Politics
IMF says South Africa should use mining revenues to fund infrastructure and other developments
The rapid growth rates experienced in sub-Saharan Africa since the 1990s – which defied expectations and proved resilient through the financial crisis are not sustainable going forward, according to the International Monetary Fund (IMF). Speaking at the University of Witwatersrand on Tuesday evening, IMF chief economist, Olivier Blanchard said it was not clear where future growth on the continent would come from.
Blanchard suggested, “African countries should use revenues from mining to prepare for the next step and invest in other infrastructure, such as manufacturing or high-productivity agriculture.” He said that in countries where mining was discontinued, there was often a “return to poverty” and this should be avoided.
Daniel Sloper, Australia’s special representative to the Group of 20 (G20), noted that member countries were looking at structural reforms in their own economies. Sloper said focuses included removing impediments to infrastructure investment, market flows and trade – which included facilitating access to supply chains.
Earlier this year, the G20 finance ministers agreed on a global growth target of 2 percentage points over the next five years. The G20, of which South Africa is a member, represent 85 percent of global GDP, 75 percent of global trade and 60 percent of the world’s poor. Blanchard said that low-income countries (LICs) had done well during the crisis and the IMF expects that they will continue to thrive.
LICs are still driving global growth, while advanced economies (AEs) are dealing with legacies from the global financial crisis. Issues of debt in particular are slowly improving, as fiscal consolidation eases and demand increases. This is particularly true for countries such as the US, UK and Germany, where fiscal consolidation is minimal and firms and households are “in good shape”, said Blanchard. The same recovery, however, is not being seen in Japan and the euro periphery, where fiscal stimulus has ended (Japan) and deflationary risks are increasing the real value of debt (euro periphery).
Emerging market outlook
Emerging markets (EMs) are no longer as able to grow at the same rates as they were before the crisis. They also need to manage changes in the external environment, according to Blanchard. This environment is characterized by improved conditions in AEs. While this increases the demand for exports from EMs, the financial conditions of developed economies have changed. For example, US monetary policy normalization has led to rising interest rates, which has caused money to flow back into this economy and out of emerging economies.
Blanchard also noted, “The extent to which emerging economies benefit from AE growth will depend on who their trading partners are and their financial openness to these countries.” For example, although South Africa will not necessarily see exports increase off the back of a US recovery (since its trade with the country is limited), its capital market will benefit. Blanchard said that on average, a 1 percent increase in the US’s gross domestic product (GDP) would increase GDP growth in EMs by 0.4 percent.
Slow but sure recovery
Blanchard went on to say, “I don’t have the kind of worries I have had for the last five years. My worries at this stage are milder.” His short-term worries include deflation in the euro area and a “hard landing” for China. If current low interest rates in the euro area should fall further and lead to a deflationary spiral, the real value of debt would increase.
This would make it more difficult to borrow and sustain debt and force a stop to personal and corporate lending. Blanchard said that the IMF does not expect a downward spiral of deflation (only a few euro countries have interest rates below zero) but he didn’t want to exclude it. Blanchard stated, “Central banks should do everything they can to avoid it.”
Meanwhile, a serious slowdown (“hard landing”) in China’s growth is unlikely, as banks could handle high loans (currently at 150 percent of GDP). For every 1 percent China lost in growth, EMs would lose 0.2 percent, Blanchard pointed out. Blanchard then concluded, “My baseline scenario is recovery and lower levels of unemployment. Although this will not be to levels one might dream of, recovery in growth would not have been my baseline three years ago.”
Source: Moneyweb