Top button

Top button

Top button

South Africa has to weigh the need to create a healthy business environment against its commitment to social transformation. Finance Minister Trevor Manuel explains the Government's strategy.

1996 was a tough year for the South African economy: the rand tumbled and foreign investment dried up. What went wrong and can you prevent it from happening again?

Last year we weathered a rather volatile period in the foreign exchange market. 1995 had seen an appreciating rand and substantial inflows of short-term capital. We had started implementing tariff reductions, and these, together with the appreciating rand, stimulated imports, putting pressure on the balance of payments. The important thing that we learnt from the depreciation that occurred in 1996 was that we operate now in an open international financial environment after a long period of relative isolation, and that there will be times when capital flows and exchange rate movements interfere with our domestic monetary management and inflation reduction. But we are fully committed to extending our participation in the international economy on terms which are competitive and market-based. We have not tried to change everything at once - there are regulatory and institutional reforms which need to be properly worked out. For example, our approach to exchange liberalisation has been explicitly designed to allow for a substantial degree of portfolio realignment to occur in advance of complete liberalisation. We have adopted prudent policies which allow for periods of adjustment - of learning the rules in new trading environments. We believe that part of the pay-off can be secured in advance if market participants are given clear signals of where policy is headed and political commitment is clear.

We see 1997 as a year of consolidation. The underlying conditions in both the real economy and the financial markets started to improve after October 1996. The medium-term prospects are positive: a sound macro and fiscal framework, the Growth, Employment and Redistribution Strategy, GEAR, has been adopted and implementation has begun; there has been a substantial acceleration in exports across various sectors of the economy; reserves have improved to a level of R22.1 billion; the markets have taken the recent steps to relax foreign exchange controls in their stride and the rand has remained firmly within its trading levels of around R4.5 to the dollar.

How is your economic strategy contributing towards the Government's targets for social change? And is it possible to reach a satisfactory balance between the need for fiscal discipline and the demands for social spending?

On the 14 June 1996, we tabled a macro-economic strategy called GEAR. We set the targets for 6 per cent growth and the creation of around 400,000 jobs a year by the year 2000. This strategy was extremely well received both internationally and locally. Any questions that arose were not whether this was what South Africa required in order to become an internationally competitive, viable economy, but whether the Government would be able to implement it.

"We are committed to transforming the economy from one which favoured a few, to one which provides for the needs of all its people"

When the Government tabled the Budget on the 12 March 1997, it showed it was committed to achieving the targets that it had set out in the GEAR strategy - the 4 per cent deficit for example. However, the budget was not only about delivering a 4 per cent deficit - it was also about finding the right balance. 55 per cent of non-interest expenditure went into the social services. Overall health and education expenditure was maintained, and welfare spending increased. At the same time, we were able to increase the resources that will go into national crime-prevention strategies. In line with the goals of the RDP and GEAR, the budget showed a clear shift in priorities towards poverty relief, social development and crime prevention, whilst at the same time reducing the tax burden for low and middle income earners, improving competitiveness through halving marketable securities tax, and introducing no net tax increases. The Government also announced significant measures to liberalise foreign exchange controls.

It's not a question of either having a high deficit, or large social expenditures. It is fundamentally incorrect to assume that every rand spent is well spent. Our task is to work with the various departments to make sure that there is much better resource utilisation. Several reform initiatives aimed at improving the effectiveness of fiscal planning as an instrument of governance have been initiated. These include the development of a medium-term expenditure framework and a forward-looking approach to fiscal planing which will assist with the reprioritisation of expenditure and ensure a better fit between policy and rands spent. These and other institutional reforms, such as a thorough review of the Government's procurement policies, are wide-reaching, and we believe they will entrench a culture of good governance and delivery.

The Government is committed to transforming the economy from one which favoured a few, to one which provides for the needs of all its people. The path it has chosen to achieve this transformation is one that demands substantially more austerity from the Government than its forerunners did, yet it does not sacrifice the fundamental objective of transformation.

How is South Africa faring in terms of winning new long-term fixed investment?

Your readers will be interested primarily in investment from foreign sources, so I will concentrate on our Foreign Direct Investment. A survey by an independent research organisation, BusinessMap, recently revealed that FDI commitments have grown consistently since the 1994 election so that these commitments - actual and planned - now stand at more than R30 billion. These are not all new investments, but also represent expansions by foreign companies.

72 percent of this FDI is concentrated in five sectors - telecommunications, energy and oil, motor and components, food and beverages, and hotel, leisure and gaming. The United States is leading investor, but some 12 per cent of their R11 billion is reinvestment. The Malaysians are second, with the bulk of their investment going into existing assets. After these countries follow the UK, Germany and Japan, with 80 per cent of FDI activity since 1994 coming from these 5 countries. Some of the figures of the top investing companies are: SBC Communication (buying into Telkom) Rm 3, 320; Telekom Malaysia (also Telkom) Rm 2,200; Coca Cola Rm 2,070; Petronas Rm 1,900; Caltex Rm 1,200; BMW Rm 1,100.

There is still much scope for increased investment, especially in view of South Africa's context within Southern Africa. The GEAR includes tax incentive packages to attract foreign direct investment. In the budget we levelled the playing field between foreign and domestic investors. We have also concluded a number of double taxation treaties which clearly strengthens the position of prospective investors and provides a fair amount of legal certainty. There are no exchange controls that apply to non-residents. The few that remain apply only to domestic investors. Therefore, foreign investors are free to invest and to withdraw their investments as they please. This, we think, provides the kind of openness that many prospective foreign direct investors would find attractive.

Why does South Africa have several regional development corporations competing for foreign investment?

The reason is historical: development corporations were set up by the previous government to fund the so-called 'homelands' - such as Transkei, Ciskei, Bophuthatswana, Venda, KwaNdebele, Qwa-Qwa. The previous government tried to market these areas as autonomous, independent states and therefore self-financing. Many of these corporations had independent marketing agents in various countries. Currently we are involved in a complete review of our Development Finance Institutions in order to eradicate duplication and unnecessary competition. In terms of attracting investment, we have a single investment authority, 'Investment SA', which has been set up by the National Department of Trade and Industry as a one-stop shop for potential foreign investors.

Is privatisation going to play a part in your plans for strengthening the economy? If so, can you point to the industries the Government is considering privatising?

Restructuring South Africa's state assets is part of the Government's policy, and as outlined in a Framework agreement reached with organised labour, may involve the total sale of the asset, a partial sale to strategic equity partners or the sale of the asset with the Government retaining a strategic interest. Recently we concluded the largest single deal in sub-Saharan Africa, namely the sale of a 30 percent equity stake in the telephone utility, Telkom. Other enterprises that are soon to be sold, fully or partially, include South African Airways, the Airports Company and Sun Air; SAFCOL (forestry) and Alexkor (a diamond mine).

What efforts are being made to tackle government debt?

One of the pillars of the Growth, Employment and Redistribution strategy, is deficit reduction. The Government is committed to reducing the overall level of government borrowing and thereby reducing over time the burden of debt service costs, which for the 1997/98 financial year, amounts to 21 per cent of total estimated expenditure, a situation with is clearly both untenable and unsustainable.

The Government has also embarked on a major project to improve the management of its assets and liabilities. A framework for risk management has been developed and adopted and a two-phased implementation strategy is underway. The strategy has two key objectives: to improve debt and cash management so as to reduce debt service costs; and to improve the structure and liquidity of the domestic financial markets through a series of market reforms. Considerable savings through better cash management have already been made.

Top  |   Back  |  Index  |  Feedback

©Kensington Publications 1997