Despite global economic turmoil, South Africa’s economy remains robust and the longer-term outlook favourable, Finance Minister Trevor Manuel said on Wednesday.
“It is time for neither gloom nor panic,” he said in his 2008/09 budget speech to the National Assembly.
“The prudent fiscal stance, international reserves of $33,6-billion, the inflation targeting regime and a floating exchange rate cushion us against shocks and reduce pressure on interest rates.”
Government had taken these decisions early and implemented them when times were good.
“We took them in the face of some severe criticism, even in this House.
“It is precisely because of the macroeconomic policies put in place since 1996 and the fiscal stance in operation that we can be confident that we will weather this storm,” Manuel said.
The South African economy had expanded continuously since September 1999.
Its pace of growth slowed slightly in 2001 and 2002, and since 2003 grew by an average of 5% a year — the longest continuous period of growth on record.
Per capita GDP increased by over 20% since 2000 and during the past five years, employment had increased at a faster pace than at any point in the past 20 years, adding over 1,5-million jobs.
‘Neither gloom nor panic’
“As we present a picture of where we are now, we must also tell South Africans and the world that our ship is stronger and we are better prepared than during previous episodes of global turmoil.
“It is time for neither gloom nor panic. But the course ahead will be somewhat tougher,” he said.
Investment in fixed capital expanded rapidly in 2007, and would remain a key support to GDP growth over the medium-term, driven by widespread public-sector infrastructure development and its effect on private investment and capacity.
Spending on energy intensive projects might be deferred over the medium-term, but growth in fixed capital formation was expected nonetheless to average near 10% over the next three years.
Food price increase
Turning to inflation, Manuel said, during the course of 2007, food prices increased by over 10%.
It was a global problem and the prices of basic foodstuffs — maize, wheat, soya beans and rice — had increased as a result of changing climatic conditions and rising demand.
Supply constraints for goods such as cement and refined petrol and diesel added to inflationary pressures, pushing up inflation to 8,6% in December last year and an average of 6,5% in 2007.
As was always the case when inflation rose, the poor had been hardest hit.
“While we may debate the best method of fighting inflation, there can be no doubt in the minds of caring South Africans that rising prices must be countered and that this must remain the key objective of monetary policy.
“The steps taken by the Reserve Bank to bring down inflation are working. Inflation is projected to fall within the target range by the end of this year and to average 4,9% in 2009.
“A policy stance that accommodates higher inflation cannot be consistent with a government that is intent on reducing poverty,” Manuel said.
Imports exceed exports
One point of vulnerability in the economy was that imports far exceeded exports.
The current account deficit, had widened to an estimated R143-billion a year.
“Part of this is because we are investing heavily in infrastructure expansion, we are importing machinery and capital goods, in addition to the imports of fuel and other goods.”
The value of exports, although boosted by high commodity prices, was insufficient to pay for imports.
“The South African economy evidently has a savings ratio that is too low to support our levels of growth. This gap, of almost R3-billion a week now, has to be financed by savings from abroad.”
The current account deficit made the economy more vulnerable, especially during times of stress in global financial markets.
“Our ability to continue boosting investment to drive long-term growth therefore depends on increasing savings and expanding exports.”
Further progress was needed on the microeconomic policy front to address this macroeconomic imbalance.
Barriers to faster export growth included skills shortages, transport capacity constraints, high telecommunications costs and tariffs that raised the price of imported intermediate and capital goods.
“These are challenges we need to address jointly with all stakeholders — business, labour, government and regulators; for the process of discovery of microeconomic solutions is at least as important as the decision itself,” Manuel said. – Sapa
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