|
US recession not worst enemy
14/04/2008 22:36 - (SA)
Cape Town - Mishandling the power crisis and electricity tariffs could do more harm to the economy than an American recession, academic Raymond Parsons said on Monday.
It was also wrong to expect an imminent recession, Parsons, who is business convenor at the National Economic Development and Labour Council, told the Northern Cape Chamber of Commerce and Industry.
"The only recession SA will experience is the one we talk ourselves into."
Decisions on electricity tariffs, including a 60% "price shock", could not be taken in isolation from their impact on the economy as a whole.
While Eskom tried hard to do the right thing, "it keeps coming out wrong".
Parsons, professor in economics at Pretoria University, called for strong political leadership and for credibility in decision-making around the electricity crisis to be restored.
Turning to the country's political outlook, Parsons said it would be unrealistic not to expect policy changes or a shift in emphasis following next year's general election.
"Post [the ANC's national conference in] Polokwane, the markets have already begun to factor in the possibility that Trevor Manuel may not stay on as finance minister, although eventual market reaction will be strongly influenced by whether a new appointment reflects a serious shift in macro-economic policy."
If Manuel left, the test of his successor would be whether he or she could successfully build on South Africa's macro-economic track record. It was crucial to maintain the confidence of non-resident investors, so that they kept putting their money into the country, which would finance the current account deficit.
2008 tough for business
Despite the current economic slowdown, the next finance minister would inherit a "very sound fiscal balance sheet", which the markets and economists would not like to see jeopardised.
While South Africa was vulnerable to global financial turbulence, it had shock absorbers in the form of a prudent fiscal stance, $34bn in international reserves, low external debt, a sound banking system, an inflation targeting regime and a floating exchange rate. High commodity prices acted as an extra safety net.
The country's potential Achilles heel was its large current account deficit, which meant that South Africa imported more than it exported.
Although it could narrow this year, the deficit still had to be financed at a time when foreign investment in South African shares and bonds had slowed to "almost nothing" and even been negative in recent months.
The present year would be tough for business and consumers and the country's economic performance would likely get worse before it got better. Growth was likely to decline from five percent in 2007, to between three and four percent. Inflation was at a five-year high of 9.4%, with food and energy prices being the main culprits.
Inflation was expected to return into the three to six percent range - electricity prices permitting.
"There are two windfalls for SA this year - high export prices and an excellent agricultural season," he said.
Growth prospects would now depend, to a larger extent, on the government's development of infrastructure.
Not another Great Depression
It should be assumed that interest rates would remain "relatively high" for the time being, and perhaps for longer than anticipated.
Parsons said there was a 50/50 chance that interest rates had peaked.
On the world economy, Parsons said the serious problems that existed internationally and which were causing a global economic slowdown, need not become another 1929 Great Depression, if properly handled.
The current dynamism and resilience of emerging economies meant that although the US economy still mattered, it did not matter quite as much as it once did.
It appeared as if the current financial turbulence was the result of financial institutions being unable to handle the consequences of the current pace of inventiveness.
"It is clear from the latest events that the rules of the 20th century are woefully inadequate to cope with the financial risks that have been created in recent times by new financial instruments, not only in the US."
Referring to the subprime mortgage crash, Parsons said arrogance had played a role as basic banking rules were ignored.
"Global bankers have discovered that lending perhaps $1 trillion to people who cannot pay you back was a bad idea."
He called for a better balance between genuine financial innovation and reckless speculation.
|
News
