The impact on Southern Africa of the financial crises in Asia and Russia

Abstract

The countries of southern Africa have not suffered seriously from "financial contagion" which is the short-term and sometimes devastating impact of financial crises in other countries. The first stage of financial contagion occurs through the markets for foreign exchange, shares and bonds. The second stage which can be even more devastating, occurs if trouble in financial markets causes a crisis in the country's banking; system, as happened in several Asian countries. South Africa's economy is potentially the most vulnerable n Southern Africa to financial contagion, because it has highly developed financial markets which are open to inflows and outflows of foreign capital. However, the economic cost of financial contagion has been limited in South Africa because the country's banking system is sound. Zimbabwe has been similarly protected from the worst effects of financial contagion. Financial markets in the other countries of Southern Africa are very underdeveloped, which limits the first stage of financial contagion; this is fortunate, because some of them have unsound banking systems. All of these countries are actively trying to develop their financial sectors, however so that their relative immunity to financial contagion may be reduced in the future. This will strengthen the case for maintaining macroeconomic balance, realistic exchange rates, and absolutely sound banking systems.