely concerning is the extent to which it has increased, especially since 2004 and 2008. Bottom line: This is a very precarious situation and is exactly the recipe that caused the financial crisis and global meltdown in 2008/2009. The fact is that the past decade has seen an increase in local asset prices (stocks and property notably), but all backed by a massive increase in domestic and external debt. In simple terms, this is a bubble waiting to burst – it is not a question of if, but when. www.forexforecasts.co.za/go/ ZAROutlook CAPTION James Paynter is the head market analyst at Dynamic Outcomes