SA's economy is resilient: Manuel
Michael Appel
13 September 2007South Africa's fiscal and monetary policies are flexible enough to ensure that the country's economy continues to grow despite the current global market turmoil, Finance Minister Trevor Manuel said this week.
Speaking at Stellenbosch University's Business School on Wednesday, Manuel said global markets were experiencing heightened turbulence driven by tightening credit conditions and an increase in the price of riskier assets in global credit markets.
"This volatility should be seen in the context of the slow unwinding of global imbalances - the pattern of large current account deficits in some countries such as the US, and [current account] surpluses in China, oil exporting countries of the Middle East and elsewhere," he said.
The US currently has an account deficit of 5.8% of its gross domestic product (GDP), equating to over $800-billion (R5.7-trillion), while China on the other hand has an account surplus of 10.7% realising a value of close to $250 billion (R1.7-trillion).
Manuel said that while these were huge imbalances in global liquidity, there was no international agency to deal with or to regulate them.
The global liquidity crisis stems from a US sub-prime mortgage market the developed as a result of a housing boom there between 2001 and 2006, which encouraged excessive risk-taking by lenders who sharply extended loans to marginal borrowers.
"A prolonged period of low interest rates around the world has led to a surge in global portfolio flows and encourages increased risk taking and borrowing by investors," he explained.
As broad portions of the credit market started experiencing low levels of liquidity, Manuel said central banks in the US, Europe and other developed markets had to inject huge sums of capital into overnight capital markets to maintain confidence in the banking system and limit the potential impact on the real economy.
Local banks, however, have indicated that they have little or no exposure to sub-prime lending or to hedge funds with sub-prime assets, while local banking systems are also well regulated with constant supervision and are adequately capitalised.
These factors all lead to Manuel reasoning that South Africa was "well placed to weather this storm."
South Africa has over the past four years seen a period of unprecedented growth in the global economy supported by low real interest rates and optimism in financial markets.
Between 2003 and 2006 world GDP growth expanded at an average pace of 5% after only 3.5% in the previous four years.
"South Africa has done well so far, and should continue to do so unless there is a significant slowdown in global growth that leads to a rapid fall in commodity prices," Manuel said.
"Such developments would be of concern given that we are currently running a current account deficit in the order of 6.2% of GDP."
Source: BuaNews
