SA waits anxiously for Manuel's Mid-Term Budget
With the world economy in trouble and the Rand suffering some of its biggest loses in recent years, South Africans will be waiting anxiously to see what the Mid-Term Budget holds.
Finance Minister Trevor Manuel, will deliver the Mid-Term Budgetary Policy Statement (MTBPS) to Parliament on Tuesday, amid high inflation, a weak Rand and a diminishing economic growth rate.
In a risk aversion strategy, international investors are pulling their money out of emerging markets and reinvesting in so-called stable developed markets.
As fears of a global recession start to set in, demand in commodities such as gold, platinum and oil has dwindled significantly, causing local commodities prices to plummet.
Despite a dramatic drop in the price of crude oil from record highs in June 2008, the poor performance of the Rand against the Dollar has removed all possible gains as less oil can now be purchased for those Rands.
More for less
South Africa is, due to the weakening Rand, now paying more money for less capital goods than in the past, further widening the current account deficit.
Capital goods are being sourced from oversees to help the South African government implement its massive infrastructure projects ahead of the 2010 FIFA World Cup.
Commenting on the current account deficit in his Budget Speech in February 2008, Manuel highlighted that volatile markets often put the local currency under great pressure having to absorb much of the damage.
"One of the points of vulnerability in our economy is that 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," said Manuel.
Volatility caused by current account deficits
Econometrix Treasury Management (ETM) economist George Glynos told BuaNews earlier this year that the danger of such a big current account deficit translated into volatility in the Rand causing unstable price environments in the country.
“It is negative for growth and adds inflationary pressure," said Glynos.
While the rising price of food and fuel as well as the global liquidity crisis will still feature prominently in the MTBPS, many challenges that were identified in February 2008 still persist.
Some of these challenges identified by the minister include skills shortages, transport capacity constraints, high telecommunication costs and tariffs that raise the price of intermediate and capital goods.
The National Treasury allocated an extra R11 billion to public transport funding over the next three years ahead of the world cup, but due to material price escalation, the figure could very well increase.
SA faring better than most
While the country and the rest of the world is facing the biggest financial crisis since the 1929 Wall Street crash, South Africa is faring much better than most due to prudent macro-economic policies and responsible banking institutions.
When the markets settle down and foreign investors flood back to emerging markets, economists believe South Africa will be well placed to take advantage of the rush back to riskier pastures.
ETM economist Russell Lamberti told BuaNews that when investment and growth opportunities in the developed countries have dried up, investors will then return to developing countries.
"Investors with increased risk appetite will return to emerging markets and South Africa is structurally well placed to take advantage of this," Lamberti said.
Article published courtesy of BuaNews
