South Africa: Mini-Budget Must Speak to Global Developments

The upcoming Medium Term Budget Policy Statement (MTBPS) must reinforce what the country can do to cushion the negative impact of developments in the world economy.

“Given the uncertain global economic outlook, the MTBPS must reinforce what SA can do to cushion and adapt to the negative impact of actual and potential developments in the world economy,” Business Unity SA’s Economic Policy Committee said on Thursday.

Overall, it said household spending remained weak and consumer and business confidence were at low levels, while private fixed investment was also slow.

Finance Minister Pravin Gordhan will present the mini-budget on 25 October.

“BUSA does not yet see overwhelming evidence of a sustainable recovery in economic activity. With world growth forecasts being regularly revised downward – and although emerging markets are expected to do better – the SA economy has thus also experienced a loss of momentum.”

BUSA revised its growth forecast for 2011 from 3.4 to 3.1%, which does not augur well for large scale employment creation. It added that the country’s resources and strategic focus should remain concentrated on strengthening the domestic economy, while also reducing the costs of doing business in South Africa.

“The MTBPS therefore comes at a difficult time this year when markets remain nervous over government budgets worldwide. The key factor for business confidence is credibility. There need to be credible forecasts in the MTBPS for the economic outlook, as well as a continued clear path to fiscal health,” explained BUSA.

BUSA said fiscal policy should be growth-enhancing, with an emphasis on enterprise and job creation, while state spending must be made more effective.

“This will need to be a tough but essential message in the MTBPS, given the weak global and domestic economic climate – but is necessary for predictability and sustainability in the fiscal outlook. SA’s excellent reputation to date for fiscal discipline will stand the country in good stead in this challenging period.”

For monetary policy, interest rates – which were unchanged at 5.5% in September – will need to remain low for longer, probably well into 2012, while a further cut “may become necessary soon.”

“If SA inflation is seen as mostly target-bound and driven by exogenous factors, and taken together with slow global growth, interest rate trends elsewhere, as well as SA’s sub-optimal growth and employment performance, there could be a case for another interest rate cut in November.”

BUSA added that other appropriate policy interventions may have to be considered depending on global and internal developments in the near future.