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A view of the South African economy in the global crisis. Chris Loewald National Treasury 15 May 2009. A sharp collapse in economic activity, driven by diverse causes.
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A view of the South African economy in the global crisis Chris Loewald National Treasury 15 May 2009
A sharp collapse in economic activity, driven by diverse causes • Defaulting assets = no credit extension to other banks, to non-financial firms, and households (interest rates near zero, e.g. US 0.25%). • Sharply reduced borrowing by consumers and firms = falling new orders and demand (production decline of 13%yoy in US and 18% in Eurozone) • Declining production = reductions in employment and working hours (US rate to 8.4%). • Falling commodity prices reverse income gains to many exporters (commodity prices down by 58% on average from peak in April 2008). • Lending & capital flows to developing world curtailed (US$165 billion in 2009 compared to $929 billion in 2007). Driven by structural imbalances (US & China), regulatory failures, overly loose monetary policy, and an unparalleled rise in household debt. … followed by trade & production collapse globally.
…severely affecting global economy as trade volumes collapse Global trade volumes … …and shipping cost 3
… and manufacturers reduce inventories under the pressure of weak demand Purchasing managers indices
… and while policy responses have been vigorous, they cannot prevent contraction Source: IMF WEO, April 2009
Africa in crisis… a very good decade at risk Channels of influence: Trade Capital flows Remittances Public finance Private sector credit • DRC, 100 000 jobs lost in smelter closures. GDP to contract by 1.5 per cent in 2009. • 42 000 jobs in Lesotho’s textile sector. • Copper = 70% of Zambia’s exports & price fall from US$9 000mt to US$3 000mt. • BLNS depend on SACU revenue for 30% to 60% of government revenue. • R6.8 billion customs shortfall between Budget 2008 forecast and estimated collection for 2008. • Export revenues losses (Botswana to decline by 50%, and 2009 budget deficit to 13% of GDP).
As global economy slows, so too does South Africa South Africa: real GDP growth 7
… driven in part by a need for households to lower debt levels Ratio of household debt to disposable income 8
… and corresponding adjustment to production Production indicators Mining production falls to unprecedented low Output declines point to further contraction in GDP growth in the first quarter of 2009. Manufacturing production at 2005 levels 9
… putting long-run employment gains at increasing risk as exports and other sectors weaken Total employment (Thousands, March QLFS) Formal sector employment by industry
Economic shock to a more resilient SA economy • Domestic economic landscape changing • Household expenditure 61% of GDP in 2008 vs long term average of 62% • Public sector expenditure 28% of GDP in 2008 vs long term average of 14% • Fixed capital formation 23% of GDP in 2008 vs long term average of 16% • Economic slowdown following four years of above-potential growth • Fiscal policy has become decidedly counter-cyclical, and remains systemically sound • Fixed capital formation benefits manufacturing, construction, electricity and transport and communications sectors • Key objective of government is set on creating long term growth potential.
With fiscal policy space to provide counter-cyclical stimulus Fiscal balances 12
… and support longer-term public infrastructure development Public sector borrowing requirement Parastatal consolidated capex and funding 13
… and offsetting decelerating private sector investment Relative rise in real fixed investment spending Investment ratio increased to 24.2% of GDP at the end of 2008. Private sector contribution to investment growth has fallen sharply as government and public sector share has risen. 14
…which sustains the large current account deficit and raises macroeconomic risks Savings and investment ratios 15
… raised further by global risk aversion and uncertain portfolio flows… short-term financing a concern Foreign portfolio flows to South Africa Foreign currency holdings of SA banks 16
… but not over a longer time horizon… measures of capacity to finance foreign & short term debt are sound South Africa: external debt to exports Short term debt to FX reserves Comparative external debt to exports (2008) 17
Feeling for the stones in South Africa • Risks to South Africa extremely high due to global fragility… need to maintain growth and financing for the current account deficit. • Deteriorating fiscal position heightens risks… higher public debt and lower GDP growth will drive up the cost of borrowing and the deficit. • Fiscal adjustment and monetary stimulus to support growth. • And microeconomic reforms & new approaches for growth & productivity. • And big issues remain… • The labour market: how to maintain people in jobs without impeding adjustment? • Exports: how to promote competitiveness and lower high costs of inputs for the economic recovery? • Public infrastructure: how to ensure we can finance our physical infrastructure sustainably?
