Daily News Articles for the General Sector, 2008

Linda Ensor, Business Day
Political Correspondent

CAPE TOWN — The government was building up a “cushion” to ensure that SA benefited from globalisation and was protected from global financial market turmoil, Finance Minister Trevor Manuel said this week.

However, he warned that the current account deficit — currently at 6,2% of gross domestic product — was a source of vulnerability, especially if there was a significant slowdown in global growth that resulted in a rapid fall in commodity prices.

The government has budgeted for a surplus of 0,3% in the current fiscal year and is planning for another 0,6% next year before moving to deficits in subsequent years. This year’s surplus could be higher than originally anticipated if, as expected, revenue inflows exceed forecasts as in the past few years.

Speaking at a dinner of the University of Stellenbosch Graduate School of Business on Wednesday night, Manuel said the macro underpinnings of the South African economy remained sound, with growth remaining broad-based and investment rising.

“Countries with solid macro-economic fundamentals are better placed to weather the market storm than others. In particular, those with high foreign exchange reserves and current account surpluses, as well as those with flexible exchange rate regimes, inflation targeting and responsible fiscal management, are likely to perform better.

“Fiscal and monetary policies are also flexible enough to address negative economic shocks should they occur. Prudent budgetary decisions have created fiscal space and resources for countering negative shocks.”

The accumulation of foreign exchange reserves significantly reduced SA’s external vulnerability and local banks had indicated that they had little or no exposure to the subprime lending market in the US or to hedge funds with subprime assets.

Manuel suggested that the current market correction could be part of a process of reducing the scale of global imbalances. This would require a combination of slower US consumption growth, a weaker dollar, a slower build-up of savings in emerging markets and a repricing of Asian exchange rates. It would also result in reduced capital flows to emerging markets.

“As this process unfolds, various markets will experience volatility, especially those that have exhibited asset price inflation in recent years. We need to recognise that while the process of rebalancing will lead to temporary changes in global growth, an orderly unwinding of imbalances is necessary in order to maintain the unprecedented strong global growth path over the longer term.”

Addressing the National Assembly on Wednesday, Manuel said the government had no intention of seeking Parliament’s approval for special appropriations unless this was “absolutely necessary”. He was speaking in the first reading debate of the Special Adjustments Appropriation Bill, which allocates a total extra amount of R5bn to Sentech, the Pebble Bed Modular Reactor, Alexkor, Denel and the Land Bank as well as for the fast-track construction of the stadiums for the 2010 Soccer World Cup.

Manuel said the money was urgently needed to meet the cash requirements of the institutions and could not wait until the normal Adjustments Appropriation Bill, which would be tabled in Parliament next month.

He expressed disappointment at the outcome of the government’s attempts to focus the activities of some state-owned enterprises and development finance institutions to ensure their financial stability. A lot more work had to be done to improve the quality of management and strategic direction of these enterprises. However, the government had an obligation as the shareholder to ensure these entities did not engage in risky financial arrangements that would inevitably cost consumers more in the long term.

Parliament’s finance committee was not entirely satisfied with the appropriations. However, the Democratic Alliance and Inkatha Freedom Party decided to support the bill because of the urgent need for the funds.