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Building capacity to help Africa trade better

The world economy and South Africa: extracts from SA Budget documentation

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The world economy and South Africa: extracts from SA Budget documentation

The world economy and South Africa: extracts from SA Budget documentation
Finance Minister Nhlanhla Nene. Photo credit: City Press

The South African economy faces a difficult few years ahead. Some of the difficulties are the result of a weak global outlook, while others have to do with the structure of our economy. But the net result is that economic growth is likely to remain subdued over the medium term, rising from a projected 2 per cent of GDP in 2015 to 3 per cent of GDP in 2017.

Slow growth means that the economy does not generate the tax revenue needed to balance our budget. To continue increasing our stock of debt, and the interest payments that will consume R420.8 billion over the next three years, would jeopardise the sustainability of the public finances. This requires government, as the custodian of public money, to take deliberate steps to narrow the budget deficit.

The 2015 Budget proposes revenue and spending measures needed to stabilise the public finances.

Economic outlook

Lower commodity prices, slow growth among major trading partners and volatility in global monetary policy and capital flows will directly affect South Africa over the next several years. The European monetary stimulus is expected to have a muted impact on GDP growth in Europe, and the anticipated weakness of the euro will limit South Africa’s currency competitiveness. Weaker commodity demand from China in particular is expected to have a negative effect on South Africa’s exports.

The net result of these trends, however, is offset by several developments. South Africa’s deepening trade links with sub-Saharan Africa, where investment has begun to diversify towards manufacturing, services and infrastructure, should continue to provide expanded export markets, though there may be negative effects from reduced Chinese demand. In the short term, lower oil prices are expected to reduce transport costs and improve the terms of trade. Disciplined government spending will reduce the economy’s vulnerability to capital outflows, and create sufficient space for monetary policy to support investment and a competitive real exchange rate.

Despite a more competitive rand, export growth has been revised down from 4.2 per cent to reflect supply-side constraints. Exports are projected to grow by 3.3 per cent in 2015 and by 5 per cent in 2017.

Import growth has also been revised down in line with weaker domestic demand and reduced imports of capital equipment. Exports to China fell by 15 per cent in 2014 in response to lower commodity demand. In contrast, exports to Africa grew by 11 per cent. The continent now accounts for 19.2 per cent of the export portfolio. The share of exports to Europe has also increased, to 25.8 per cent in 2014, mainly due to strong vehicle sales. Gold exports declined significantly.

Agriculture has become more export focused. Labour-intensive horticultural exports (such as grapes, citrus and tree nuts) are growing as a share of output, replacing highly mechanised grain exports such as maize. Investment growth has averaged over 10 per cent since 2010.

SA Budget Review 2015 Major export destinations

SA Budget Review 2015 Investments in Africa

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