/ 21 October 2008

Manuel: ‘The thunder will pass’

The financial storm has arrived and is fiercer than anyone could have imagined, said Finance Minister Trevor Manuel on Tuesday in presenting his Medium-Term Budget Policy Statement.

However, he said, South Africa will ride out the storm due to the pre-emptive action it has already taken.

“The thunder will pass,” said Manuel.

“We saw the signs early and we took appropriate action,” he told Parliament.

“We can say to our people: our finances are in order, our banks are sound, our investment plans are in place, our course is firmly directed at our long-term growth and development challenges, and we will ride out this storm, on the strength of a vision and a plan of action we share,” he said.

He noted that the government took the “tough decisions” early.

“Yet there is no avoiding the coming storm,” he added, saying that global economic growth will slow “for several years”, South Africa’s export earnings will be negatively affected and it will be more difficult to finance the country’s investment needs.

The Treasury says in the budget statement that tough economic decisions taken early on are bearing fruit in the face of the world financial crisis.

“Early decisions on macroeconomic policy, banking regulation, the gradual approach to exchange-control liberalisation, the introduction of inflation targeting and our counter-cyclical approach to fiscal policy have enabled South Africa to benefit from the global environment, while providing a degree of protection from the worst effects of financial contagion,” it says.

It notes that South African banks do not have significant exposure to global deleveraging.

Manuel told the media in a briefing before delivering the speech that although GDP growth is seen dipping to 3,7% this year (from 5,1% in 2007) and to 3% in 2009 (then to 4% in 2010), this does not mean growth had been “slashed”.

“We have not slashed our growth outlook. Clearly, there is a very good story,” he said, noting that a small budget surplus of 0,1% has been projected for the fiscal year.

“Continuing investment in infrastructure contributes to the momentum of growth in South Africa,” he said.

The country’s prudent approach to fiscal policy had enabled the Treasury to “cushion the economy” against the worst effects of the global crisis.

Manuel noted, too, that CPI — to replace CPIX inflation as the official targeted measure of inflation –will fall into the 3%-to-6% target band in the third quarter of 2009. “Moderation of inflation must remain a central policy objective,” he said.

Manuel and South African Reserve Bank Governor Tito Mboweni have agreed that the target band for headline CPI will remain unchanged at 3% to 6%.

“Inflation targeting will remain the anchor for monetary policy,” says the National Treasury in the Medium-Term Budget Policy Statement.

Some critics have called for its scrapping and others for the target to be increased to, say, 3% to 7%. However, the Treasury pours cold water on these calls and highlights the inflation target as a reason South Africa is not being knocked as badly as it could have been otherwise.

“Inflation targeting helps to manage long-term inflation expectations by providing an appropriate anchor for monetary policy,” it says.

“The flexible exchange rate, a well-capitalised and prudently regulated banking system, low external debt, deep domestic capital markets, higher foreign-exchange reserves, sustainable fiscal policy and ongoing commitment to inflation targeting provide key anchors for improved economic performance,” says the Treasury.

Among South Africa’s key economic challenges, Manuel said, the savings rate needs to be lifted and a more export-oriented economy needs to be constructed. He also wants to see a more labour-intensive growth trajectory.

He noted that the shift to a deficit in the next fiscal year of -1,6% of GDP is “moderate” in the bigger picture and it is the early decisions on fiscal management that allow this adaptability to the changing business cycles.

Manuel made it abundantly clear on Tuesday that he has no intention whatever of tinkering with the value-added tax system — despite pressure from the left to zero-rate more foodstuffs and other items important to the household economics of the poor.

“Somewhat lower rate’
Manuel said CPI will replace CPIX inflation as the official targeted measure of inflation in February next year.

The Treasury also says in the statement that it is expected that the reweighted CPI will indicate a “somewhat lower rate” of inflation in 2008 than the present index, partly due to lower expenditure weights for food and petrol.

The Treasury says that the replacement of mortgage interest rates with owner’s equivalent rent is in line with international best practice.

“Mortgage interest costs were previously excluded from the target measure of inflation (CPIX) because changes in interest rates directly affected that measure of housing costs, resulting in a perverse relationship between headline CPI and monetary policy.

“The new measure solves that problem, enabling the cost of housing to be represented in the target measure of inflation,” says the Treasury.

The current CPI weights reflect expenditure patterns observed in 2000.

