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10 Sep 2009 17:00
South Africa’s economy will probably contract by 2,1% in 2009, but recover next year, supported mainly by a strong countercyclical policy response to the global downturn, the International Monetary Fund said on Thursday.
Africa’s largest economy lurched into recession in the first quarter of this year, for the first time in 17 years, as depressed local and global demand hit mining and manufacturing.
“The short-term outlook is for output to begin a gradual recovery in the latter part of 2009, with the pace of growth next year remaining below the economy’s potential,” the IMF said in a report after consultations with South African authorities.
“Downside risks to this outlook prevail, and the economy remains vulnerable to changes in investor sentiment, particularly in light of the projected current account deficits.”
The Fund said in its Article IV report South Africa’s monetary policy stance had been appropriate, but that there might not be any more room for further easing given increased inflation risks.
The central bank has cut interest rates by 500 basis points to 7% since December last year as the economy struggles, completely unwinding rate increases in the two years to June 2008 that were aimed at combating inflation.
“The scope for easing may have been exhausted if inflation is to be brought within the target range by end-2010, as the authorities intend.”
Targeted consumer inflation has persisted above the top end of a 3% to 6% band since April 2007, and was at 6,7% year-on-year in July.
The IMF said inflation would slow through the third quarter of 2009, then pick up again on rising energy prices.
Thumbs up for inflation targeting
The central bank’s inflation targeting policy, criticised by South Africa’s powerful labour unions, was critical for the transparency of monetary and the bank’s effectiveness in anchoring inflation expectations.
The IMF said there were risks to the medium-term fiscal position, particularly if complementary reforms to improve public service delivery and enhance efficiency in infrastructure provision were delayed.
The government has previously said it would use counter-cyclical measures such as fiscal and monetary stimulus to help set the economy up for a faster recovery.
“The [South African] authorities ... acknowledged the risks to their medium-term fiscal position, but emphasised that they intend to run a disciplined and pragmatic fiscal policy,” it added.
In response to the report, South Africa’s Treasury—which has indicated it expects the budget deficit to widen more than the previously forecast 3,8% of GDP—reiterated it will limit debt to less than 50% of gross domestic product.
It stood at 34,4% of GDP at the end of March 2008, but is likely to rise sharply this year due to a big jump in borrowing.
The IMF said an assessment of the level of the exchange rate suggested the rand was moderately overvalued, although there was a considerable range of uncertainty around this.
The rand has strengthened more than 2% against the dollar over the past week, partly aided by data showing South Africa’s nagging current account deficit narrowed sharply to 3,2% of GDP in the second quarter of this year from 7% previously.
The fund said the current account shortfall was seen at 6% of GDP in 2009, and would widen again in the medium term.
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