Johannesburg - Three days after President Jacob Zuma conceded that the South African economy was “sick”, Finance Minister Nhlanhla Nene signalled yesterday that he would slash his earlier growth targets when he presented his medium-term budget next month.
That the growth targets have to be cut reflects the precarious condition that now confronts the South African economy amid a slowdown in China, falling global commodity prices and a weaker rand. Two weeks ago the rand hit a record low of R14.06 against the US dollar before bouncing back to the R13.40 range.
Nene told Parliament yesterday, during question time to Ministers in the Economics Cluster, that he would table revised projections for economic growth during his medium-term budget policy statement.
Although he said the government was committed to boosting growth, Nene did not say how it planned to overcome the constraints that pushed the country’s gross domestic product (GDP) into negative territory in the second quarter.
Contraction
Statistics SA figures released last week showed GDP had contracted by 1.3 percent in the three months to June as such key sectors as mining, manufacturing and agriculture buckled, reversing a 1.3 percent gain in GDP in the first quarter.
In his February Budget speech, Nene said the Treasury’s forecast was for GDP growth of 2 percent this year, which was a reduction from a prior estimate of 2.5 percent.
For 2017, he forecast GDP growth of 3 percent, and pledged then to rein in government spending to bring the budget deficit to below 3 percent of GDP in two years time.
The minister came under fire yesterday from opposition parties on the poor state of the economy and over Zuma’s apparent failure to reignite the economy. However, Nene said a number of factors had led to the negative growth in the second quarter. He denied the opposition’s claims that the government was “thumb sucking” the 3 percent economic growth target until 2019.
He said the conditions had changed, and this would be reflected in the revised growth targets next month. He said Parliament was the only correct platform to articulate the policy position of government.
The government would not run the risk of gambling with the numbers, he said.
Nuclear plans
Nene also told Parliament the government was still busy with the financing model of the nuclear build programme.
He denied claims by the DA that there was confusion between the Treasury and the Department of Energy on the project. He said there was open and transparent communication on the procurement process for the nuclear build programme.
“Procurement is not done in the committee; procurement is not done in the way that you want us to do it,” Nene told the opposition parties.
He reiterated that the Treasury was looking at a financing model, and that included the issue of affordability. Critics of the programme have said it would bankrupt the country, with costs estimated to be north of R1 trillion.
Energy Minister Tina Joemat-Pettersson denied that she had signed any deal with the Russians. She said the process was open for any country bidding for the contracts. “If there is any deal that has been signed, please give me proof. I have not signed any deal,” said Joemat-Pettersson.
She said they had only signed co-operation agreements with vendor countries including Russia, China, Korea, France and the US.
The next stop will be Canada and Japan. She said she was supposed to travel to Japan last week with Deputy President Cyril Ramaphosa to sign the co-operation agreement with that country, but did not make the trip. However, she will travel to Japan and Canada at a later date.
She said the state law advisers had scrutinised all the co-operation agreements and found nothing untoward.
Joemat-Pettersson added that nobody would be favoured on the selection of the successful bidder later this year. She said the process would be clean and fair.
Meanwhile, the Treasury said yesterday that it welcomed Moody’s decision to reaffirm South Africa’s rating despite the rating agency’s credit analysis’ downbeat outlook on the local economy.
Moody’s said yesterday that it expected South Africa to avoid recession in 2015 despite signs that the economy was struggling, after it contracted in the second quarter. The agency now forecasts growth of only 1.7 percent in 2015 and 1.9 percent in 2016, with 3 percent growth unlikely before 2017 or 2018 at the earliest.
The Treasury’s GDP forecast for 2016 is 2.4 percent.
Moody’s said electricity shortages, low commodity prices, a drought and weaker-than-expected global growth would constrain the economy over the next 18 months.
“Uncertainty surrounding the Chinese economy and the broader global outlook, as well as the timing of any tightening of US monetary policy, will make capital flows more volatile and may have a considerable impact on South Africa in the second half of this year.”
However, this was already reflected in the government’s Baa2 rating with a stable outlook, Moody’s said.
The ratings agency cut South Africa’s rating to Baa2 from Baa1 in November, citing poor prospects for medium-term growth and rising public debt, but changed its outlook to stable from negative.
The Treasury said: “Moody’s decision to affirm the rating is in recognition of South Africa’s commitment to sound macro-economic policies and its strong institutions.”
In May, Moody’s warned that there was a risk of a downgrade if the government’s commitment to fiscal consolidation and stabilising debt faltered or the investment climate deteriorated further.
Moody’s said yesterday that the economy was suffering from the steep fall in commodity prices, the negative impact of which outweighed the benefits of cheaper oil.
Energy woes
“We now expect the economy to pick up only modestly this year because the drought that took such a heavy toll on agricultural output in the second quarter will further weaken growth that has already been slowed by electricity shortages.”
The ratings agency said energy constraints and weak business confidence had undermined investment and had hindered the country’s growth performance relative to most other emerging markets.
“Other challenges include a skills shortage in the labour market, economic inequality, low savings and investment rates, difficult industrial relations, over-dependence on natural resources and infrastructure bottlenecks.”
The Treasury said the government was aware the country’s economic growth performance needed to be improved in a sustainable manner and had thus made the resolution of the energy challenge an immediate priority.
Moody’s said consumer demand remained subdued due to expectations of higher interest rates and relatively high household debt levels, while investment was going through a prolonged slump.
The Treasury said maintaining a prudent fiscal position remains one of government’s top priorities.
BUSINESS REPORT