Michele Zini's blog

A while ago we reported on the impact of the financial crisis on South Africa. Following the global trend, the last few months have seen the figures gradually getting grimmer, with the real economy taking the biggest toll.

GDP figures for the last quarter of 2008 came in negative (-1.8% seasonally adjusted and annualized), with manufacturing falling by a jaw-dropping 21.8%, the biggest slump since record-keeping began. The automobile industry (a large employer and the main contributor to international trade tax revenues) is down over 30% year-on-year; indeed, overall job creation is slowing down and jobs are being shed in some sectors. Mining production continues to fall, as global commodity prices remain depressed. Consumers’ expenditure is declining, credit extension to the private sector is slowing down, and housing prices dropping.

The government’s policy response was prompt. Finance Minister Trevor Manuel recently tabled a decidedly expansionary or “countercyclical” budget. While tax revenues are projected to decrease considerably, the budget shows a visible tilt toward social sector expenditure (housing, education, social protection, public works program and health). The country’s budget balance is now expected to reach -3.9% in 2009/10 (it was -1.2% in 2008/09 and +1% in 2007/08).

On the monetary side, the Reserve Bank announced that its Monetary Policy Committee will meet monthly (rather than every two months) during 2009. Soon after the announcement, interest rates were lowered for the third time in a row bringing the repo rate to 9.5%. Since December 2008, the repo rate has already declined by 2.5 percentage points. As inflation slows down and the economic outlook deteriorates, observers are expecting several more rate cuts in the coming months.

When the storm hit, South Africa had been sitting on relatively strong fundamentals and emerging from a protracted period of economic expansion. The meltdown allowed “not-so-well-hidden” vulnerabilities to surface. Unemployment, inequality, poverty, crime, and HIV/AIDS still continue to plague the country. Agriculture, mining and manufacturing declined while the trade and current account deficit (CAD) widened. Household indebtedness reached worrying levels in a low-interest rate environment and inflationary pressures mounted. Moreover, severe energy shortages erupted (inducing blackouts) and a tense political climate resulted in President Mbeki’s resignation.

In months ahead, the sustainability of the CAD and the impact of the crisis on the real economy will remain the key issues. The financial account has so far been sufficient to finance the CAD, but sudden stops of capital inflows are not unheard of in developing countries during hard times. While the free-floating exchange rate rules out insolvency issues, financing the CAD will be much more difficult and costly; on the other hand, lower global demand will hurt South Africa’s export-sector and the falling rand is not expected to significantly counter the decline.

The crisis has also impacted the real economy. House prices have been declining, along with vehicle sales. Manufacturing production has slowed, the mining sector is shrinking further, and retrenchments are on the increase. Growth is expected to slow-down which is a risky proposition for South Africa and for Africa as a whole. Luckily, the sound fiscal position will somewhat cushion the economic slowdown.