Johannesburg - Africa may be the next emerging market bubble, according to David Cowan, an Africa economist at Citi. Cowan said yesterday that Africa had been largely insulated from emerging market crises, but the continent could be “smack in the middle of the next one”.
He said: “Everyone wants to put money into Africa. So at what point does all that money chasing assets lead to some sort of a bubble, and how long does that bubble take to burst?”
He cited valuations of consumer goods companies on the Nairobi or Lagos Stock Exchanges, where price:earnings (p:e) ratios were around 30. The average p:e ratio for JSE-listed firms on Wednesday was 20.16.
Africa’s consumer goods companies have become popular in recent years on expectations that the middle classes in Africa will continue to grow rapidly. According to the African Development Bank, Africa’s middle class rose from 111 million people in 1980 to 151.4 million in 1990 and 313 million in 2010.
Cowan described the p:e ratio as a sign of a bubble, as “too much money chases too few assets”. And he warned of the dangers posed by rising current account and budget deficits in many countries. A current account deficit is the gap between revenue from exports of goods and services and the import bill; a budget deficit is the gap between revenue inflows to government and government spending.
“Fiscal deficits have widened substantially since 2008, against the background of still robust growth rates,” Cowan said. He said the fiscal deficits, at a time of strong economic growth, had led to “a significant widening of current account deficits”.
“In 2011-13, we have seen that a combination of rising fiscal and current account deficits, often against the background of some form of shock, periodically spill over into exchange rate weakness,” Cowan said, citing the example of the emerging market shock in May, when signals from the US Federal Reserve that it would taper its quantitative easing policy redirected financial flows into US dollar investments.
However, the danger may be 10 years down the line, he said. - Business Report
