Upbeat Manuel looks to future

By Ethel Hazelhurst, Business Report / October 22, 2008

Against a backdrop of "extraordinary uncertainty" and an unfolding "global financial crisis", finance minister Trevor Manuel struck a remarkably upbeat note yesterday, with a reassuring adjustments budget and a consistent approach to longer-term planning.

In his 11th medium-term budget policy statement, Manuel referred to slowing growth, but predicted that the budget surplus projected in the February budget would still be achieved in the current fiscal year - though it would be equal to only 0.1 percent of gross domestic product (GDP), instead of the 0.8 percent estimated in the original budget.

He reaffirmed that economic policy should focus on the country's longer-term interests, highlighting the dangers of policies "designed for populist appeal". He told parliament: "I am very aware that our policy decisions have sometimes been controversial. But if … we tried to finance everything at once, for everybody, then short-term gains would quickly give way to long-term misery."

The surplus - the excess of revenue over expenditure in the fiscal year - has been criticised by those who demand additional spending to stimulate growth and address poverty.

But Manuel has countered that a surplus is prudent at a time when the country has benefited from the earlier windfall from high commodity prices.

The commodity cycle has now reversed and, in contrast to the February budget estimates of a small surplus in each of the next two fiscal years, Manuel yesterday projected a 1.6 percent deficit next year and a 1.1 percent deficit the following year, to accommodate the reversal in the cycle.

Manuel confirmed the inflation target range of 3 percent to 6 percent, saying: "The inflation measure for policy purposes will be the full consumer price index for major urban areas."

He predicted that inflation would fall for the rest of the year and return to the target range by the third quarter of next year, ahead of the projection made by the Reserve Bank monetary policy committee earlier this month that it would return to the range only in 2010.

Both the concept of inflation targeting and the target range are controversial among critics on the Left. But Manuel pointed out at a press conference that the Reserve Bank's mandate to preserve price stability was enshrined in the constitution, and that the inflation target was an anchor for monetary policy.

Manuel saw "storm clouds on the horizon" at the time of the February budget. The fact that these clouds have now burst over the global economy has created further challenges.

But he reassured parliament of the country's financial health at a time when there has been a "destructive implosion" in world financial markets, which has cost global stock exchanges $5 trillion (R53 trillion) over the past month. "Our finances are in order, our banks are sound, our investment plans are in place, our course is firmly directed at our long-term growth and development challenges, and we will ride out this storm, whatever it takes," he said.

Manuel spoke of the challenges created by slowing global growth. He downgraded his domestic growth forecast from the 4 percent projection made at the time of the February budget to 3.7 percent, and next year's growth forecast from 4.2 percent to 3 percent.

A major challenge in the current global environment is that growth of close to zero or negative growth in the seven richest economies will reduce South Africa's export growth.

A related challenge is the need to fund South Africa's current account deficit, which was 8.1 percent of GDP in the first half. The deficit - the shortfall between earnings on exports of goods and services and the cost of imports - will remain high as the government and the private sector maintain their capital spending projects.

Manuel told the press conference that delivery was critical. "Unless departments have a business plan, they should not be given taxpayers' money." He said parliament should ask departments to set measurable objectives and should measure performance against these.

In the mini budget, Manuel warned that the country "faces a difficult period ahead. There is no telling how deep the global financial crisis will be, nor how severe and enduring its impact will be on incomes and economic uncertainty."