The United States of America subprime mortgage crisis which began in August 2007 degenerated into a full-scale global financial crisis between August and October. Commentators have referred to this crisis as the worst the world has witnessed in the last 80 years . The crisis has resulted in significant asset depreciation, closures of companies, rising unemployment and a sharp slowing down of economic growth, with most highly industrialised countries entering a recession. After a lag, the crisis was then felt by South Africa. The country has especially been affected by the sharp fall in demand for its export products, the fall in prices of key export commodities and falling foreign investment. The economy has recently been plunged into a recession for the first time in 17 years and its macroeconomic forecasts have had to be revised downwards substantially. The declining growth has potentially negative implications for incomes, employment, and investment; and on social programmes partly through the slowdown’s effect on tax revenues for government. This document uses a dynamic computable general equilibrium model (CGEM) to analyse the impact of the financial and economic crisis on South Africa. The remainder of the document is divided into six sections. Section 2 describes the general impacts of the crisis in South Africa while section 3 discusses the data used for the model as well as the model. The international crisis for South Africa is represented by the drop of world prices, world demand and foreign direct investment. Section 4 analyses the impacts of a combination of these three falls with two scenarios depending on the magnitude of the shocks. In section 5, we analyse the separate impact of the three drops to better understand what the most harmful transmission channel of the crisis is for South Africa. Finally, section 6 concludes.
Project leader: Margaret Chitiga
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