(AsgiSA) Annual Report 2008 - South African Government Information

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