2 May 2014

Last post, 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 there is something more concerning, which is –

...what lies behind these increasing ‘cashflow shortfalls’ on the current and fiscal accounts?

The below Chart, reflecting South Africa’s External Debt, gives some indication of what has been happening – massive offshore borrowing to shore up our shortfalls!

South Africa's External Debt Bubble - When Will It Burst? Click to see full size...

This paints an alarming picture if ever there was one, with External Debt (red line) having grown exponentially, and totaling R1.44 trillion in December 2013 in 1990.

To put this in perspective:

  • It has increased 24 times (2405%) since 1990 levels of R59.6bn – an average growth of 15% p.a. y-o-y.
  • Since 2004, it has increased 5.7 times (at 21% p.a. y-o-y) and more than doubled since 2008.
  • 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 percent 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.

Bottomline: 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 have seen an increase in local asset prices (stocks and property notably), but all backed by a massive increase in domestic and external debt.

This is a bubble waiting to burst –

It is not a question of IF, but WHEN...

So, WHAT will cause it?

In simple terms: An inability to service debt.

The repaying of debt is difficult enough when interest rates are at historical lows (as they have been), but when they start increasing, that is when the pain really starts, and defaults occur, debt is written off and asset prices fall.

And why would interest rates increase?

It all starts with confidence in this country and its ability to pay, measured in terms of what foreigners are prepared to lend the government.

  • The more confidence investors have in their capital being safe, the less return/yield they are willing to ask.
  • The less confidence investors have, the more return/yield they will demand.

A fair measurement of this confidence would be the yield on the 10 Year Government Bond.

South Africa's 10 Year Government Bond Yield
Click to see full size...

Above is the yield on the 10 Year Bond since 1998.

As can be seen, yields have trended lower since the late 1990 high of over 20% to reach an all-time low of 5.77% in May 2013.

But since then, yields have jumped to over 8%, and in so doing, have clearly broken the (grey) long term trendline resistance, clearly signaling a change in long term trend on interest rates.

This is an early sign that trouble is on the (not-too-distant) horizon, with the bubble bursting and a credit crisis resulting.

If you want some more insight into the Rand and what affects and drives it, get our latest issue of The Rand Exposé - the Fundamental Truth.

As always, would appreciate your feedback and comments below.

To your success~

James Paynter

P.S. And if you are exposed to Rand currency fluctuations, and are feeling frustrated by the Rand's wild movements, let us assist you by giving you up-to-date forecasts so that you can better time your transactions, and save you time, money, stress and effort. Go here for details.

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    2 replies to "When Will SA’s External Debt Bubble Burst?"

    • Neil Proudfoot

      "But since then, yields have jumped over 8%" should read "But since then, yields have jumped to over 8%" ?

      • FXadmin

        Quite correct, Neil, thank you - don't need to make this worse than it is! Text has been amended.

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