SA will weather the storm - Manuel

The country's fiscal stance coupled with international reserves of US$33.6 billion, the Reserve Bank's inflation targeting regime and a floating exchange rate has cushioned South Africa against global instability.

Dominoes - US housing crash

Manuel told Parliament in his Budget Speech 2008 that America's housing market crash is worse than was initially anticipated.

“The losses due to bad lending practices in America's housing markets appear to be worse then we thought – estimates now reflect a combined loss of US$400 billion,” he said.

The sub-prime mortgage crisis in the United States, where financial institutions credited unworthy consumers with debt they couldn't afford, offset global markets causing a severe liquidity crisis.

The minister said the disruptions travelled across the global landscape rapidly, adding, higher oil prices are lowering growth prospects in Europe and Japan and raising the inflation outlook everywhere.

The finance minister explained, however, that for the time being, the cross-currents of commodity prices remain supportive of economic growth in many parts of Africa, favouring mineral-rich economies.

The signs of uncertainty in the markets is showing, he conceded, with R24 billion in foreign holdings of rand-denominated bonds and equities having been sold. Inflation and South Africa's lack of savings also makes it more vulnerable to financial turbulence.

GDP highlights

The 2008 Budget highlights Gross Domestic Product (GDP) growth of 5% in 2007, with growth averaging about 4.3% for 2008/09.

According to the national treasury, Consumer Price Inflation excluding mortgage bonds (CPIX) inflation which has risen to 7.1% in 2008 will level out and drop to about 4.9% in 2009.

The upper level of the Reserve Bank's inflation target band of 3 - 6% has been breached a number of times consecutively since the country's inflationary cycle began in June 2006.

Touching on one of the points of weakness in the South African economy, Manuel said the country's widening current account deficit has made the country vulnerable.

“...we import far more than we export – this gap, called the current account deficit, has widened to an estimated R143 billion a year.

“Part of this is because we are investing heavily in infrastructure expansion, we are importing machinery and capital goods, in addition to the imports of fuel and other goods.

“The value of our exports, although boosted by high commodity prices, is insufficient to pay for our imports,” explained the minister.

South Africa's R3 billion a week deficit is evidence of the country's low savings ratio in comparison to levels of growth.

The minister said challenges to increasing exports included skills shortages, transport capacity constraints, high telecommunication costs and tariffs that raise the price of imported intermediate and capital goods.

Article published courtesy of BuaNews