(AsgiSA) Annual Report 2008 - South African Government Information

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Accelerated and Shared Growth Initiative for South Africa ANNUAL REPORT 2008 2. Macroeconomic overview To achieve the objective of halving poverty and unemployment by 2014, AsgiSA estimated that the economy would need to grow on average by 4,5% per annum between 2004 and 2009, and reach an average growth of 6% for the period 2010 to 2014. To achieve this accelerated growth, it was estimated that gross fixed capital formation (GFCF as physical investment spending) will need to grow by about 10% a year, with investment as a percentage of gross domestic product (GDP) rising from 16% to 25% by 2014. In respect of macroeconomic policy, AsgiSA argued that inflation targeting should remain a government policy to lower inflation and interest rate volatility; thereby not only reducing exchange rate volatility but also positively contributing to lowering international risk premiums. AsgiSA also argued for retaining the policy of a floating exchange rate regarding the value of currency and currency volatility, and that the fiscal and monetary authorities must explore possibilities and opportunities to reduce the currency’s volatility and ensure, as far as possible, that the level and stability of the currency supports balanced growth. This should include committing resources to support accumulation of foreign exchange reserves. Economic growth averaged 3% for the period 1994 to 2003 and averaged growth of over 5% from 2004 to 2007 – the AsgiSA period. This robust growth was backed by progressively entrenched macroeconomic stability accompanied by sound and transparent fiscal and monetary policies. This resulted in, among other things, a relatively lower inflation and interest rate environment, the closing of the forward book by the South African Reserve Bank (SARB) and a build-up of foreign exchange reserves. It is possible to question whether a more vigorous reserve accumulation strategy and a more cautious fiscal policy should have been followed, as a relatively overvalued exchange rate and rapidly expanding demand contributed to a rising balance of payments deficit, which eventually undermined our performance. Real annual GDP at market prices increased by 3,1% in 2008, following an increase of 5,1% in 2007. The slowdown in growth for 2008 is mainly as a result of the electricity emergency in the first quarter of 2008 when growth of only 1,7% was recorded and a decline of growth of 1,8% in the fourth quarter as the global economic crisis started impacting on the South African economy. While the growth target was hit for the first four years of AsgiSA, the next period will be a greater challenge. Inflation accelerated way beyond the upper limit of the inflation target range of 3% to 6% during 2008 with CPIX inflation peaking at 13,6% in August 2008, mainly as a result of higher global commodity prices, in particular energy prices and a weaker exchange value of the Rand. Since then, inflation has decelerated and is expected to be back within the inflation target range by the third quarter of 2009 as global economic growth slows down as a 6
Accelerated and Shared Growth Initiative for South Africa ANNUAL REPORT 2008 result of the financial market turmoil and the sharp decrease in commodity prices. In November and December 2008, inflation declined to 12,1% and 10,3%, respectively. The official inflation rate (i.e. the percentage change in the CPI for all urban areas at January 2009 compared with that at January 2008) was 8,1% at January 2009. It should be noted that in October 2008, the Minister of Finance announced that the new headline consumer price index (CPI) for all urban areas would become the new inflation target measure replacing the CPIX. The global economic crisis started to impact on the economy in 2008, resulting in declining economic growth recorded in the last quarter. The global crisis was preceded by a sharp tightening in domestic interest rates to counteract rising inflation, resulting in a double blow to growth. Despite the monetary tightening, the rate of investment rose sharply with real fixed investment growing at an annual rate of 10% in the third quarter of 2008 and investment reaching 24% of GDP. The AsgiSA investment rate target was virtually achieved five years early. While private-sector investment continues to grow but at a much slower pace, the growth in investment spending is mainly due to increased capital expenditure by public corporations and general government. The deficit of the current account on the balance of payments remains the Achilles’ heel of the South African economy. By 2004, when the economy’s growth rate exceeded 4% per annum, the current account moved into deficit. Largely as a result of the low interest rate environment since 2003, the rapid growth in government expenditure and an overvalued exchange rate, the surge in demand resulted in growing demand for imported goods and imported capital goods as firms expanded their production capacity and government accelerated its investment in necessary infrastructure. While exports as a percentage of GDP grew from 21% in 1994 to over 30% in 2006, growth in imports outstripped the growth in exports. The deficit on the current account of the payments balance, however, was comfortably financed as long as foreign investors were attracted to South Africa – with a substantial increase of foreign capital entering South Africa up to 2008. Most of the foreign investment has, however, been in the form of portfolio investments, mainly on the JSE Securities Exchange and in South African government bonds. Given current global economic conditions and turmoil in global financial markets, financing of the deficit is of concern and could negatively impact growth going forward. What has been learnt in the recent period is that a pro-cyclical fiscal policy along with an overvalued currency was a recipe for overheating – the South African economy would have been forced to cut back in the current period even without the global slowdown. In the next round of growth, government might prefer to try to balance the macroeconomic variables more carefully to avoid premature overheating and a stop-start growth pattern. 7
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(AsgiSA) Annual Report 2008 - South African Government Information

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