Global economic situation needs responsible reaction from government to prevent economic damage at home
On Friday, Standard and Poors downgraded its credit rating of US government debt from AAA to AA+. Although this is a relatively small adjustment, it has accelerated an already steady plunge in stock market prices across the world, starting on Asian markets this morning. Under these conditions, there is growing concern that the much feared double dip recession is a highly probable outcome in developed economies in the US, UK and Europe, where the damage from the sub-prime bubble burst was most significant.
In Europe, the public finances of Spain, Portugal, Ireland and Greece could not withstand the pressure of the debt crisis and they came close to being unable to service their debt obligations. This is extremely serious given that sovereign debt is, under usual circumstances, considered to be one of the least risky investment asset classes and often underpin portfolios held on behalf of risk sensitive investors, such as pensioners, including those in South Africa. Italy has now joined the other "PIGS" as potential defaulters.
As Euro currency participants, they have the benefit of richer Western European economies offering bail-outs and debt restructuring to prevent damage to the Euro, and their own economies, but their capacity to do this is limited for economic and political reasons. The USA narrowly averted default on its sovereign debt during a political stand-off, but the subsequent downgrade that could have been avoided with better policy choices will increase the cost of its debt.
These troubling events in the global economy need steady responses from our government to prevent a deepening economic crisis at home. It should consider the fact that South Africa is an emerging market destination - with relatively strong infrastructure at the gateway to a potential market of almost 1 billion people on the African continent.
It remains possible for South Africa to position itself as an attractive destination for long term investment capital, but we need to be desirable to extremely nervous investors. Investors need confidence that our economy will grow. To determine medium to long term growth potential, they consider predictive indicators such as potential future economic activity - usually driven by a well educated workforce within an environment that facilitates the economic activity that generates growth. Under these circumstances wealth increases and unemployment decreases.