27 August 2008
editorial
Johannesburg — INFRASTRUCTURE spending and rising capital investment will help support SA's economy in the face of slowing consumer demand, but may not prove to be the panacea many are hoping for.
The government wants to boost the economy's sustainable - or "potential" - growth rate to at least 6% by 2010, versus 4,5% now.
After four years of an average 5% growth rate, the pace of expansion is set to slow to between 3% and 4% this year and next. The good news is that the slowdown is part of a normal business cycle. It is also in step with global trends.
The question is whether, when the cycle turns up again, probably in 2010, SA's potential growth rate will nudge above 6%?
To achieve that pace, the government has set a goal of boosting gross domestic capital formation -- the main investment measure -- up to 25% of gross domestic product (GDP) by 2010, from 21,5% now.
This certainly looks achievable, given a dramatic surge in capital spending on infrastructure and other projects by state entities and the private sector. So far, power constraints appear not to have curbed those ambitious plans.
In fact, power utility Eskom's expansion programme is a major component in the spending boom which will ultimately help boost the economy's growth potential.
At the same time, plans by transport utility Transnet to pump money into rail and ports will help the mining and manufacturing sectors to increase exports, after a poor performance in recent years.
But there is a big potential snag: SA's savings rate is much lower than that of most of its peers, at 13,7% of GDP. Unless this picks up, the country will continue to rely heavily on fickle foreign capital inflows to finance future investment. Any turnaround in these flows - which has already started to happen this year - will put pressure on the rand, inflation and interest rates.
This will push up the cost of borrowing for the state and for big companies, eroding returns and making investment more costly, and is also likely to cap SA's growth rate at about 5%, between 2010 and 2014.
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