Historic 2011-budget awaits

Discussions and assessments of last month’s mid-term budget forecast are not quite behind us yet and it is still three months away but finance minister Pravin Gordhan’s budget address scheduled for February 23 2011 is already shaping up to be one of the most important in the history of the country.

Reporting back on the outcomes of the recent G20 summit  at a media briefing last week minister Gordhan foreshadowed some of the challenges  that would have to be addressed in next year’s budget. South Africa is in the process of developing a multidimensional package to deal with not only its critical economic challenges of unemployment and poverty but also to help it cope with the prevailing global economic imbalances, including among others destabilising capital inflows, he said.

The task for minister Gordhan and his advisors is immensely complicated by the fact that so much of what could impact on South Africa’s economic and financial wellbeing lies in processes that are playing themselves out way beyond South Africa’s control.

There were clear indications that the minister  wisely is not fixated on a simplified silver-bullet type of approach, but is rather taking the pragmatic and flexible route to meet the uncertain terrain of  immensely complicated, unpredictable possibilities of the battlefield that the world economic order has become in recent times.

Just for one moment consider the implications of the  statement in a recent opinion-piece in The Global Times in reaction to the United States decision to flood the markets with effectively devaluing US-dollars under so-called quantitative easing (QE2):The global financial system is in urgent need of democracy. It is hard to say how the US dollar is going to be replaced. However, all kinds of resistance will now emerge. The more arbitrary the US dollar appears, the more fierce global resistance will get.

Minister Gordhan again cautioned that some monetary and exchange-rate policies being pursued by large and advanced economies were having a negative spillover on the currencies of emerging economies, including the rand. Also again warning that, while SA was studying additional options to weaken the rand, it should also be acknowledge that these massive flows would not last forever and could turn around as quickly as they came.

Therefore, government would tread cautiously before introducing any further measures, such as taxes on inflows – an option chosen by some emerging economies such as Brazil..

It is clear that the lessons of the 1980s were well learnt. At the time the fragile Asian economies were battered as massive investment of US dollars first flooded in  then moved out.

In the wake of the indirect currency manipulation by the US via the weakening of the dollar a la QE2 it is happening again, boosting the currencies of many nations. At the same time governments, including SA,  cannot ignore the fact that it is hurting their manufacturers and exporters and depressing the job market.

Minister Gordhan told the media that the multidimensional package would draw on the full range of tools -- and not only  macro-prudential tolls --  and would emerge sooner rather than later. Details of the plan would be aligned with the country’s emerging New Growth Path, and would be communicated during his budget address in February.

Echoing what seems to be a fairly broad-based more conservative approach from within the ruling ANC alliance on a number of fronts, he indicated that a cautious, calculated approach based on informed internal debate will be followed.

In the coming months government would seek to disaggregate the current inflows into their underlying components in a bid to improve its understanding of “how much is coming in, how long it is staying and what it is actually going into,” he said.

The assessment would also consider whether the flows were contributing to the country’s borrowing requirements and whether some of the flows could be diverted into longer-term assets, such as infrastructure.

“Then we will ask the question about what kind of overall controls, or policy measures need to be put into place,” he said and added that the analysis would also seek to understand the nature and level of outflows. In the meantime the  Reserve Bank would step up its purchase of foreign currency and would sterilise inflows associated with foreign direct investment by using foreign exchange swaps. Short-term measures would also be pursued to reduce restrictions on capital outflows to encourage an increase in foreign assets.

About the muted outcomes of the G20 summit he said that “you will find over the next six months or so there is a lot of debate … about a new set of dynamics and systems” in a genuine search for the right instruments and policies to enable a move away form the old normal to a new normal.

In the meantime South Africa would be seeking to balance its immediate national interests with actions that also limit the negative consequences for other countries.