AN OVERVIEW OF THE CURRENT FINANCIAL CRISIS AND ITS IMPACT ON THE SOUTH AFRICAN FINANCIAL SECTOR

Abstract

THE CURRENT INTERNATIONAL FINANCIAL CRISIS has had a drastic effect on the world economy and affects people all around the globe. This financial and economic crisis has been the worst since the Great Depression in the 1930s and has challenged the orthodox economic thinking of our time. It is now evident that many questionable practices were taking place in the financial system in recent years and all it took was the inevitable bursting of the housing bubble in the United States (US) to trigger a financial crash. Problems in the US credit market spread through both local and foreign banks that invested in the now worthless securitised mortgages (“toxic assets”). They either were forced into bankruptcy, mergers with bigger banks or sought central bank aid to survive. Panic set in, and soon even healthy banks were under pressure as financial institutions, distrustful of the solvency of each other, were reluctant to participate in normal day-to-day inter-bank transactions. It was inevitable that a financial crisis of this magnitude would spread to the real economy. With financial markets unable to perform adequately, economic activity drastically dropped as funds could no longer be channelled to productive investment opportunities. It was initially thought that the developing world would be largely unaffected by the crisis due to its less sophisticated financial sector and therefore the non-presence of the “toxic assets” afflicting banks in developed countries. This however has not been the case. In South Africa the financial crisis soon impacted severely on a number of sectors, especially the export-oriented sectors (mining and manufacturing) and the economy is currently in a recession (South African Reserve Bank, 2009). However, the cause of the recession in South Africa is more to do with the indirect effects of falling world demand and the near collapse of global trade than with direct problems in the financial sector. This poses the question: why has South Africa, with a relatively sophisticated financial system and which was experiencing a property boom much like the US, been able to escape the direct effects of the crisis? This research is aimed to answer this question by examining South Africa‟s financial sector. What follows in section 1 is an examination of existing literature which highlights the effect the crisis has had on South Africa, and on similar developing countries. In order to understand how the crisis got so bad in the developed world, section 2 lays down the widely accepted explanation of the events that caused the crisis in the US. Section 3 provides the research method of the paper. Section 4 explains why the South African financial sector could have been vulnerable to the financial crisis and section 5 explains why despite this it has been largely insulated from the problems experienced in developed countries financial sectors. Lastly, section 6 provides some concluding thoughts as well as limitations of the research. This research is important because it aids the understanding of a very complex topic and will help to understand how the South African financial sector had remained strong in the face of highly adverse global conditions and how in the light of recent global experience the regulatory aspect can be improved still further.