South Africa’s Finance Minister Trevor Manuel is likely to tackle the thorny issue of whether the country’s inflation targets should be adjusted when he unveils his three-year budget plans on Tuesday, analysts say.
Manuel is expected to send a clear signal on whether the targets — seen as key to South Africa’s hard-won financial credibility — will be altered after inflation ignited by the rand’s slide in 2001 forced interest rates up sharply this year.
Prices continue to soar, raising the spectre of another interest rate hike in November — which could curb economic growth at a time when the country is trying to boost meagre investment flows and the jobless rate is a punishing 30%.
Few believe that the ambitious inflation targeting framework set in 2000 should be abandoned, and the government has made clear this is not an option. But many economists think some adjustments would be acceptable, as the dramatic surge in prices this year has been beyond the control of official policies.
”The only thing I am looking for (on Tuesday) is some clarity on the inflation targeting framework,” said PSG economist Noelani King-Conradie.
”It’s fine to say we must get inflation in line with our major trading partners, but they are developed countries and I don’t think it’s fair to implement a first-world policy on a third-world country,” she said.
Manuel told parliament last week he would use his medium term budget to address the topic, which has sparked heated debate, eclipsing more traditional budget concerns like future tax cuts, fiscal deficit forecasts, and the economic outlook.
The targeted CPIX index rocketed by a record 11,8% in the year to September, the 11th consecutive month it surged outside its three to six percent target range for 2002 and 2003.
Missing the target in 2002 — the target’s maiden year — is inevitable. Most believe it will be overshot in 2003 and also in 2004 — the year the range narrows to three to five percent.
Manuel has said he is ”concerned” about the use of interest rate hikes to reach the target and asked Statistics South Africa last month to analyse the CPIX benchmark to see whether it is appropriate, and if it responds to changes in interest rates.
The index excludes changes in home loan rates, but includes volatile food and fuel prices, which have been the main drivers of inflation in the past year.
But analysts say any changes to the targeted index — adamantly opposed by the central bank — are unlikely so soon.
They believe Manuel is more likely to postpone the narrowing of the band to three to five percent by a year, to 2005.
”One option would be to shift the inflation target a year out,” Rand Merchant Bank economist Ettienne le Roux said.
”That wouldn’t be a bad approach and the small loss in credibility associated with such a move would be balanced by the authorities’ continued commitment to lowering inflation.”
Le Roux said that if this approach was taken, it was unlikely the central bank would raise its key repo rate again at its next policy meeting on November 27-28, after hiking it by four percentage points to 13.50 percent so far this year.
Another hot topic for Manuel is estimated privatisation inflows, which are likely to fall short of the 12 billion rand estimate in the February budget, even if the listing of Telkom goes ahead as planned before the end of March.
This is because global market conditions have lowered valuations for the state telecoms operator, making estimates for the 20 percent stake earmarked for sale worth six to eight billion rand versus earlier estimates of nearly 10 billion.
But even if privatisation flows fall short, this is unlikely to dent the Treasury’s healthy finances, or slow South Africa’s forecast growth rate of more than three percent in the next two years — which is above the global average.
Manuel is also expected to revise down his budget deficit to GDP (gross domestic product) ratio forecast of 2.1 percent for fiscal 2002/3 to about 1.7 percent as revenues once again surpass expectations, thanks to improved tax collection methods.
The deficit was just 1,4% last year — well in line with European norms, and contrasting sharply with ratios of around 10% before apartheid was dismantled on 1994.
Manuel may also give hints on future tax cuts, after a generous handout in the last budget which has helped support consumer confidence in the face of higher interest rates. – Reuters