South Africa: Macroeconomic Challenges after a Decade of Success

Jeffrey Frankel, Ben Smit and Federico Sturzenegger

No 133, CID Working Papers from Center for International Development at Harvard University

Abstract: The South African economy has been doing well. Capital inflows and the rand have been strong, growth was high in 2005, 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. Is the job done, or do these achievements open the door to new challenges? What are the risks in the horizon? And how does the government’s ASGI-SA strategy deal with the challenges? This report provides four areas of analysis: an analysis of the current account, the consistency of the ASGI-SA program, the benefits of the current fiscal-macro policy mix and the choice of exchange rate regime. We suggest that ASGI-SA relies too heavily on capital accumulation, in a way that other growth accelerations have not. In addition there are grounds for doubt whether the required jump in investment will be forthcoming, and for worry by how much it would deteriorate South Africa's current account deficit. South Africa would suffer less from a sudden stop of capital inflows than would other emerging economies, particularly because most of the inflows do not take the form of debt denominated in foreign currency. Nevertheless, the already-large current account deficit is worrisome. South Africa is still exposed to a possible a sudden stop, particularly one triggered by a reversal of the global climate for mineral commodities and emerging markets generally. We offer some proposals for reducing this vulnerability. They include avoidance of pro-cyclical fiscal policy and active intervention by the monetary authorities to build up reserves and dampen real exchange rate appreciations.

Keywords: South Africa; ASGI-SA (search for similar items in EconPapers)
JEL-codes: E00 E61 E63 O55 (search for similar items in EconPapers)
Date: 2006-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: South Africa: Macroeconomic Challenges after a Decade of Success (2007)
Working Paper: South Africa: Macroeconomic Challenges after a Decade of Success (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cid:wpfacu:133

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