MUNGO SOGGOT, STEFAANS BRMMER, Johannesburg | Friday
THE global recession that is likely to follow last week’s terror attacks on the United States will hit the South African economy in the short term. But economists say changed global conditions could spur the government to find new ways of stimulating domestic growth and could be positive for South Africa in the long term.
The immediate damage from the attacks has been a slump in local financial markets. But economists are now bracing themselves for the long-term effects of anything from a war in the Middle East to a state of permanent tension between Arab states and the West.
Most are forecasting a global recession, which nobody will escape, and on smaller investment flows to emerging markets, as investors move to what they consider safe havens.
Number crunchers are waiting to see what the US does in retaliation before changing their key forecasts, but are already juggling various scenarios.
The rand has performed badly since the crisis, and the prognosis is that it will remain weak.
Economists say the drying up of capital inflows into South Africa – compounded by the absence of privatisation proceeds and the push by even more companies to take their money abroad – will further undermine the rand.
Other immediate casualties, it is speculated, could be South Africa’s privatisation programme.
Deteriorating market conditions could well delay the planned listings of Telkom and South African Airways.
But the news is not all bad. John Clemmow, a London-based analyst, says in the long term the crisis could be beneficial for emerging markets like South Africa, which have suffered a dearth of investment as funds have moved to an increasingly dominant US.
“It has been a bit of a case of America ber alles,” he says. Clemmow points out that in the late 1990s there had been a 90% fall in investment flows to emerging markets. The US attacks could undermine perceptions that the US is the safe centre of the world, and could encourage more interest in emerging markets.
Clemmow says the rand will remain weak. But he adds that South Africa may be able to cash in on higher demand for the commodities it produces, stemming from increased military spending in the West.
He believes the government does not need the proceeds from its planned privatisation programme, but has rather pursued the policy to improve the cost and efficiency of services. Even without privatisation proceeds, the government could achieve a budget surplus this year. While politically embarrassing, this would underscore the fact that it does not depend on state asset sales.
Clemmow says the local tourism sector is unlikely to suffer much damage, as it remains largely dependent on the visits of “kith and kin”. This was in contrast to countries like France, which would be hard hit.
Some analysts hope poor global conditions will spur the government into lateral thinking on compensatory measures to stimulate the local economy.
Iraj Abedian, Standard Bank’s group economist, says South Africa can offset the negative impact of a global slowdown with the appropriate refining of fiscal and monetary policy to stimulate domestic growth. The looming global slowdown would hopefully “spur us into action and make us focus on specific spending that will enhance growth in the medium term”.
The government could, for example, use more of its unspent capital budget. Amounting to about R9-billion, this is a side-effect of tight fiscal policy.
Abedian emphasises that the government is unusual for its underspending, and that many other emerging markets lack such resources on which to draw.
“South Africa should bank its achievements. It is a very real – not a hypothetical – chance. We do have the cash.”
To complement this, Abedian says government should beef up its spending on key aspects of the state, including the justice system, to enhance domestic growth prospects.
Accompanying this should be a lowering of interest rates, in line with the post-crisis strategies of other central banks that have recognised an approaching global slowdown. This, in turn, would help allay inflation fears.
“If we coordinate the two policies – focused government spending and a softening of monetary policy – we should go a long way towards compensating for a slowdown.”
On Thursday the Reserve Bank indeed cut the repo rate – the rate at which the central bank lends to commercial banks – by half a percentage point to 9,5%.
The main wild card for economic forecasters is the oil price. Tony Twine of Econometrix believes oil will “bounce between $27 and $30 a barrel on rumours of war, and the price will spike up if rumours turn into fact”.
But Twine adds the Organisation of Petroleum Exporting Countries has made it clear it will do its best to keep supply channels open, to prevent a spike becoming more permanent. Africa watchers say Middle East turbulence could prove a boon for African oil producers such as Angola and Nigeria.
Africa is expected to provide about 30% of US oil requirements by 2006. This could result in a broader economic focus on the continent on the part of the West.
Pieter Laubscher, senior economist of Stellenbosch University’s Bureau for Economic Research, says the bureau is working on a “low-impact” scenario in which the US would mobilise wide international support for its “war on terror”, including Muslim countries.
Pre-crisis thinking was that the US downturn was already near its lowest point, and would have rebounded by the end of the year, with Europe following suit some six months later, Laubscher says.
But the “destruction of the Manhattan economy” resulting from the attacks, together with related outcomes such as the impact on airlines and a further blow to already-low consumer confidence in the US would bring “great negative pressure” on the US and world economies. The result could be the first real world recession in two decades.
Laubscher says, however, that recession is unlikely to last long, with a strong stimulus for recovery coming from US spending on reconstruction and the expected military effort. Legislators have already voted an extra $40-billion (R345-billion) for the US war effort.
The bureau now expects the US economy to recover during the second half of next year, rather than the end of the current year.
Negative effects of the US and world downturn on the South African economy would include downward pressure on non-gold and non-oil commodities. Because it is seen as less of a refuge, gold will not come to South Africa’s rescue as it did in the 1970s.
Coupled with this will be lower growth in South Africa, although the local economy is “in a different cycle” and far from recession.
In July, when the bureau was already concerned about possible world recession and its effects on the local economy, it predicted South African growth of 2,5% this year and 3% in 2002.
Now it is working on a figure for next year as low as 2,5, although 3% “remains a possibility depending on how soon the world economy recovers”.