National Treasury Response to GDP Figures for First Quarter of 2009

Q: A journalist pointed to the fact that most analysts had revised their forecasts to expect some contraction. She asked for an indication of how the forecasts for 2009 would look in comparison with previous forecasts. She also enquired as to whether they expected the economy to show some growth later in the year.

A: Mr Kganyago responded that they had a forecast of 1.2%. He noted that they did not have the luxury of a constant stream of data that market analysts enjoy. This allowed market analysts to easily change their forecasts. At the National Treasury they did a forecast at the time of the budget and at that time, they predicted the economy would grow by 1.2%. Economic circumstances were now significantly different. The global economy had been expected to grow by 0.5% and it was now expected to shrink by 1.3%. The International Monetary Fund has had to revise its forecast eight times since April 2008.
The National Treasury would continue to monitor all the high frequency data and take a view on our domestic economic forecast based on that. The only certainty he could provide was that the growth figure would be revised downward by the Medium Term Budget Policy Statement (MTBPS).

The D-G expanded that the more pressing question concerned the point at which they expected this position to turn. There were 2 fundamental drivers in determining this. One key driver was what happened in the global economy, as this impacted primarily on the demand for South African exports. The figures released had shown that the only sectors that recorded growth were those dependent on domestic economic activity, rather than exports. The forecasts of a possible recovery in the second half of 2009 or the first half of 2010 depended on conditions globally and locally.

The second driver was the time lag for policy actions already taken to have an impact on the economy. Some of those actions only take effect as of April 2009. Additionally, they had to consider the impact of the recent monetary easing. One had to allow for the accepted time lags (12 to 24 months) in order to see the effect.

Q: A journalist asked what the effect of the recession would be on revenue collection in the year.

A: Mr Kganyago stated that it was important to let the policies that the Treasury had undertaken impact on domestic markets and fiscal activities. It was also important to wait for monetary policy to impact on domestic demand. He warned that the country was only seven weeks in to the new fiscal year. Generally speaking, April was not a very good revenue month. It was crucial to see what would happen once the Treasury received the June revenue and expenditure figures.

Q: Mr Kganyago was asked about looming labour strikes, particularly how the government would respond to demands for wage increases in view of inflation.

A: Mr Kganyago responded that this issue had nothing to do with what they were doing today and could only be addressed by the Department involved who were better placed to deal with it.

Q: A journalist referred to the earlier mention of budget stimulus. He asked if the National Treasury felt that was enough or if more fiscal resources were necessary for stressed sectors of the economy.

A: Mr Kganyago responded that they had a stimulus package that they believed would be sustainable and would have impact. When the IMF was asked to review the stimulus packages of the G-20 countries, the conclusion they reached about South Africa was that our fiscal stimulus was actually 1.8% of GDP. If one includes the infrastructure spend of State Owned Enterprises (SOEs), that figure would be closer to 4.5%. This resulted in a significant amount of money being pushed into stimulus. Furthermore the IMF only measured discretionary stimulus and this did not account for automatic stabilisers such as protecting spending and allowing the drop in revenue to result in a rise in the deficit.

Q: The journalist asked Mr Kganyago for estimates regarding job creation. She also asked for the National Treasury’s view on bailouts.

A: Mr Kganyago answered that jobs were created when the economy grew. He had yet to find an economy that created jobs while it was shrinking. If the country experienced another quarterly contraction more jobs would be lost. There would be more jobs lost than created.

Mr Christopher Leowald, Deputy Director-General: Macroeconomic Policy (National Treasury) addressed the issue of bailouts. He stated that the Treasury would have to analyse industries on a case-by-case basis. There would be a question of whether the support would be temporary or permanent. The Treasury would also look at what form the support would take, such as whether financial support would be in the form of loans or government guarantees. There was no straightforward answer for this.

Q: A journalist asked if Mr Kganyago felt there was room for monetary easing.

A: Mr Kganyago responded that this question would be responded to by the responsible persons after the Cabinet Lekgotla at a press briefing to be convened on Thursday.

Q: The press referred to the already stressed manufacturing sector and queried the compounding effect of the strong Rand. He added that there was a large body of thought in favour of the weakening of the Rand and asked the D-G for his view on this.

A: Mr Kganyago responded that South Africans should decide on the preferred level for the exchange rate. When the Rand was weak (at around ± R13, 75 to the dollar), a commission of enquiry was launched to investigate this. When the currency strengthened to ± R 6 to the dollar), we again cringed that the currency was too strong. In policy making there were certain uncontrollable factors that simply had to be accepted - the exchange rate was one of these factors. Huge reserves are required to intervene in the foreign exchange market and control the currency. What the country really needed was a less volatile, competitive currency. Taken to its logical conclusion this means that we have to bring down inflation to be in line with that of our major trading partners.

