Although the exchange rate volatility remains a concern, the South African economy is in a much stronger position to take advantage of the emerging global economic recovery than it was a decade ago, Finance Minister Trevor Manuel said during his 2004 Budget Speech in Parliament yesterday.

“We are now integrated into the global economy and we have diversified our trade, by product and region. A healthier balance of payments position means that faster growth can be sustained without the boom-bust cycles of the past. We now have access to international capital markets, allowing us to source long-term foreign capital to supplement domestic savings,” he said.

Gross domestic product is expected to increase by 2,9% during 2004 and accelerate further to 3,6 and 4% in the next two years.

Manuel explained that an inflation-targeting framework has assisted in anchoring price expectations, while making monetary policy more transparent.

At the same time, wide-ranging reforms have reduced the vulnerability of the fiscus and a well-regulated financial system has enabled the economy to withstand several shocks to the international financial system over the past decade.

Within this context of a strong macroeconomic and fiscal framework, Manuel called for a streamlining of the operation of the economy, encouraging investment, tackling barriers to business development and invigorating job creation and labour market processes.

He pointed out that key microeconomic reforms would include improving the efficiency of communication and transport flows, including investment in ports, road and rail networks; easing the regulatory burden for small businesses; extending access to financial services; consolidation of further education colleges and expanding training and skills development opportunities; and capacity building in trade administration, regulation of public utilities and competition policy.

“Our economy has expanded for 20 consecutive quarters – the longest period of continuous growth for over 50 years. However, the preliminary estimate of output growth of 1,9% last year is rather lower than the 3,3% projected this time last year,” Manuel commented.

He explained that factors contributing to slower growth included a sharp decline in agricultural production, as a result of adverse weather conditions, weak demand in several trading partner countries and the impact of the strength of the rand on industry and tourism-related sectors.

Gross domestic expenditure increased by an estimated 4,4% during 2003, supported by monetary policy easing last year and the significant tax relief of the past two fiscal years.

“Despite the slowdown in manufacturing, capital formation remained robust and expanded by about 8% in 2003, laying a firm foundation for future output growth. With expenditure rising somewhat faster than domestic production, we recorded a rise in the deficit on the current account of the balance of payments.

“This is expected to increase moderately in the years ahead, but without unduly straining the overall balance of payments, which benefited from healthy capital inflows last year,” Manuel revealed.

Inflation, as measured by CPIX, has slowed down significantly from its peak of 11,3% in October 2002. The tightening of monetary policy during 2002, the stronger rand and a slowdown in the food price trend in 2003 contributed to the moderation in inflation.

“CPIX is now firmly within the target range of 3% to 6%. With the producer price index indicating a decline in factory gate prices year-on-year to December 2003, and inflation expectations steadily declining, our projection is that CPIX inflation will average 4,8% this year and remain within the target band over the medium term,” he stated.