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Analysis & opinionOctober 4 2009

Pravin Gordhan

Pravin Gordhan, South Africa's minister of financeSouth Africa's finance minister talks about the steps taken to steer his country towards economic recovery.
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Pravin Gordhan

The outlook for the global economy, and for South Africa, looks considerably brighter today than it did a few short months ago. The worst of the storm has passed, and the country can look forward to a recovery, albeit slow and gradual.

Global economic growth has turned positive in recent months after a deep and painful global recession. The current recovery is due to wide-ranging public intervention measures, which have supported demand and lowered uncertainty and systemic risk in financial markets.

South Africa has managed to weather the storm relatively well, due in no small part to the foundation laid by years of considerable hard work. Before the onset of the crisis, prudent fiscal and monetary policies were pursued, focusing on building an economy that could grow at a sustainable pace over the longer term.

The country also benefited significantly from the global boom in commodity prices created by the growth in China and India. This had substantially positive implications for growth, employment and the public finances. However, the key lesson derived from previous global commodity booms was that they are inevitably followed by busts. For this reason, the period of global growth was used wisely, to accumulate a fiscal surplus, pay down debt and actively diversify our economy away from its traditional reliance on resources. I think history has judged our prudence to be well placed.

Well placed

South Africa has also benefited from a well-regulated banking system - our banking system had limited exposure to international assets, high-quality Tier 1 capital, and low leverage ratios. South Africa's ranking in the World Economic Forum's most recent Global Competitiveness Index reflects the quality of governance, regulatory oversight and the advanced development of the country's financial infrastructure.

South Africa's level of financial market sophistication was given a ranking of 12th out of 134 countries. South Africa was also ranked number four in the world for financing through the local equity market. Our financial auditing and reporting standards are regarded as being the fourth best in the world, with the same ranking for the efficacy of corporate boards. The strength of investor protection was ranked ninth, and the soundness of our banks was ranked 15th in the world.

Of course, while South Africa was spared the full brunt of the financial crisis, the country nonetheless felt the secondary effects of the global economic slowdown. In 2009, the South African economy entered a recession, its first in 17 years, primarily due to a slowdown in global demand for our exports and the unwinding of consumer-led growth internationally. However, it is likely that this recession will be relatively short-lived, and all indications are that a recovery is on the way.

The question now facing policy-makers globally, myself included, is what the shape and strength of this expected recovery will be. There is an alphabet soup of options. Expectations range from a swift V-shaped recovery to a U-shaped recovery, with the economy remaining weak for the next few quarters. There is also the risk of a double-dip recession, with the effects of a few quarters of positive growth wearing off if global aggregate demand doesn't respond quickly.

Whatever the shape of the global recovery, it is likely to be a gradual one. Financial systems remain under pressure, stimulus plans need to be gradually removed, and households in countries that suffered asset price declines need to rebuild savings while struggling with higher unemployment.

Therefore, the key macroeconomic challenge facing South Africa, as with many other countries in 2010, is ensuring a sustainable economic recovery. The country embarked on a substantial economic stimulus programme, mainly in the form of increased government spending on infrastructure, which was already under way before the onset of the crisis. This will go a long way toward supporting a sustainable economic recovery.

The fiscal space to respond in this manner was created by the country's management of public finances during periods of higher growth. Steps taken to reduce public debt, and debt interest costs, have provided a degree of flexibility to manage the effects of the present downturn.

The size of the stimulus at the general government level is estimated at 3% of gross domestic product in 2009 and 2.1% of GDP in 2010. This sustained growth in public spending has allowed the country to expand labour-intensive employment programmes, broaden social security benefits, continue to invest in education, health and other public services, and to support well-targeted industrial development.

A monetary stimulus has also been provided through reductions in interest rates. Inflation pressures have moderated along with the widening output gap and the decline in commodity prices, especially food. The country will also be host to the FIFA World Cup in 2010, and has used the event to create a number of 'legacy assets' for the country, particularly in transport and tourism.

Working with G-20 partners

As a G-20 member country, South Africa has been active in a number of multilateral forums that are aimed at improving the global financial system. In particular, South Africa is working together with other countries to improve global regulatory co-ordination, develop a macro-prudential approach to regulation, and deepen the capacity of global bodies to monitor and ensure compliance in regulation.

The world is only now beginning to understand the complexity of the events in the global economy in the past two years. We understand that regulatory failure was a common denominator. Swift action is needed to correct the weaknesses in our overall regulatory system, strengthen our economies, and get out of the downturn as quickly as possible.

I am greatly encouraged by the new level of global co-operation that this crisis has created, which will lay the basis for charting a new way forward for the global economy.

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Doing business: South Africa is highly dependent on the sustainability of its macroeconomy

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