South Africa looks to ramp up growth

25 October 2011

Amid concerns over a sluggish global economic recovery and an unresolved European debt crisis, South Africa is to focus more on investing in infrastructure and boosting industrial capacity while setting up a special nest-egg fund to support growth.

Delivering his Medium-Term Budget Policy Statement in Parliament on Tuesday, Finance Minister Pravin Gordhan said that following the 2008-09 global financial crisis, the Eurozone crisis had brought new challenges and threats to global growth.

“Once again we face the prospect of declines in global trade, falling industrial demand, delays in investment, liquidation of businesses and stressed financial institutions, this time with the added risk that fiscal austerity in some parts of the world will extend the slowdown and deepen the crisis,” Gordhan said.

This year’s Medium-Term Budget sets out the fiscal and budgetary dimensions of the government’s response to the crisis, key to which is to focus spending on creating long-term public assets by investing more in infrastructure and job-creating assets.

Keeping govt wage bill in check

At the same time, Gordhan plans to reduce the growth in the government’s wage bill by keeping annual increases for public servants at five percent over the next three years.

He said public-sector wage settlements had to be balanced against the crucial considerations of the share of spending allocated to social and economic priorities such as infrastructure and social security.

Policy reserve, stimulus package

Gordhan also mooted the creation of a policy reserve, which would allow for portions of some revenue allocated to departments to be put aside in a separate account, to be drawn on in difficult times.

Added to this, he proposed R25-billion in funding over six years to boost industrial development zones and build up world-class businesses, incentivise firms to improve competitiveness, and help support job creation and training projects.

Global risks, vulnerability of exports

While global economic recovery has slowed, although moderate growth is expected over the next three years, Gordhan singled out the risk of the unresolved European debt crisis to bank recapitalisation and slow growth of the US.

The International Monetary Fund (IMF) has lowered its global growth forecast for 2011 and 2012 from 4.5% to 4%.

Gordhan said after their strong recovery last year, international trade volumes had flattened this year and added that South Africa remained heavily reliant on its traditional developed country partners of the US, EU and Japan, making exports vulnerable to a slowdown in advanced economies.

He called on exporters to improve their productivity and keep their input costs down to get more lasting benefits from a more competitive currency – which he said had fluctuated between January and October from R6.58 to the dollar to R8.25 to the dollar.

In a media briefing earlier today, the National Treasury’s Director-General, Lungisa Fuzile, said South Africa’s foreign exchange reserves were at about the right level now – at about six months worth of imports.

GDP forecast revised down to 3.1%

Meanwhile in his speech, Gordhan said growth in the domestic economy had slowed from 4.5% in the first quarter to 1.3% in the second quarter.

He attributed this to the strikes that hit the country in the middle of this year and to slower household consumption, as well as the fallout in global trade resulting from the tsunami in Japan in March.

Gross domestic product (GDP) growth is expected to increase by 3.1% this year (down from the 3.4% forecast in the Budget in February) and move up to 3.4% next year, before lifting to 4.3% in 2014, as the current global uncertainty subsides.

The jobs challenge

While revealing that the National Treasury had received 2 651 applications under the Jobs Fund, launched in June, Gordhan also pointed to the country’s worsening unemployment rate.

Only 210 000 jobs were added in the 15 months of the recovery to June this year, while unemployment had risen from 21.8% in the fourth quarter of 2008 to 25.7% in the second quarter of this year, he said.

The unemployment rate did not include the estimated 2.2-million workers who had stopped looking for work, he said, adding that much of the new jobs in the formal sector outside of the agricultural sector, were created in the public sector.

Gordhan warned that South Africa’s current projected GDP growth remained too weak to meet the employment targets of the country’s New Growth Path – to create five-million jobs by 2020.

He said measures were needed to improve capital budgets, change the way network industries operated and promote competition, while strengthening skills and education.

Inflation forecast

Meanwhile, South Africa’s inflation rate is expected to breach the 3% to 6% target band temporarily in the first quarter of next year and to average over 5.5% over the next three years.

Gordhan said rising food and petrol prices had seen inflation move from 3.2% in September last year to 5.7% in September.

Increases in prices set by government agencies was a major factor in fuelling inflation, as 14 of the 18 administered price components were above 6% – with double-digit increases in electricity, water supply, refuse collection and sewerage prices.

The ratio of household debt to disposable income, though still high, had declined from a peak of 82% in the first half of 2008 to 75.9% in the second quarter of this year.

Gordhan said low levels of credit demand, a sluggish housing market and high levels of non-performing loans, had contributed to muted growth in credit extension to households.

The Reserve Bank had, however, kept the repo rate unchanged at a 30-year low of 5.5% since November last year, he said.

Capital investment forecast

After falling 3.7% last year, gross fixed capital formation was expected to increase 2.9% this year and 4.5% next year, before moving to a 6.3% increase in 2014.

Private fixed capital investment grew at 4% in the second quarter, mainly on the back of purchases of machinery and transport equipment.

Investment in mining and communications registered the fastest growth in the first half of 2011, with overall investment growing at two percent in this period compared to the same period in the year before.

However, despite this, real investment in the second quarter of this year was still eight percent below its pre-crisis peak.

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