Q: Mr Kganyago was asked to comment on the National Economic Development and Labour Council (NEDLAC) Framework Agreement, as there was no information available on this matter.

A: Mr Kganyago replied that the Framework needed to be translated in to tangible actions. There were working groups hard at work deciding how they would do this. Unfortunately, there was no fixed date set for when this would happen.

Q: Mr Kganyago was asked to comment on Treasury's reaction to the release of the GDP figures for the first quarter of 2009. The journalist asked whether these figures had been met with shock or some other emotional reaction.

A: Mr Kganyago responded that this was not a matter of emotions; rather, it was one of analysing the data to reach conclusions. The data said that it was time to speak to the analysts and South Africans to discuss the extent of the situation and how bad things really are. He added that there was an opportunity in every crisis and South Africans needed to grab this opportunity. This was the time to aggressively implement the policy actions the National Treasury had formulated to respond to a crisis. This would allow them to assess the extent of the recession and whether there was any hope of recovery.

Q: A journalist asked what the ordinary consumer's role should be now. Should they be spending or saving?

A: Mr Kganyago responded that it was logical that consumers who had spare cash should spend. He note that our bugbear as a country was our relatively low levels of saving. South Africa has a huge investment programme and for a given level of savings we are running a savings/ investment imbalance, reflected in the current account deficit. South Africans should continue to save.

Q: A journalist asked what it would mean for the majority of South Africans following the formal announcement that the country was in a recession given that the poor had been getting poorer and poorer over the years.

A: Mr Kganyago responded that those who were unemployed would have nothing to save. The recession had slowed down job creation and increased unemployment since there were people who previously held jobs but no longer held jobs as a result of the meltdown. However, he wanted to disabuse the journalist from the notion that the poor were getting poorer. He stated that this was neither an urban legend and neither was it a rural legend. South Africans had enjoyed improving living standards over the years because the nation had enjoyed very robust economic growth in the form of forty quarters of consecutive economic growth. This had enabled the government to roll out basic services such as housing and electricity and more importantly, job creation.

Q: A journalist noted that the Director-General had said that it was unclear as to when the economy would improve. Yet, the statement that was released by the Treasury said that there would be an improvement in the second half of 2009. He asked if Mr Kganyago was expressing doubt about the statement or if it was just a comment about when the turn would be positive. 

A: Mr Kganyago explained that the Treasury expected an improvement in the economy in the second half of the year however, some people expected the economy to turn in the first half of next year.

Q: A journalist asked which sectors of the economy would anchor recovery when it occurred.

A: Mr Kganyago responded that it was too early to predict at the moment. What they knew was that the sectors that the sectors that were domestically focused would continue to grow and these were three sectors, construction, government services and personal service. The other sectors that depended on trade with the rest of the world would rely very much on how the global economy functioned.

The briefing was concluded.

Gross Domestic Products (GDP) figures for the first quarter of 2009
26 May 2009

The GDP figures released this morning confirm that South Africa, along with much of the global economy, is in a recession. For South Africa, this is the first recession since 1992. However, the economy is expected to improve in the final two quarters of this year.

Looking ahead, we expect another quarterly contraction for the second quarter, but this is expected to be smaller. Quarters on quarter figures are expected to show improvement and a stronger economy in the second half of 2009. We are unlikely to achieve the GDP growth rate for this year expected at the time of the budget.
 
Domestically, interest rates have come down by 350 basis points since last year, as inflation has moderated from the highs of 2008. This monetary easing will help to improve credit conditions, ease pressures on consumers and small businesses and raise growth rates.

There is a lot going for South Africa. We are in a strong fiscal position which means that we are able to respond to this crisis without putting an undue burden on future generations. This underlying strength in the South African economy has meant that this slowdown is less severe than in many countries. The fiscal stimulus announced in the 2009 budget has supported economic activity, especially in infrastructure, prolonging growth in the construction sector. The inflows of tourists for the Confederations Cup, private and public investment ahead of the World Cup, are also expected to provide support to the local economy.

These factors are expected to continue to support economic activity in the medium term.
While indicators of real economic activity are expected to remain weak in coming months, some tentative signs of improvement in the world economy suggest that the global contraction may have bottomed out. Commodity prices, capital inflows and indicators of purchasing manager’s outlook in some key global economies have stabilised and even strengthened.