Cablegate: South Africa: Finance Minister Thinks Ahead

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 005357

SIPDIS

DEPT OF TREASURY WASHDC

SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

DEPT FOR AF/S; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD SF
SUBJECT: SOUTH AFRICA: FINANCE MINISTER THINKS AHEAD

REF: A. PRETORIA 5007
B. PRETORIA 4879
C. PRETORIA 4809

1. (U) Summary. Minister of Finance Trevor Manuel was the
guest of honor at the 60th anniversary conference of the
Bureau for Economic Research (BER), a well respected South
African think tank. Manuel reflected on progress made since
the Growth, Employment, and Reconstruction (GEAR) plan was
launched. While the economic policies of the 1990's were
"distastefully Washingtonian," he said, "in retrospect, they
were the right ones to pursue." Today, he thought that
fiscal and monetary policy was on a stable platform, foreign
exchange management strong, the inflation trajectory under
control, and the government was able to focus more on skills
development and reversing past discriminatory social policy.
Looking to the future, Manuel explained that while public
sector debt and investment would account for an increasing
share of the economy, public sector leadership would also
foster more robust economic growth. He said that now policy
makers should start looking qualitatively at redesigning the
country's rural and urban landscape. End Summary.

2. (U) Introduced as the longest serving Finance Minister in
the world, Trevor Manuel was the guest of honor at the 60th
anniversary conference of the Bureau for Economic Research
(BER) held in Stellenbosch on November 18. He took the
opportunity to reflect on how far South Africa had come in
the nine years that he had been finance minister, and where
the country now needed to go. The tone of the half-day
conference was decidedly upbeat, as the four speakers who
preceded Manuel acknowledged newly found stability in the
economy and strong growth indicators, but decried the ill
effects of an overvalued currency on job creation and the
export sector. Had South African Reserve Bank (SARB)
Governor Tito Mboweni participated as planned, the conference
might have focused more on the differences between National
Treasury and the SARB when it came to the impact that
interest rates had on the exchange rate. Former Monetary
Policy Committee member and now SARB Senior Consultant for
Research Bernie de Jager replaced Mboweni at the last minute.
Other speakers included BER Director Ben Smit and Rand
Merchant Bank Chief Economist Rudolph Gouws.

The Road Traveled
-----------------

3. (U) Manuel began his talk by reflecting on progress made
since the Growth, Employment, and Reconstruction (GEAR) plan
was launched in 1996. The fiscal challenges that the country
faced then included modernizing the tax system and growing
the tax base, stabilizing the fiscal budget, deepening the
country's debt markets, controlling inflation, and investing
in growth and development. He paused to explain that right
when the government was making some progress in 2001, it had
to respond to a speculative attack on the rand. Today, he
mused, "A little less market confidence in the rand might be
a welcome relief."

4. (U) While the economic policies of the 1990's were
"distastefully Washingtonian," he said, "in retrospect, they
were the right ones to pursue." Today, the country's fiscal
and monetary policies were on a stable platform, foreign
exchange management strong, the inflation trajectory under
control, and the government is focused on skills development
and reversing past discriminatory social policy. He claimed
that policy makers in OECD couldn't believe how quickly and
successfully South Africa had taken decisions to open its
market to trade and investment. "The hold up in WTO was
about the reality in South Africa." He stressed, "What we did
in the 1990's is what is now so hard for others to accept" in
WTO Doha Development Agenda negotiations.

Looking Toward The Future: Growth and Development
--------------------------------------------- ----

5. (U) Manuel said that there was encouraging evidence of an
increase in pace of economic growth and along with it job
creation. Alluding to 5.6% annualized GDP growth in Q3,
Manuel said that "the economy was really pumping at the
moment" and that finally unemployment had begun to fall.
Referring to objectives outlined in the Mid Term Budget
Policy Review (Ref A), Manuel declared that the government
could now turn more of its attention toward accelerating the
growth rate of investment in productive activities, improving
economic participation of the marginalized population,
raising the level of human development (e.g., skills
training), improving the effectiveness of government, and
entering into regional and international partnerships that
supported South African growth and development.

The Role of Public Sector Investment
------------------------------------

6. (U) Noting with pleasure that public sector investment had
grown 19% in 2003 and another 21% so far in 2004, Manuel
reaffirmed that the government intended to increase this
further as it pursued major infrastructure projects,
including the port, rail, power, telecommunications, and
water projects. Much would be funded from the bond markets
-- good news for bond traders, said Manuel. While public
sector debt would grow under this scenario, so would the
economy, and this should mitigate any rise in the debt to GDP
ratio. Manuel explained that while public sector debt and
investment would account for an increasing share of the
economy, public sector leadership should also foster robust
economic growth.

Redesigning the Urban Landscape
-------------------------------

7. (U) "Still a Cape housing activist at heart," Manuel said
that he had started asking questions about in which types of
cities did South Africa want its children to live, work, and
play. While roads, electricity, water, sewage, and housing
had kept pace with a changing society, he confessed that the
quality of life in low income and poor areas was bleak --
littered with townships of the apartheid variety and
formalized squatter communities that warehoused human beings
to labor in nearby first world cities. Manuel believed that
South Africa had to redevelop its urban landscape, to
reconnect these communities with commercial and industrial
areas that surrounded them, or develop growing commercial
zones and recreational areas where there were none to bring
jobs closer to living areas. Moreover, cities needed to
provide affordable and efficient services -- such as power,
water, transport, and banking. The country suffered from the
distorted spatial planning of the past, and now Manuel felt
policy makers could start thinking more qualitatively than
quantitatively.

8. (U) Manuel confessed that the situation was not helped by
the fact that the country had reorganized itself into 284
wall-to-wall municipalities, sometimes creating a tremendous
mismatch between revenue capability and budget needs. This,
he said, was the starting point for a new fiscal policy, but
he did not elaborate. He only said that the National
Treasury was looking at ways to deepen municipal financing
going forward.

Redesigning the Rural Landscape
-------------------------------

9. (U) Manuel said that South Africans also had to start
thinking about their rural landscape, one that had also been
distorted and fragmented by apartheid. He reiterated a point
that he made in his October budget policy statement, that the
first order of business would be to resolve outstanding land
restitution claims (i.e., claims by citizens who had their
land confiscated by the state after June 19, 1913). This
would free up budget and bureaucratic resources to start on
land redistribution -- "which had broad implications," he
said, "but need not loom large." Manuel said that land
restitution and redistribution would continue for a long
time, and new land coming into agricultural production might
even become an important area for economic growth. In the
years ahead, he said that there would be a shift in both
public and private financing of rural agriculture. He
thought that land redistribution needed to be more
self-financing, but that once land had changed hands, the
state had a crucial role to provide support through programs
such as the Comprehensive Agriculture Support Program. He
also suggested that the Land Bank should diversify its client
base and extend more credit to rural farmers for things like
water management and irrigation, and international trade.

Why not Mzansi Life and Health Insurance?
-----------------------------------------

10. (U) Manuel commented that he was very pleased with the
launch of the Mzansi bank accounts to make banking more
affordable and more available to the poor. He confessed that
sometimes he did not understand how capitalists worked. "Why
did it take so long for the banking community to come up with
the idea of bringing new, low-income customers into the
market?" he asked, after recounting how he had just heard on
the radio that the newly created Mzansi account had already
attracted 100,000 new customers to the formal banking sector.
The government welcomed private sector contributions that
had a social purpose, he said. Now, he challenged, "Why not
Mzansi life and health insurance?"

FRAZER

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