“Significant shifts in spending have occurred since then. The weight of food in headline CPI will fall from 25,7% to 14,3% and the weight for petrol will drop from 5,1% to 3,9%,” says the Treasury.

The statement (PDF)

Read the full Medium-Term Budget Policy Statement

More cash for healthcare
Manuel said that improving the provision of healthcare is to be a spending priority, with “particular emphasis on reducing infant, child and maternal mortality and broadening prevention and treatment programmes tackling TB, HIV and Aids”.

The budget statement says that expanding and improving the primary healthcare system enjoys priority in public health policy. Since the turn of the century the revitalisation of hospitals has received increased attention, and the number of staff employed in public hospitals has increased by about 30 000 in the past three years.

To help boost these trends, an additional R728-million has been recommended in the statement for the hospital-revitalisation programme to compensate for the effects of inflation and to ensure that hospitals are appropriately equipped and modernised.

R932-million has been added to the comprehensive HIV/Aids conditional grant, bringing the total planned spending on this programme to R12,4-billion over the medium term.

Another R233-million is to be added to the national tertiary service grant to deal with inflation-related increases on goods and services purchased in tertiary hospitals.

Increase in numbers of police
High among the “most pressing priorities” identified by Manuel is “investing in the criminal justice sector to reduce the levels of crime and to enable citizen safety”.

He told MPs: “Key priorities here are to further expand police numbers and to invest in investigative capacity, forensic laboratories and enhance IT network infrastructure.”

The increase in allocations to the Safety and Security Department will enable an increase in the number of police officers to more than 200 000 by 2011. There were only 131 730 police officers in 1997/98.

Spending on education will rise by 10,4% a year over the period.

Manuel’s statement points out that last year South Africa enrolled 98% of children of school-going age in school. “To ensure that this trend continues,” the statement says, “the percentage of children in no-fee schools will be increased from the current 40% of earners to 60% over the medium term.”

A new conditional grant will support the recapitalisation of technical high schools, and the purchase of equipment needed to expand the country’s skills base.

The budget policy statement also points out that the increased spending targets progress in science, engineering and technology, with increased funding being channelled in these directions.

Funding Eskom
Of the medium-term spending plans announced by Manuel, R60-billion will go to Eskom to fund its new generating plant. R10-billion will go to the power utility this year and R50-billion over the next two years.

The funding to Eskom will go as a loan, however, so interest will have to be paid on it, and in 30 years’ time it will have to be paid back.

According to Lesetja Kganyago, Treasury Director General, speaking at a media briefing in Parliament on Tuesday, the coupon on the loan will be 6,25%, based on the R209 bond. No interest will be paid for the first 10 years of the loan, but 20 years later a “bullet payment” will have to be made to pay back the entire sum to taxpayers.

Manuel told MPs that the electricity failures experienced in the early part of the year signalled capacity constraints in several areas of infrastructure, and he said that to break these constraints “we must invest more”.

“Financing these investments will be challenging,” he said. “Government will support our state-owned enterprises through providing selective guarantees on their borrowing and through increasing the capacity of our development finance institutions to contribute to funding major infrastructure projects.”

But the minister said that it is essential to price utility services “appropriately” in order to encourage more efficient use of these inputs and to generate the resources to fund greater expansion in capacity.

“We must also create a more amenable environment for the private sector to invest in economic and social infrastructure,” he said.

Other issues
The budget statement says that R1,4-billion has been set aside to cover cost overruns for 2010 Soccer World Cup stadiums.

The statement also says that R600-million will be spent on internet connectivity between the stadiums and the national backbone network.

Also, the Treasury reports that the originally estimated consolidated fiscal surplus of 0,8% of GDP for 2008/09 has been revised to a surplus of just 0,1% of GDP.

The surplus, however, then recedes into deficit territory in 2009/10 at 1,6% of GDP as tougher conditions bite.

From there it reduces to -1,1% in 2010/11 and to a balanced budget in 2011/12 — the new fiscal projection period added to this medium-term budget policy statement.

In February, a surplus of 0,6% was seen in 2009/10 and one of 0,7% in 2010/11.

“Over the past six years the fiscus benefited from rising commodity prices in the form of higher tax revenues. Over the medium term, revenue growth — in particular corporate tax collection — is expected to decline as a share of GDP,” says the Treasury in the statement.