ANNUAL REPORTS

Macroeconomic overview continued
momentum as the year progressed. Other constraining
factors were the strong currency, which affected the
competitiveness of the local industry in general; weak
economic conditions in Europe, an important trading partner;
and poor employment growth after substantial job shedding
since 2009, which added to the high levels of structural
unemployment. This underscored the contrasting conditions
between those in formal employment who were able to secure
significant real wage increases and those without jobs who
experienced increased financial stress and deepening
poverty. It underlines the need for a growth path for the
economy that can deliver faster and more inclusive growth
on a sustained basis. It is only through greater job creation
that sustainable incomes can be generated to reduce
poverty and inequality. In this context, the five priorities of
government target massive job creation in the next ten years,
through a number of mechanisms, to raise the rate of growth
and labour absorption.
Significant increases in global commodity prices, combined
with above-inflation wage settlements and increases in
administered prices for fuel, electricity and other local
government services potentially posed inflation dangers
to the economy. In the event, however, the strong rand,
underpinned by strong inflows of portfolio investment from
abroad, effectively shielded the domestic economy from
the worst of the offshore cost pressures. A lack of demand
pressures in the domestic economy further supported low
inflation, enabling the monetary authorities to continue to
facilitate the economic recovery through low interest rates.
However, if the rand weakens, fuel prices remain high and
the mooted administered price increases go ahead, the
economy faces significant inflation dangers; the monetary
authorities might well raise interest rates sooner than would
otherwise have been the case.
The DBSA
The DBSA’s operating environment continued to present
substantial challenges. In some respects, the global recovery
and better economic conditions in South Africa and the
region assisted the Bank. However, the sectorally and
spatially unbalanced nature of the recovery in South Africa
and deeply rooted structural challenges in the DBSA’s
mandate space made for a difficult environment in which
to achieve ambitious objectives.
On the positive side, the better performance of many SADC
economies and the favourable regional fundamentals after
a difficult 2009/10 improved the climate for the Bank’s
regional investment activities. Returning risk appetite among
global investors and a positive outlook for emerging markets
and commodity-producing countries improved investment
inflows to the region. Significantly improved liquidity in global
financial markets assisted with access to capital markets,
although the return of the corporate sector to the global
markets widened the investment options for investors and
introduced more competitive issuance dynamics into the
primary capital markets.
In South Africa, the need for accelerated investment in social
and economic infrastructure remained pressing. However,
the Bank’s performance was constrained by a number of
factors. These included the uneven economic recovery,
which affected the financial position of many public and
private sector clients; the structurally weak financial position
of many municipalities; low interest rates, which negatively
affected interest income from the Bank’s investments; and,
most importantly, the lack of institutional capacity at various
levels of government to plan, fund and execute infrastructure
projects. This last factor in particular contributed to the
operational challenges faced by the Bank in accelerating
its public sector lending. As a result, the Bank made a
considerable effort to address these problems through
research, capacity building and assistance with programme
development and project management.
In the year ahead, the global economic recovery should
continue, but in all likelihood, at reduced momentum. Recently,
downside risks to the recovery have been rising owing to
escalating sovereign debt and fiscal difficulties in Europe
and the United States. Business and investor confidence
are being impacted in the process, governments are
facing further difficult policy and political dilemmas and the
resilience of the global financial system is being tested once
again. This in a situation where high commodity prices, in
particular energy and food, have already impacted negatively
on global growth, and overheating risks in the key economies
driving the global recovery have elicited policy tightening
and resultant easing growth. Global financial markets
remain fragile and over the next two years will be tested by a
series of large, crisis-related debt rollover thresholds. In this
setting, economic performance in sub-Saharan Africa
is nevertheless expected to remain favourable, but in
South Africa it is likely that the economic recovery will be slow
to gain progressive traction.
For the DBSA, operating conditions in South Africa will remain
difficult, given the challenges of securing a flow of bankable
infrastructure projects from the public sector. The Bank will
continue to support the government in policy and strategy
development, project and programme development and
management, and skills development in the public sector.
Continued low interest rates will affect interest income for
much of the year, although rates are likely to rise before
the end of the financial year. Furthermore, the Bank’s
operating expenses are likely to remain under pressure as
administered prices, in particular energy prices, contribute to
higher input costs.
24 DBSA DBSA | ANNUAL | ANNUAL REPORT REPORT 2010/11 2010/11