Sep 15 2008

Was this Trevor’s worst Budget?

Published by at 6:08 pm under Opinion,South Africa

First published on my old blog on 28/3/2008. 

A month is a long time in the life of a national government Budget…..in South Africa. What looked solid and realistic then, looks very shaky now. I’m talking about Trevor Manuel’s Budget numbers.

These were based on, among others, an exchange rate, an inflation rate and a GDP growth assumption, which seemed (for most economists) realistic at the time, but seem rather unrealistic today. 

At the time Trevor said inflation will be edging below 6% in the second half of the Budget period from around 9% at the time of delivering his Budget speech. Today the opposite seems likely – inflation might edge higher later this year. If the following interview is anything to go by…

(What follows is a Radio 702 interview, published on iAfrica.com and shortened by me here.) 

March 27 
Bruce Whitfield (Interviewer of Radio 702):

Worse than expected producer price inflation number today. It came in quite a lot higher than expected in February, but may not be all that bad. Or am I being overly optimistic? Chris Hart, the chief economist at Investment Solutions, am I being overly optimistic when I see producer price inflation at 11.2 percent, based on a new calculation, or is it as bad as it looks? 

Chris Hart: 

It is almost as bad as it looks. I think the key thing is that inflation is experiencing another surge, we had PPI peaking early last year at about 13.2 percent that was April and May last year and it came down below 10 percent and now is rising quite strongly again. 

Bruce Whitfield:

That imported PPI number is close to 16 percent. That is very scary, considering the trade deficit and with the currency as weak as it is, it does add additional pressure to the overall economy. 

Chris Hart:

That adds a huge amount of pressure. Where is that going to end, or where is consumer inflation going to end? I suspect CPIX may well breach the double digit area and, in the absence of any other measures to fight inflation, with Eskom coming on with a potential huge increase and municipal charges looking quite scary. In addition, there is the change to the way the rates are calculated. So, the consumer is under a huge amount of pressure, but inflation may rise above 10 percent and tempt the monetary policy committee to hike rates. I suspect they are going to hold off now, but by June they may be tempted to hike rates. 

Bruce Whitfield: 

Chris Hart, thanks very much indeed, the chief economist at Investment Solutions. 

So, four weeks after delivering the Budget speech it already looks like the numbers are going to be way off the mark. All because the rand forecast was wrong, which made the inflation forecast wrong, which made the average interest rate forecast for the period wrong, which made the GDP growth rate for the period wrong, which (in turn) made Trevor’s guess of his tax income wrong. 

But, we haven’t seen the last of it. If the rand doesn’t stabilize soon (which it probably won’t), the 2008/09 Budget could turn out to be one of Trevor’s worst on record (as far as the credibility of the numbers are concerned). 

And all of this just four weeks into the new fiscal year…

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