S.African economy faces uncertainty - CNBC Africa

S.African economy faces uncertainty

Southern Africa

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South African Finance Minister, Nhlanhla Nene. PHOTO: GCIS

Minister Nhlanhla Nene indicated that this instability has great consequences for both South Africa’s government and the private sector.

“We as policymakers are struggling with difficult choices. For example, South Africa has both a wide current account and budget deficit, even though our economy has not rebounded and consumers are pessimistic about the future. This in itself is an unusual situation,” he said.  

“Any standard economic model would predict that a weak domestic economy and weakening currency would quickly result in narrowing of the current account deficit. Instead, it has remained stubbornly high. We are faced with the additional conundrum of needing to narrow these deficits, while giving continued support to the economic recovery.”

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Nene added that while the country is currently facing a period of high interest rates and lower commodity prices, there are other factors adding to the uncertainty.

“The tapering of quantitative easing is likely to continue to unsettle emerging markets. With the unresolved debt problems in Europe, the bond market is skittish, with the possibility of spiking interest rates or abrupt changes in demand for our debt,” he said.

“The uncertain outlook in China also has significant implications for the South African economy. China is our biggest market for mineral resources and a significant slowdown in Chinese growth will reduce commodity prices. The future suddenly looks very different for South Africa, in a world with higher interest rates, falling commodity prices, and changing trade patterns.”

As a result of this, Nene emphasised the importance of government’s ability to be able navigate risks associated with these global and local developments through economic forecasting.

“As we move into an increasingly constrained fiscal environment, the credibility of forecasts becomes important, and the margin for error smaller. Indeed, many EU countries are starting to adopt so-called ‘structural balance rules’,” he explained.

“Structural fiscal rules require policymakers to know the size of the output gap, and have a good sense of how the economic environment will evolve. As a result, despite their inaccuracy over the past five years, economic forecasts are likely to become an increasingly integral part of the budget process.”

He also highlighted the forecasts already published by South Africa’s economists and the role they play in the country’s budget process.

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“Our fiscal stance and expenditure ceiling are set to reflect the economic outlook, and our view on long-term potential growth. Given our limited fiscal space, and our commitment to countercyclical policy, economic forecasts are going to play an increasingly important role in our budget process,” said Nene.

“Our forecasts are often in line with those of the private sector. Where they differ significantly we interrogate the numbers to see what aspects need to reconsidered, or what additional information we may have that was not taken into account in the private sector forecasts.”