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.
On the external front, due to the sharp deterioration in real output growth of South Africa’s major trading partners, the volume of merchandise exports decreased noticeably. At the same time, the value of imports contracted more than proportionally, thanks to a drop in the international price of crude oil and a moderation in domestic demand for imported manufactured goods. Thus, while only a few months ago, the current account deficit was expected to rise to over 9% of GDP, it is now projected to slow down to less than 6% in 2009. Foreign reserves continue to be healthy and financial inflows remain sufficient to fund the deficit, but a slowdown of incoming portfolio investments is a risk that should be taken into account.
Whether countercyclical spending and looser monetary conditions will cushion the economy and whether currency depreciation will suffice to boost exports remains to be seen. What is clear, though, is that South Africa, like other countries in the world, is in for a rough ride in the months ahead and, to turn a famous quote on its head, what is bad for South Africa, is bad for the rest of Africa.