The article below by Chanel Pringle was published in Engineering News in late January. amongst other things, it draws on a talk that I gave at the Gordon Institute of Business Science that considered the outlook for South Africa in 2010 and grappled with the greater issue of South Africa's long-range economic competitiveness The original article can be located here.

Inflation A Bigger Worry Than Rand

Inflation is a bigger problem than the strong exchange rate for South Africa''s competitiveness, and should, therefore, be of more concern, former Rand Merchant Bank economist Rudolf Gouws said on Monday.

Speaking at an economic outlook conference, held at the University of Pretoria''s Gordon Institute of Business Science, he said that there was little the South African Reserve Bank (SARB) could do about the exchange rate, as this was mostly influenced by global occurrences.

He noted that the recent strengthening of the rand had not been as strong as was often assumed. Rather, the currency had regained some of the strength that it had lost during the global economic crisis in 2009.

Nevertheless, the strengthening of the rand had impacted on many sectors, leading to debates about whether the central bank should intervene, or not.

The Confederation of South African Trade Unions (Cosatu) has long demanded a weaker currency and has also called for the scrapping of the inflation targets that guide monetary policy.

Late last year, the ruling African National Congress, Cosatu and the South African Communist Party agreed to look at broadening the mandate of the SARB.

However, Gouws noted that South African policymakers did not have a fixation with inflation targeting at the expense of economic growth and added that the country''s inflation targets of between 3% and 6% were among the most lenient.

South Africa had the fourth highest inflation targeting range out of the 26 countries that used this practice, while the country also had the third-largest inflation rate.

Further, he noted that, contrary to popular belief, there was no global move away from inflation targeting.

The SARB''s scope for influencing the nominal value of the local currency was limited, said Gouws, adding that depreciating the rand would only have lasting benefits if tighter monetary policy were followed.

Depreciating the rand would also lead to higher inflation and raise the cost of acquiring capital goods, while South Africa was still in a long-term fixed investment cycle.

Slow economic growth and unemployment could not be blamed on inflation targeting, he asserted, noting that this was rather a result of shortcomings in terms of skills development, infrastructure, electricity generation and distribution, the State''s capacity and efficiency, the labour market and a low savings rate.

Last week, global ratings firm Standard & Poor''s said that South Africa''s inflation target and flexible exchange rate were the cornerstones of its current macroeconomic framework and warned that a move away from inflation targets could affect the country''s sovereign ratings.


Cannon Asset Managers chief investment officer Professor Adrian Saville , meanwhile, highlighted that the strength or weakness of a currency and cutting the repo rate, would not drastically change a country's prosperity or its competitiveness.

He noted that while these were helpful for business and consumers, the recipe for success, in terms of the national competitiveness, resided in the long-term structural investments in human capital.

If South Africa did not invest and improve the health, education and skills development of its citizens, its competitiveness would not improve.

Saville noted that while South Africa's government had developed a lot of policy to try to improve economic growth and the competitiveness of the country, this has had little impact for the majority of the country's citizens.

He added that the country's policies were regressive, with the poorer citizens becoming worse-off and being given the fewest opportunities.

Further, while South Africa's spend on education was the highest in Africa and among the highest in the world, 80% of schools were "dysfunctional".

The country, including citizens and not only government, had to identify a national purpose towards which it could work.


Meanwhile, Saville noted that there were some reasons to be positive about South Africa's economic prospects in the near term, despite the economy having experienced its first recession in 17 years in 2009.

These would not shape South Africa's competitiveness, but would make things easier for the country in the coming years, he added.

The low government debt as a percentage of gross domestic product, the strong currency, the high gold price and other commodities and the 2010 FIFA World Cup, could all benefit the economy.

This would allow the country to continue to extend the growth it had achieved after 1994.

Saville noted that since South Africa became a democratic country, it had recorded cumulative growth of 85% in US dollar terms between 1994 and 2008.

This was much higher than the 36% average cumulative growth recorded by other democratic countries over the same time frame, as well as the 7% cumulative growth achieved by nondemocratic countries between 1994 and 2008.