SA macro-economic policy goes on the offensive

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By Cees Bruggemans

Globally, economic policymakers have shown tremendous aggression for some time, such as the Fed expansion of its balance sheet, the dramatic drop in interest rates near zero and many governments guaranteeing their bank systems or parts thereof.

Governments have also allowed their budgets to rake up larger deficits as tax revenues fell off on account of the deepening global recession, while certain types of spending (unemployment support) increased.

In addition, there have been fiscal emergency packages nearly everywhere, from $580bn in China to $787bn in the US, but not forgetting Europe, UK, Australasia, Russia, India and many more.

South Africa has remained mostly very quiet throughout this period of enormous turmoil, not least because our banking system wasn’t devastated by events, while our economy gave mostly the impression of only slowing down (though already effectively in recession from mid-2008).

Events of late September 2008 changed all that rather dramatically even if our policymakers took a long time saying so clearly in public and following through with appropriate policy actions.

Meanwhile the Rand did fall substantially, from 7:$ in 2007, ultimately settling near 10:$ in early 2009. And during that period the Minister of Finance accepted a greater borrowing requirement to accommodate tax shortfalls and budget overspending (now estimated at R14bn and R29bn respectively in 2008/09), pushing his budget stance from a surplus of 1% of GDP in 2007 to a deficit of 1% of GDP in 2008.

By December 2008, the SARB was also ready to act, but still cutting by only 0.5%, and that after much public agonising whether they would cut at all or rather (much) later in 2009.

The real action had to wait for February 2009, two months before the April general election. By then the SARB and the Minister of Finance were finally also ready to come out with all guns blazing.

In early February the SARB cut rates by another 1%, prime falling to 14%. However, SARB Governor Mboweni said he had favoured a 2% rate cut, immediately boosting April expectations for another 1% cut.

The Governor then within a day further upped the ante, hinting at a possible interim meeting before the scheduled April one if economic data proved poor (a near given by then). And thus expectations rose of another 1% rate cut in March, suggesting prime of 12% by April, and possibly 11% by June 2009.

The Minister of Finance a week later doubled the ante yet again by unveiling a hugely stimulatory 2009 budget, with tax revenue to undershoot further by R50bn both this year and next, and spending to overshoot by R63bn this year and R56bn next year. As a consequence the budget deficit is expected to widen further in 2009 to 4% of GDP.

Most of the spending action is being aimed at the poor, such as increasing the number of welfare grant recipients by one million to 13.3 million.

Along with the dramatic decline in the oil price from $150 in mid-2008 to $40 today, the 40% Rand decline during 2008, and the huge infrastructure construction commitments of recent years (confirmed in this year’s budget with a 50% increase to R190bn, and a further R800bn allocated for the three years 2010-2012), these latest actions by the SARB and the Minister of Finance underwrite a very aggressive macro policy stance aimed at supporting the South African economy while it navigates currently very trying global conditions.

Provided global events don’t keep deteriorating, but also respond positively to the many policy actions of a monetary and fiscal nature being undertaken globally, economic revival should start to take hold from later this year.

Source: Cees Bruggemans, FNB, February 17, 2009.


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