SA ‘must keep investing in growth’

21 October 2008

While South Africa was hoping to maintain its five percent economic growth rate in 2008 and 2009, global economic conditions had forced the downward revision of expected growth, Finance Minister Trevor Manuel said in Cape Town on Tuesday.

Delivering his medium term budget policy statement – a three-year guideline to government spending – in Parliament, Manuel said projections for South Africa’s output growth in 2008 and 2009 had been revised downward to 3.7% and 3% respectively.

“Depending on international developments, gross domestic product growth is expected to recover to above 4 percent in 2010 and beyond.”

Economic growth in the seven richest countries, which make up half of world economic output, may well be zero or negative next year, he indicated. Overall global growth is expected to fall from 5% in 2007 to 3.9% this year and could even drop as low as 3% in 2009.

“The world is experiencing a financial crisis on a scale not seen since the 1930s,” the minister told Parliament. “The prospects for global growth are poor and the short-term outlook is clouded by uncertainty.

“However, South Africa’s longer-term economic expansion rests on sound economic policies, healthy public finances and resilient financial institutions.”

The healthy state of South Africa’s financial sector relative to that of the United States, Germany and Britain, among others, would help the country escape the worst effects of the global economic downturn, Manuel said.

However, decreasing export demand, financial volatility, exchange rate fluctuations and uncertain economic conditions in the future would have an affect on South Africa’s economy.

“The proposed fiscal framework for the 2009 Budget takes into account both slower economic growth and the need to support continued infrastructure investment and social development in a context of heightened uncertainty,” the minister said.

Manuel noted that South African consumer inflation has been outside the Reserve Bank’s inflation target band for over 15 months. This high inflationary environment has forced the Bank to raise interest rates, which has also had an effect on economic growth.

Further pressuring GDP growth was the Eskom debacle, which cost the South African economy billions of rands in lost revenue after unscheduled blackouts in January and February significantly disrupted business, especially mining, operations in the country. The country’s GDP plunged to 2.1% in the first quarter following the power disruptions.

Delivering his Budget Speech in February, Manuel had predicted a budget surplus of about 0.6 percent, but this figure was likely to drop in the face of decreasing consumer demand for goods and the resultant decrease in Valued Added Tax (VAT) revenue for government.

“The South Africa economy has grown by an average of 5 percent a year for the past six years. During this period, investment increased from about 15 percent of GDP to more than 22 percent. The unemployment rate declined from about 29.3 percent in 2003 to 23 percent today.

“Nevertheless, employment is still unacceptably high, and a critical objective of an economic policy over the next five years is to create work opportunities,” Manuel said.

For the creation of jobs, however, the South African economy needed to grow, as well as to refocus on developing more labour-intensive projects.

In order to foster greater GDP growth, the government was committing funds to improve South Africa’s competitiveness globally.

“It is important to recognise the causes and consequences of South Africa’s aging physical infrastructure and poor skills base,” Manuel said. “Decades of underinvestment in physical infrastructure, from electricity generation to water supply, roads and rail have constrained the economy’s ability to grow more rapidly.”

Decades of apartheid education, and limited progress in improving the quality of post-1994 education, had reinforced skills shortages that likewise inhibited economic growth.

The 2009 Budget, he said, would see further resources allocated to employment-intensive programmes in the public sector, as well as incentive programmes for private employers and non-governmental organisations to use more labour-intensive methods.

Navigating through such a changed economic environment would be a tough challenge, the minister said, but the government would continue to expand and improve public services, and invest in the infrastructure needed for growth.

Source: BuaNews