Finance Minister Trevor Manuel understandably celebrated South Africa’s economic fortunes and placed a surprisingly high degree of faith on the global economy. Unveiling his 10th Budget this week, Manuel restated the government’s widely praised sound stewardship of the economy.
This time last year, the government expected the economy to grow by 4,3%. Estimates from Statistics SA show the economy grew by about 5% in 2005. The South African economy is expected to grow by 4,9% this year, dipping to 4,7% in 2007 before reaching 5,2% in 2008.
Manuel was surprisingly optimistic in his assessment that the global economy is expected to grow by 4,3% over the next three years. This is against the backdrop of sluggish European and United States economies and a stand-off with Iran that threatens energy prices.
The most heartening aspect of Manuel’s sentiment is that of the South African economy grounded in the reality that nothing lasts for ever. On commodity prices, for instance, the minister noted that these will stay at current levels for the year ahead, perhaps for several years, “but one day, they will retreat”. In dishing out tax relief, he also noted that the bountiful corporate profits that yield revenue overruns are temporary and cyclical.
The strong rand has enabled South Africa to hoard imported goods. This has led to a widening current account deficit, which currently stands at 4,3% of gross domestic product (GDP). The South African export sector has shown remarkable resilience in the face of a strong rand. Last year, exports grew by 12% and are expected to grow by 6,7% over the next three. Last year, the value of imports grew by 14,8%
The deficit is frequently pointed to as a likely source of future rand weakness, especially if sentiment on emerging markets turns and foreign inflows dry up. That is a distant thought because last year net inflows of foreign direct investment stood at R35,7-billion.
Manuel urged moderate consumption. Household consumption has been a driver of growth for the past five years, contributing 2,6% to GDP between 2000 and 2004. Over the same period, investment contributed 1%.
That is why investment in skills and infrastructure is expected to be the new driver of growth. Investment in skills development is projected to grow by between 9% and 10% over the next three years. But a real boost will come from infrastructure investment, which is expected to grow by between 10% and 15% over the next three years.
On unemployment, Manuel may have touched a raw nerve, but he did not make light of the issue. He used contested figures, devised by the economist Mike Schussler, to suggest that the economy may be creating 1 500 job opportunities a day. Schussler based his figures on new unemployment insurance registrations, but the figures remain controversial.
Between September 2001 and September 2005, the narrowly defined unemployment rate, one that excludes discouraged work seekers, fell from 29,4% to 26,7%.
In that period, the economy’s labour absorption rate rose from 39,8 % to 41,4%, yet the labour force participation rate remains virtually unchanged at 56%. This supports the view by a number of economists that the economy is creating jobs, but not fast enough to keep up with new entrants into the labour market.
The Extended Public Works Programme remains a key component of the government’s job creation focus. Over the next three years, the programme will benefit, along with the Construction Industry Development Programme, and form an allocation that will rise from R98,8-million to R113,3-million.
The Department of Public Enterprises has a few headaches of its own to deal with. It will recapitalise the beleaguered Denel to the tune of R2-billion and also inherited the responsibility of driving the controversial Pebble Bed Modular Reactor, to which it will transfer R580-million.
The Department of Trade and Industry will recapitalise the National Empowerment Fund by about R400-million a year over the next few years. But the department is yet to convince a sceptical economic community that the piecemeal development of industrial policy is having any impact.
The department says that between 2003 and 2008 it expects spending owing to its incentive programme for small-and medium-enterprise development to rise from R579-million to R1,9-billion. This year, it expects to spend R50-million on a new incentive scheme on outsourcing programmes.
Manuel acknowledged the spending capacity constraints that have hampered infrastructure investments. To overcome this, his department is overseeing a programme to support provinces and municipalities in construction contract management, while the Development Bank of Southern Africa will help with implementation.
Debt as a percentage of GDP currently stands at 30,8%, making South Africa the envy of many economies. The cost to the state of servicing the debt, is currently at 14%, down from 24% in 1998 and set to reach 10% by 2009.
The economy in 2005
Final household consumption 6,7%
Final government consumption 4,9%
Gross fixed capital formation 8,0%
Gross domestic expenditure 4,8%
Exports 12,6%
Imports 10,9%
CPIX (Metropolitan and urban,
average for year) 3,9%
Current account balance
(percentage of GDP) 4,2%
GDP at current prices R1 518,9bn
Real GDP growth 5,0%