With the rand weakened against the US dollar this week, should we hope for genuine and sustainable growth or just a 'funny economy ' with 'funny money'?
The ANC Government saying that they were aiming to bring down the country's deficit to 4.6% by keeping interest rates low, meant that the deficit reduction promises are rather slippery at best to begin with.
It seems each time Finance Minister,Mr Pravin Gordhan,brings out a chair for South Africa to sit on in any of his budget speeches, our South African economy forgets how to stand on its own two legs. Now you'll find that after years and years of sitting down living on Government handouts…the economy has become almost paralyzed.
There are still too many unanswered questions regarding Pravin's budget. Reducing our deficit and put our country on a fiscally sound path sounds all well and good on paper and speeches made in Parliament, but you have to question the way some of his approaches were set out. More concerning is how one in four South African remains unemployed. Gordhan tells Talk Radio 702 that South African debt levels are "moderate" and aren’t a source of concern.Really,you got me all misty-eyed Gordhan.
South Africa's central bank should maintained its benchmark rate of 5.5% if the U.S. and Europe threatens to derail economic growth in South Africa. The IMF forecast for South Africa suggested that South Africa's economy was expected to expand by 3.6% in 2012,compared with the sub-Saharan average of 5.75% in 2012. Which means even though our growth is bigger than that of the European Union other developed countries,it lags behind the rest of Africa even with our current biggest economy status.
Should Jacob Zuma recapitalize South African banks with the country's public funds? That to me is the quickest way to find equilibrium levels allround.The default by Greece on its sovereign debts and their second bailout deal by the Euro zone countries,meant subsequent losses on a vast range of banking assets,because that's how its morphed into the banking crisis.
Sovereign exposure levels after the banking stress testing was done meant that certain European countries took on the banking debt of the wrong countries in the Eurozone and South Africa is feeling the full effects of that as the recession in Europe meant damping the demands for South Africa’s exports. It also meant that uncertainty over the quantity and valuation of their banks' "toxic assets" if you will, in which many of these cannot count on loans from one another to meet their daily needs and that illiquidity in the markets have impaired their ability to lend more money to households and businesses under highly adverse conditions.
South Africa should use the gold standard for the Rand. With places like Japan and the West reaching debt saturation,the world is edging ever closer and closer to reviving the Gold Standard. World Bank chief Robert Zoellick said it was time to "reconsider employing gold as an international reference point" so why not do that Gordhan?
Already some states in America has recognised gold as their legal tender for tax payments. Question though is what standard would a new Gold Standard be based on? The "Bancor" variant proposed by Keynes in the late 1940's where a basket of say 30 commodities intended were to be less deflationary than pure gold,is a start.
China,the largest producer of gold currently,revived the idea of using the gold standard when their central bank chief,Zhou Xiaochuan,said two years ago that this was a way of curbing the "credit-based" excess.
US Federal Reserve Chief Ben Bernanke was himself asked by US Congress on the role gold plays. Why do people buy gold Bernanke was asked? He replied "As protection against of what we call tail risks or really,really bad outcomes".
The euro zone debt crisis and its effects has spread to other countries that have become too big to save like Spain and Italy. Europe is hoping the €3.5 trillion rescue fund bailout would ensure the survival of its Europe’s currency,the Euro. South Africa's close economic ties to the global economy means that its growth path will be affected by outcome of results in the EU and US financial debt crisis.
Well was what was said to be expected from Gordhan's Budget speech? When you tell people what they want to hear then they'll love you for it. In this instance the Euro bailout package is exactly what the financial markets wanted to hear,but give it time lets say 6 or even 12 months down the line and you'll see a different reaction by the markets and investors.
The Rand increased by 2.9 percent to 7.7194 versus the dollar last week,as the 2nd European bailout agreement for Greece and U.S. growth spurred demand for higher-yielding assets. So the bondholders took a 50% write off on Greek debt as 1 trillion euros got pumped into a rescue fund for Europe's southern state indebted nations.
I guess the JSE should be relieved in a sense in that further stresses on the financial system brought about short and medium term stability,but then again how will it all pan out 6 months down the line when the markets have had time to fully digest the implications of such a bailout? Is recapitulation of the banks really the answer to peripheral Europe's debt crisis?One wonders!
One in Four South Africans are currently unemployed....
High unemployment in South Africa tends to be rooted in high illiteracy. It's a known fact that 90% of the unemployed in South Africa is semi-literate. Start with improving the quality of education and the success rate of post-graduates in the country to boost future employment.
Then there is the Business Sectors of South Africa. South Africa's inflation targets of between 3 and 6% are good for Foreign Direct Investment into the country which in turn are good for the economy in creating more jobs. Also having hosted a successful World cup 2010,South africa already had the property boom infrastructure which gave local people jobs at the time, but it should really continue on right now.
New and improved road construction building projects,house building projects,new schools & hospitals etc is what Gordhan had budgeted for already? There is a lot of work to be have in our country's Automobile Sector and our Car-manufactoring.
South Africa are producing and exporting container loads of cars to Europe and the rest of the World so there you have it -so many jobs just in that sector to create. Then there is also our Retail Sector.Wallmart has made huge investments into its 51% acquisition of a controlling stake in South Africa's Massmart. This has given it a beachhead into the expanding markets of Africa which should really see more people working in our shopping malls and supermarkets.
The real reason why South Africa's growth is lagging...
David Keohane of the Financial Times wrote:
"South Africa politics are stifling growth. For Jacob Zuma,South Africa’s accession to the ranks of the BRICS represented a diplomatic coup...lagging behind Brazil,Russia,India and China in terms of the size of its population and economy,but more importantly in terms of its growth rate, which has been increasingly sluggish.
South Africa is a country where economic challenges has become secondary to growing political uncertainties and if South Africa can navigate this crucial moment in its history remains to be seen.
South Africa’s political machinery is creaking fast and Zuma,whose own position at the helm of the ANC party is under huge pressure,finds himself leading a party that is rapidly shedding support of him.
South Africa’s growth is slowing. Looking at the country’s last interim budget,which forecasted 3.1% growth in 2011,down from 3.4%,while predicting 3.4% for 2012,revised down from 4.1%. These are growth rates that other developed countries would envy but aren’t high enough to tackle the soaring unemployment rate of 23.9% which Zuma has promised to address.
Since the South Africa went into a recession over a million jobs had been lost.Zuma has pledged to create 5million jobs by 2020,but that target looks increasingly unrealistic with poor infrastructure,inflexible labour laws and underdeveloped education aren’t helping either".
Gordhan said that :"...state enterprises, municipalities, and government departments all need to improve their planning and management of capital projects".
Any capital distribution plans should be based upon projected performances under the stress scenarios and these institutions mentioned by Gordhan should be required to submit their capital plans.
They must be able to demonstrate sufficient financial strength to operate as successful financial institution under stressed macroeconomic and financial market scenarios, should pass a stress test.
A bank will need to prove that it can pass the stress test even after it pays out a dividends or uses capital to repurchase shares.
References:
1.The Daily Reckoning.
2.Bloombergnews.
3.wikipedia.org/wiki/financial_intermediary.
4.www.ecb.int › Monetary Policy › Structure of the euro area economy.
5.Financial Times.
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