South Africa : macroeconomic issues for the transition

Abstract

In the 1980s the South African government undertook quite effective policy adjustments in the macroeconomic arena to respond to the short-run crises it faced. Today, however, the macroeconomic situation is fragile. Four areas that could make or break the transition are reviewed in this paper: investment; foreign investment; savings and the deficit; and inflation. The ratio of fixed investment to Gross Domestic Product (GDP) is 20 percent at the beginning of the 1990s and private investment held up relatively well at 15 percent of GDP. Private investment will be critical, both because of its size and its central role in the productive sectors. External debt has already been reduced to less than 20 percent of GDP, compared with almost twice that in Mexico. Maintaining non-gold export growth to finance the expansion of imports will be essential, and exchange rate and associated macroeconomic management should probably be aimed at futher real depreciation. On the surface, South Africa is in reasonable shape with respect to both savings and the deficit. However, private saving has been on a declining trend. The costs of financing the deficit are rising. A reduction in mandatory requirements channeling financial savings to finance the government is leading to a rising interest rate on public borrowings. The inflation rate has remained stubbornly in the region of 15 percent for over a decade. This is likely to remain a problem. Uncertainties over the political transition makes the macroeconomic outlook uncertain. With a smooth transition and a reasonable degree of social stability, short-run prospects could be good. The relaxation of the external position, together with the expansion of some spending programs should support a significant recovery in growth in the near term.