Godongwana warns of intensifying risks to economy

Downside risks to SA’s economy are intensifying as a result of escalating geopolitical tensions and China’s sluggish economy along with the impact of floods in KwaZulu-Natal earlier this year, frequent power cuts, and rising inflation, finance minister Enoch Godongwana said.

The deepening war in Ukraine, including sanctions imposed on Russia for invading its western neighbour have “gravely impacted our assumptions [in the February budget] on the domestic outlook,” he said in a speech at the Government Employees Pension Fund annual conference in Cape Town.

Godongwana, who will deliver his medium-term budget policy statement in parliament on October 26, said the conflict “as well as other risks which are beginning to materialise will put pressure on the fiscal space in developing countries such as SA”.

Slower growth in China’s economy as well as lower global growth meant lower external demand, threatening the pace of economic recovery in SA, he added.

The IMF has revised its 2022 GDP forecast for SA down to 2.1%, warning that tighter global financial conditions could induce debt distress in emerging markets and developing economies, Godongwana said. The Washington-based lender has also been revised down its growth forecasts for almost 70% of emerging markets and developing countries, he added

The war in Ukraine had created new risks for SA’s economic outlook, and to fiscal and monetary policy, and had worsened the supply chain bottlenecks that emerged during the Covid-19 pandemic, Godongwana said. The conflict had also increased inflationary pressures through higher energy and food prices, leading to a rapid tightening of monetary policy while adding to fiscal pressures. 

“More aggressive interest rate hikes by major central banks have already prompted capital outflows from emerging markets, raising fears of economic contraction in the near term,” Godongwana said.

The IMF has cut its 2022 global economic growth forecast to 3.2% from 3.6%, citing a worse-than-anticipated slowdown in China, further Covid-19 outbreaks and lockdowns, and the effects of the war in Ukraine, he said. Among emerging markets and developing economies, growth is projected to fall to 3.4% in 2022 from 6.6% in 2021, well below the annual average of 4.8% from 2011-2019, Godongwana added. 

“The negative spillovers from the war in Ukraine will more than offset any near-term benefits from higher energy prices in some commodity exporters,” he said.

Addressing the issue of pension fund investments in infrastructure, Godongwana said government’s framework for public private partnerships (PPPs) was “long overdue for revision” as it took too long to get them off the ground. 

“To address this, we aim to create a centre of excellence for PPPs, as well as introducing an expedited approval process for projects below a predetermined value. This centre of excellence will be a direct interface with private financial institutions for investments in critical government infrastructure programmes,” he said.

“In SA the amount needed to finance both brown and greenfield infrastructure projects totals in the region of R1-trillion over the next five years. Put differently, SA needs to lift the level of fixed investment in the economy to at least 30% of GDP from the current level of around 19% of GDP ... [government] will require partnerships with the private sector, especially in the finance sector where global institutional investors including pension funds have more than $100-trillion in assets under management.” 

Godongwana acknowledged that the problem was not merely a lack of private sector desire to invest but often also an insufficient supply of investible infrastructure projects. 

“Inadequate project design and preparation, as well as regulatory and institutional frameworks that are too difficult to navigate are not conducive to private investment,” he said

Government had capitalised on the Infrastructure Fund to the tune of R100bn over the next five years, he said.

ensorl@businesslive.co.za