Mariam Isa And Linda Ensor
11 June 2008
Johannesburg — THE World Bank expects SA's economy to grow by a robust 4,2% this year, slightly above official estimates and surpassing consensus forecasts for a sharp slowdown prompted by higher interest rates, power shortages and global risk aversion.
Rising investment in power plants and other infrastructure would help offset waning consumer demand and the bleaker global investment mood, author of the World Bank's 2008 Global Development Finance Report, Hans Timmer, said.
"We think there is underlying growth potential in SA and it will continue," he said at the b ank's annual conference on development economics in Cape Town.
"The fact that there is global financial turmoil, a current account deficit and at some point less abundant external finance, is no reason to expect a sudden stop to growth."
Consensus forecasts from a Reuters poll this month predicted SA's pace of growth will slow to 3,4% this year from an average of 5% over each of the past four years. Timmer said this pace was not sustainable, but that SA could maintain an annual growth rate of 4%.
He said household consumption, which accounts for about 60% of SA's economy, was slowing gradually while investment was rising rapidly. SA's main investment indicator surged to 20% of gross domestic product (GDP) last year from 15% in 2000 -- spurred mainly by capital investment by state entities.
"Some parts of investment are interest rate-sensitive, but there are others which will continue irrespective of changes in monetary policy," he said.
"There are lots of projects and construction under way."
But Timmer said there were "serious risks" which could curb SA's growth to lower levels in the long term.
The World Bank sees economic growth accelerating to 4,4% next year and 4,8% the following year -- also just above official forecasts.
The threats stemmed mainly from inflation and the jittery global environment, which has curbed foreign investment in SA bonds and equities .
This is a worry as the volatile portfolio inflows have, in the past few years, financed the growing deficit on SA's current account -- its broadest measure of trade in goods and services.
The shortfall widened to 7,3% of GDP last year -- a 36-year peak and one of the biggest for an emerging market.
Portfolio investments fell to 38% of SA's current account in the fourth quarter of last year from 85% in the past few years, posing one of the main risks to SA's economy. "Unwillingness to continue providing short-term flows could put pressure on the rand, as has happened in the past, in turn pushing inflation up and prompting the Reserve Bank to hike interest rates," the bank said.
The rand fell to a two-month low against the dollar yesterday.
The Reserve B ank has lifted lending rates by 4,5 percentage points since June 2006 and is expected to hike its key repo rate by a full percentage point to 12,5% when its two-day policy meeting ends tomorrow.
Treasury director-general Lesetja Kganyago said yesterday that SA had taken steps to reduce vulnerability stemming from the current account gap, mainly through reducing its short-term foreign debt.
Policy had also been adjusted to protect the country's growth trajectory, and boost national savings through a budget surplus, he told a panel discussion at the World Bank conference.
"We believe we have taken the correct steps to protect SA."
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