Friday, May 22, 2009

South Africa’s Economy Is Facing a ‘Sharp’ Decline

Somewhere we commented on the Black Diamonds and the financing of BEE deals. Well I wait in anticipation, to see who or how these will be refinanced. Now, if only all these Black Diamonds had been entrepreneurial, we may have been looking at a different scenario. Instead we have simply divided up the cake with the many, but the risk is carried by the few.

South Africa’s economy faces a “sharp cyclical downturn” as mining and manufacturing output slumps, making it difficult for the government to meet its employment goals, National Treasury Director-General Lesetja Kganyago said.

The government probably won’t meet its target to cut the unemployment rate to 14 percent by 2014 from 23.5 percent in the first quarter, Kganyago told economists in Johannesburg today.

South Africa’s economy, the biggest on the continent, probably fell into its first recession in 17 years in the first quarter, according to the central bank, as the global financial crisis slashed demand for platinum and vehicle exports. The budget deficit will widen to 3.8 percent of gross domestic product in the year through March 2010, the highest in a decade, as tax revenue falls and the government maintains spending on power plants, roads and houses.

“We have reprioritized expenditure towards capital expenditure,” Kganyago said. “We’ve had a supportive environment and we are now adjusting to the deterioration in the economy.”

The National Treasury, which forecast in February economic growth would reach 1.2 percent this year, won’t revise its estimate until October, Kganyago said. The statistics office will publish first-quarter gross domestic product data on May 26.

Growth Outlook

The Bureau for Economic Research, based at the University of Stellenbosch near Cape Town, today forecast the economy will contract 0.8 percent in 2009, compared with 1.9 percent growth estimated in November last year. The economy will probably expand 2.5 percent next year as lower interest rates spur consumer spending, the bureau said.

The government aims to “claw back” spending to trim the budget deficit as the economy recovers, Kganyago said. Any stimulus package must be “temporary,” helping to boost the “potential” economic growth rate and not overburden future tax payers, he added.

South Africa posted its first budget surplus since the 1960s in 2007. While the government plans to spend 787 billion rand ($93.4 billion) over the next three years to expand power, rail and road infrastructure, debt levels are “very manageable” at about 30 percent of gross domestic product, Kganyago said.

“The risk of us getting trapped in unsustainable debt levels is mitigated by the fiscal space” built up over the past few years, Kganyago said. “Creating that fiscal space is a long, painful process.” The danger is that “you can blow it like that by making crazy decisions.”

Kganyago said it was too early to say whether the government will miss its tax revenue target this year.

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