SA's economic recovery not strong, says Nene

South Africa’s economic recovery is not sustainable yet and is still relying on loose monetary and expansionary fiscal policies, Deputy Finance Minister Nhlanhla Nene said on Wednesday.

Nene’s comments suggest there is a case for delaying interest rate increases until the recovery is more broad-based.

Reserve Bank chief economist Monde Mnyande said last week monetary policy could remain favourable.

The Reserve Bank has left the repo rate steady at 5.5% this year, after reducing it by 650 basis points between December 2008 and December 2010.

The market is divided on whether the central bank will start tightening policy in the fourth quarter of 2011 or early next year. Its next meeting is on July 19 to July 21.

The economy grew by a stronger-than-expected 4.8% in the first quarter of 2011 but Nene said this was not enough.

“While this recovery is stronger than a year ago ... its foundations are not yet sustainable and it is highly dependent on support from expansionary fiscal and monetary policies,” Nene told a G20 conference on infrastructure and growth.

Manufacturing data showed production levels remained sluggish while credit growth, although rising, was also weak.

Inflation in May quickened to 4.6% year-on-year, mainly driven by food prices, raising the chance of an interest rate rise before year-end.

Although the Reserve Bank expects inflation to briefly breach its 3% to 6% target range and peak at 6.3% in the first quarter of 2012, it has said it would not raise rates solely because of cost-push pressures such as food.

Inflation has been inside the targeted band since February 2010, partly helped by a rand that has appreciated against other currencies.
The rand has gained nearly 30% to the dollar since the beginning of 2009 mainly on increased capital inflows.

Nene said on Wednesday the rand was putting pressure on the current account, leaving South Africa vulnerable to shocks.

“The rand appreciated sharply over a prolonged period, and as such this exchange rate overvaluation has exacerbated pressures on our current account deficit and increased our vulnerability to future shocks.”

The deficit on the current account widened to 3.1% of GDP in the first quarter, partly as imports rose.

For now, the shortfall has been adequately financed by capital inflows but such inflows could reverse if the global economy slows sharply.

Nene said uncertainty over the trajectory of the global economy was a risk for South Africa.—Reuters

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