S.Africa must boost exports for long-term growth -OECD

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South Africa should increase export performance and guard against a strong rand to boost its long-term economic growth, said the Organisation for Economic Co-operation and Development.

OECD Secretary-General Angel Gurria also told a press briefing that while Africa’s biggest economy was not threatened by a sovereign debt crisis like some European countries, GDP growth would take three years to reach “potential”.

In its first major survey of Africa’s biggest economy, the Organisation for Economic Co-operation and Development said South Africa needed to boost growth to create jobs and limit its reliance on local demand, reports Reuters.

Most analysts expect South Africa’s economic growth to average 3-3.5 percent in the next three years, lower than potential growth, which the South African Reserve Bank has put at 4.5 percent.

The OECD said in the report the economy would have benefited from the World Cup this year and Gurria said annual growth could by next year move above trend, estimated at around 4 percent.
“Nonetheless, the economy is still around 3 percent below potential, and will probably take at least 3 years to reach potential,” he said.

South Africa exited its first recession in almost two decades in the third quarter of 2009, helped by monetary and fiscal stimulus.
“There is now a need to ensure a rapid recovery from the downturn and to boost trend growth and thereby create the millions of jobs required to make full use of South Africa’s large supply of under-utilised human resources,” the OECD said.
“Macroeconomic policy stimulus should be removed only gradually as a self-sustaining recovery, led by the private sector, takes hold.”

The National Treasury has spent billions on infrastructure, and the central bank has cut interest rates by 5.5 percentage points since December 2008. Analysts expect rates to be left at a three-decade low of 6.5 percent this week. Key to boosting growth would be higher exports and savings, factors that have characterised growth in other countries.

South Africa’s exports fell in the first quarter, partly due to growth worries in key trading partner Europe and the strong rand.

RAND APPRECIATION A WORRY
“South Africa should do more to resist waves of real appreciation of the rand associated with surges in private capital inflows, which are largely driven by investor sentiment towards emerging markets in general, and commodity plays in particular,” the OECD said.

Unions and some producers have called for the government to take steps to weaken the rand, which is considered relatively strong at current levels of around 7.60 to the dollar after gaining close to 30 percent last year.

Central bank Governor Gill Marcus has said the rand’s volatility makes planning difficult. But the central bank has said it will not target a level for the currency.

Asked on Monday to respond to the OECD’s recommendation for more aggressive moves to cap rand strength, Finance Minister Pravin Gordhan said the government would allow central bank intervention in the market when affordable.
“We have said very consistently that we want both a competitive and stable exchange rate … to the extent possible and affordable, we will enable the Reserve Bank to buy reserves,” he told the media briefing.

The OECD said South Africa’s fiscal prudence, which was eroded during the recession, could be improved.
“South Africa … would benefit from stronger fiscal institutions to prevent unwarranted fiscal expansion when the economy is strong,” the OECD said.
“The monetary policy framework … could be refined to bolster the credibility of inflation targets and to exploit scope for limiting exchange rate fluctuations,” it said.

Another concern was above-inflation wage increases granted to labour unions, which analysts have said are a constraint to job creation in a country where a quarter of the labour force is unemployed.

The OECD said there should be greater co-ordination between wage bargaining and macro-economic policy.



Co-ordination could help bring about “wage changes with lower nominal increases and an improved inflation performance.”
“Lower and less variable inflation could in turn permit the SARB to maintain lower real interest rates … which would be supportive for growth,” the OECD said.