South Africa: Macroeconomic challenges after a decade of success1

Abstract

More than halfway through the new decade, the South African economy has done very well. Growth has been high since 2004, the budget is relatively healthy, and inflation rates and interest rates are low. As democracy continues to consolidate, there are plenty of grounds for optimism; in fact business confidence indicators and private investment are at an all time high. This report asks the question whether such achievements provide grounds for complacency. In particular it discusses the current account challenge in light of the ASGI-SA program. Our assessment is that a cautionary note on the need to reduce the external imbalances of the economy is needed. We also provide policy recommendations to minimize the negative impact of a possible sudden stop of capital inflows. On the consistency of ASGI-SA program, we note that, although successful growth accelerations are typically based on productivity bursts and not on capital accumulation, nevertheless a large investment program is required to deliver the desired growth rates, given South African employment andproductivity performance. In our view this imposes a large burden on public investment and on the current account itself.