Is S.Africa’s economy in jeopardy? - CNBC Africa

Is S.Africa’s economy in jeopardy?

Southern Africa

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A poverty trap, according to Hagedorn, is defined as a lack of purchasing power. PHOTOS: Getty Images

“Some of the first points to make are that South Africa’s economy is very unusual: transformation and growth model strategies are severe, the challenges are really immense, and they need to be balanced,” Hagedorn, an independent strategy advisor, told CNBC Africa.

“If they’re not balanced, what would happen in a lot of other economies is it would lead to a banking crisis.”

Hagedorn added that in an ideal world, credit agencies and capital market participants would be quick to alert the masses and insitutions of where the economy is going, but the cue is yet to be taken.

South Africa has a strong credit culture, indicating the ability to therefore manage substantial credit risk.

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The real risk, according to Hagedorn, is that if the country’s policies aren’t leading the economy into becoming more competitive and creating more purchasing power, South Africa could end up having a poverty trap.

Hagedorn believes this is much worse than a banking crisis.

(READ MORE: S.Africa's poverty figures on the decline)

 “It’s not as if economists have a cut and dry definition [of a poverty trap], but it is people who don’t have purchasing power. I think a lot of people are starting to wonder: is that happening now, in South Africa? We can go back over the last 10 years, go back as far as you want, and we could work out why we’ve now arrived at a juncture where this is a real risk,” Hagedorn explained.

The fall of African Bank, the banking arm of [DATA ASA:African Bank Investments Limited], can be looked at as a prime example of a reaction based on what Hagedorn believes were market signals that indicated a much larger problem.

(READ MORE: Moody's downgrades Abil's African Bank)

 It is however expected that African Bank will settle into calmer waters due to the South African Reserve Bank’s (SARB) intervention.

 “Distinguishing between market signals and market failures are very important, and that would bring in the whole issue of did SARB respond to what really was market signals, that there is something like a poverty trap going on, and they saw that as market failure,” said Hagedorn.

“I very much see it as market signals which have been misinterpreted. Lending generally can be a good thing, and I think that we’ve had clear market signals and not a market failure. The market signals should’ve been listened to.”

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