South Africa’s government needs to do more to support the country’s vital manufacturing sector, the Finance Minister says.
Manufacturing accounts for 16 per cent of output in Africa’s largest economy and its weakness does not augur well for second quarter growth figures, backing the case for the Reserve Bank to delay monetary tightening into 2012.
“Over the past 6-9 months it (manufacturing) has risen, but it faces many pressures,” Gordhan said. “They seem to be coping but government needs to do more to support it.”
Output growth quickened less than expected in May in volume terms to 0.6 per cent year-on-year from 0.2 percent in April, suggesting economic growth may have slowed in the second quarter from 4.8 per cent in the first quarter.
The Reserve Bank has left interest rates at 30-year lows this year, loathe to raise them and strangle a weak recovery after 2009’s recession.
Gordhan said the main challenges for the sector stemmed from the strength of the rand and the impact of the eurozone debt crisis on European economic growth.
One third of South Africa’s exports are to Europe and policymakers have said the uncertainty of that region’s growth is the main risk to the government’s growth forecast of 3.4 per cent this year.
With about a quarter of the labour force jobless, South Africa’s high unemployment rate has contributed to an increased number of violent protests and strikes this year.
The government has said the economy needs to grow by 7 per cent a year to make a meaningful dent on unemployment and any delay to double growth rates will fuel instability, putting pressure on the ruling African National Congress to adopt populist economic policies.
So far, the government has not buckled to leftists demands, which include strong intervention to weaken the rand, which they say will support the manufacturing sector.
The government has undertaken a range of interventions, including buying dollars and relaxing exchange control regulations, as it has sought to rein in its volatile rand, one of the most traded emerging market currencies.
Gordhan has previously dismissed stronger intervention to weaken the currency and on Wednesday said government measures have worked. “Since the start of 2011, the rand has weakened by 6.4 per cent against a trade-weighted basket of currencies and by 2.6 percent versus the dollar,” Gordhan said in response to written questions in parliament.
“This suggests policy measures implemented thus far have helped to prevent further nominal appreciation,” Gordhan said. He added capital inflows, the main driver of the rand in the past two years, were likely to remain volatile given Greece’s debt crisis and the uncertain outlook for the United States.
The rand has firmed by more than seven percent against the dollar and the euro since the beginning of last year. Many analyst expect it to remain resilient, softening to about 6.9750 in the next six months.