19 November 2008
With the full effects of the global economic crisis having yet to kick in, Finance Minister Trevor Manuel has spoken out strongly against any policy changes – such as introducing new exchange controls or abolishing inflation targeting – that would increase the cost of doing business in South Africa and drive away foreign investors.
Addressing Parliament in Cape Town on Tuesday, Manuel said South Africa had to “think carefully” about how it was to achieve its domestic goals of creating jobs and reducing poverty in the new global environment spawned by a worldwide financial and economic crisis.
Crisis ‘entering new, more serious phase’
“[W]e should be under no illusions about the fact that our economy will suffer along with the rest of the world,” Manuel said, noting that the financial crisis was giving way to a slowdown in the real economy.
South Africa had suffered only partly from the financial crisis, with well-regulated banks not dependent on foreign credit lines or exposed to “toxic assets”.
“Global economic weakness in trade and investment, however, will have more far-reaching effects,” Manuel warned. “Declining commodity prices and lower growth in major trading partners will lower demand for South African exports and reduce the income we derive from them.”
Closing the gap between the six percent economic growth rates the country aspired to, and “the realities of slower growth we are now experiencing”, would require renewed efforts to reform the economy in order to propel investment by foreigners and South Africans alike.
Renewed efforts to propel investment
“Purchases of South African bonds and equities by foreigners accounted for almost half of South Africa’s financing needs between 2002 and 2007,” Manuel told MPs, noting that the country needed about US$20-billion a year to finance its current account deficit.
For South Africa to continue to attract foreign investment, it would have to both maintain confidence in its macroeconomic policies and raise the growth rate of the economy.
“Our dependence on foreign savings can be reduced over the long term, but the only way to do this sustainably is to export more – to produce goods and services more productively and at lower cost than before and sell them abroad,” Manuel said.
“This is where economic reform needs serious engagement by South Africans to make good long-term decisions.”
Raising the cost of economic activity and restricting the country’s ability to trade was not the right path for South Africa, Manuel said. “We live in a world where our domestic industries, such as the domestic auto or metals industries, are intimately and irrevocably linked to the rest of the world.”
Any “indiscriminate dispensing of cash” to companies that lobbied for help would also not raise incomes or create jobs, Manuel said, adding that the government had made financing available for industrial policy and that it was time that “economically sensible plans” were articulated for public review.
Room for policy adjustment
“There is room for policy adjustment in a range of sectors to facilitate investment in new businesses and growth in employment, particularly in network industries.
“New power generation, greater responsiveness to environmental needs, expanding our access to advanced telecommunications, the redevelopment of water and transport infrastructure, among others, imply fertile ground for private and public partnership and new economic activity.”
Manuel said the government would press ahead with its infrastructure upgrade programmes, including the expansion of South Africa’s energy production capability and the upgrading of transport and other facilities ahead of the 2010 Fifa World Cup.
“Our good track record in financing investment in human capital – in health, education and skills development – will also be maintained.
“These commitments will help to raise the economy’s growth rate in the present as investment spending is maintained, and in the future contribute to rising potential growth of the economy.”
Improving productivity, exports, savings
In the long term, Manuel told Parliament, South Africa needed to ensure that its companies and its people were “more productive, more export-oriented, and ha[d] higher saving and investment rates. We need to be able to achieve much higher economic growth rates with a sustainable current account.”
The global crisis “enjoins us to take forward our efforts if we intend to permanently reduce unemployment, increase incomes, and lower poverty,” Manuel said.
The country’s macroeconomic policies were sufficiently flexible to address a prolonged economic downturn. “Our macroeconomic framework is sound and, because of the choices we have made in the past, we have the resources and policy space to set an appropriate response to the evolving economic downturn.
“We need, however, to address the microeconomic and regulatory constraints to more rapid economic growth,” Manuel said.
This called for renewed social dialogue and, in order to meet the country’s long-term growth and employment challenges, a broadening of that dialogue.
“Much needs to be done to achieve our aspirations of a country without poverty.”
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