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S Africa’s economic weakness revealed through global economic woes

24th February 2016

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

  

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The deepening global economic crisis has exposed South Africa’s weaknesses, the depth of the nation’s external vulnerabilities and the internal constraints that limit its potential for growth, the National Treasury said on Wednesday.

Unpacking the 2016 Budget, Finance Minister Pravin Gordhan explained that the plunging oil price, exacerbated by significant declines in South Africa’s major exports, particularly commodities, had lowered the country’s export earnings and revenue, while leading to job losses, business failures and declining investment.

Further, the period of unprecedented monetary stimulus following the 2008 recession was not yet over and global volatility and structural imbalances were far from being resolved, leaving South Africa vulnerable, highlighted the review.

Government revised its medium-term expenditure framework in a move to mitigate the impact of the deteriorating global conditions and a weaker domestic economic outlook, with Gordhan saying he believed the 2016 Budget proposals would speed up fiscal consolidation and narrow the budget deficit faster than proposed in October’s mid-year budget.

However, the measures proposed in the 2016 Budget would require South Africans to share the “burden of a necessary adjustment” to protect the health of the public finances and “set the stage” for faster, more inclusive job-creating growth as conditions improved, said Gordhan.

“All the choices before us are disagreeable, some more than others. Drawing on the country’s resilience, it is necessary to make tough decisions,” he said of the revised budget, which stipulated tax increases and spending reductions to narrow the fiscal deficit and stabilise growth of public debt, as well as public- and private-sector contributions to development.

The National Treasury showed that South Africa’s gross domestic product growth rate, at 0.9%, had fallen behind the rate of population increase, resulting in declining per capita incomes and, in effect, making the average citizen poorer.

South Africa’s slowdown was expected to continue in 2016, with low commodity prices, heightened financial market volatility and diminished consumer and business confidence weighing heavily on the African country’s economic outlook.

Further, a severe drought had led to declining agricultural output and food price inflation, while constrained electricity supply continued to limit growth and deter fixed investment.

Some industries had leveraged a weak currency to boost exports, with the rand depreciating 30%, though South Africa’s current account deficit remained “stubbornly wide”, with any advantages of a weak rand eroding if inflation – which was already under pressure – accelerated.

However, Gordhan assured that the “institutional foundations” of South Africa’s economy remained resilient, with an effective macroeconomic policy, well-capitalised banks and financial institutions, liquid rand-denominated debt markets and an inflation-targeting framework providing an anchor for price and wages.

“In the numbers, there are indicators that an economic turnaround is possible if we build confidence and make the right choices,” said Gordhan, adding that government, which was working more closely with the private sector, trade unions and civil society, was taking “determined steps” to restore confidence in the economy and address structural constraints to economic growth.

“Government recognises the need to boost confidence and strengthen investment, including by promoting co-investment in capital projects, and improving policy certainty and the ease of doing business. Over the period ahead, government will strengthen its partnerships with the private sector, labour and civil society to speed up the economic transformation envisioned in the National Development Plan.”

Gordhan noted that public-sector spending would reach some R865.4-billion, with major public–private partnerships expected with independent power producers in gas and coal over the next several years, boosting investment and energy supply.

“These and other measures are needed to enable the economy to grow more rapidly as economic conditions improve. Over the medium term, fiscal measures to narrow the budget deficit and stabilise the growth of public debt, complemented by the inflation-targeting framework, will contribute to renewed confidence and greater investment,” he concluded.

Edited by Creamer Media Reporter

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