The Economy

South African Economy Overview

We said last year that South Africa's economy was showing the strain of eight consecutive years of expansion. In 2007, it began springing leaks. Inflation crashed through the targeted ceiling, the trade and current account deficits mounted, the rand weakened in February 2008 to a five year low and the prime interest rate hit 14.5%, the highest level in several years.

So, the economic outlook for 2008 is less rosy than for the past several years, during which the the economy had clearly benefited by the strong demand for commodities emanating from global economic expansion, especially China's robust growth.

South Africa's Macroeconomic Policy

Over the past several years, government policy focused - successfully - on macroeconomic stability - getting inflation, debt, and currency volatility under control. In 2006, government introduced the Accelerated and Shared Growth Initiative (Asgi). It is a blueprint for economic growth and flows from government recognition that reducing unemployment to 15% by 2014 can not be achieved without addressing constraints to investment, including:

• infrastructure bottlenecks
• lack of capacity, especially at the local level
• skills shortage, especially in the public sector
• labour market rigidity
• currency stability
• over-regulation

Monetary and Fiscal Policy

The South African Reserve Bank has responsibility for formulating and implementing monetary policy. It sees its primary objectives as reducing inflation and maintaining a stable, competitive currency. Money market operations between the Bank and the commercial banks constitute an integral part of the process of setting interest rates.

The 2008-09 budget continues the government's established pattern of fiscal discipline, even in the face of testing economic circumstances. The changes in the ANC leadership had no apparent impact on the fundamental macro-economic policy that has led to the longest economic expansion on record.