Chris Vellacott and Sujata Rao London
SOUTH Africa was likely to cut its 2014 growth forecast next week but the government did not expect the economy to slip into recession, Finance Minister Nhlanhla Nene said yesterday.
The country is feeling the impact of a slowdown in key market China and a fall in mining output, due largely to labour unrest.
It is also seen as vulnerable to an expected tightening of monetary policy in the US, which could raise the cost of financing its high budget and balance of payments deficits.
“The conditions under which we tabled the Budget in February have deteriorated, so we are likely to see some downward revisions,” Nene said on the sidelines of an investment conference organised by the Financial Times in London. “We are only being realistic.”
He ruled out a recession, however. “Growth will be slower than expected, but won’t be in the negative.”
The government’s forecast is for growth of 2.7 percent this year, with a budget deficit of 4 percent of gross domestic product.
The economy grew 0.6 percent in the April to June quarter on a quarter-on-quarter annualised basis, narrowly averting recession in the second quarter after contracting 0.6 percent in the first quarter.
Nene will present his debut Budget statement next week. His comments confirm expectations he will cut economic growth forecasts while predicting a wider budget deficit.
But he said the counter-cyclical fiscal policy in place allowed a measure of flexibility, meaning there would be some room to boost spending on essential items.
“The countercyclical fiscal policy allows our deficit to grow to be able to protect expenditure on our imperatives… we are moving in a direction to restrain expenditure in some areas but we need to look at revenue-raising measures (and) also ensure we protect the poor and vulnerable.”
President Jacob Zuma’s government is struggling to deliver convincing economic growth to lift millions out of poverty and to reduce unemployment. The country may face more labour unrest after the longest mining strike in its history ended in June.
Public sector unions are demanding a 15 percent salary hike and have said strikes were possible if their demands were not met. The government is expected to respond next week but Nene has warned that a high wage settlement could “compromise headcount”.
Nene said: “We can only accommodate their demands within a tight envelope… Hopefully, we will reach a settlement that takes into account the restrained fiscal environment we find ourselves in.”
South Africa is one of the economies that were hardest hit last year when the Federal Reserve suggested it would start to unwind its money-printing programme. The Fed is now on track to raise interest rates from 2015, raising fears that South Africa, Turkey and other countries will find it tough to draw in cash from foreign investors with which to finance their hefty balance of payments deficits.
The rand has fallen 5.5 percent this year versus the rising dollar after a far greater depreciation last year.
Nene said hard times should be seen as an opportunity to reform and build resilience. South Africa was doing that by investing in infrastructure, he said, adding that a recent fall in oil prices was also likely to help the trade balance.
“Just as we benefited from capital inflows, we will also take the strain now. We have to take into account [the Fed has] an economy to run so we actually have to build our own resilience mechanisms… Rather than complain about the spill-over effects, we should be looking at how we insulate ourselves as an emerging economy.” – Reuters