Carolyn Cohn and Sujata Rao
THE global community should fear the worst over the US debt crisis and shore up its economic defences accordingly, Finance Minister Pravin Gordhan said yesterday.
Financial markets are getting nervous that the budget deadlock in Congress may not be resolved before October 17, the deadline to raise US borrowing limits. That could lead to an unprecedented technical default by the world's largest economy.
As the US government moved into the second week of a shutdown yesterday with no end in sight‚ a deadlocked US Congress also confronted the October 17 deadline to increase the nation's borrowing power or risk default. The last big confrontation over the debt ceiling‚ in August 2011‚ ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to occur. A similar last-minute resolution again looks a distinct possibility.
Neither Republicans nor Democrats have offered any sign of impending agreement on either the shutdown or the debt ceiling‚ and both blamed the other side.
Gordhan said there was a "heightened sense of anxiety" among the world's investors and policymakers. "This is clearly an issue that might go to the brink. All of us need nerves of steel at this point," Gordhan said on the sidelines of a conference in London. "We need to anticipate the worst and hope that we all have sufficient defences in place." Gordhan earlier told the conference economic growth in SA would not reach its 2.7% target this year but would not fall below 2%. He said the US crisis might cast the International Monetary Fund into an "extraordinary role". Emerging economies needed to make sure of their fiscal credibility and to take steps to address vulnerabilities such as high current account deficits.
Meanwhile, South Africa's reliance on external capital flows to plug its balance of payments deficit has seen it labelled as one of the "fragile five" major emerging economies. Gordhan criticised the description as "regrettable" and demonstrating "the short- sightedness of financial commentary".
"We don't feel fragile at all. We have a better growth path than many of the developed economies in the world, and a lot better prospects," he said.
Plugging South Africa's current account deficit, one of the biggest in the world at more than 6% of its economy, would be no problem, Gordhan said, citing healthy foreign demand for the country's debt. He also said markets looked better prepared than they were in May or June for a scaling back of the US Federal Reserve's money-printing – the timing of which is likely to have been pushed back by the debt impasse.
As well as uncertainty about US events, South Africa's economy has also been hit by falling demand for metals exports and by labour unrest. – Reuters