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‘World must prepare for US debt crisis’

Finance Minister Pravin Gordhan says there is a “heightened sense of anxiety” globally.

FILE: Minister of Finance Pravin Gordhan. Picture: GCIS

LONDON - The global community should fear the worst over the US debt crisis and shore up its economic defences accordingly, Finance Minister Pravin Gordhan said on Monday.

Financial markets are getting nervous that the budget deadlock in Congress may not be resolved before 17 October, the deadline to raise US borrowing limits. That could lead to an unprecedented technical default by the world's largest economy.

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 told Reuters and Reuters Insider 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 South Africa would not reach its 2.7 percent target this year but would not fall below two percent.

He said the US crisis might cast the International Monetary Fund (IMF) into an "extraordinary role".

Meanwhile, emerging economies needed to make sure of their fiscal credibility and to take steps to address vulnerabilities such as high current account deficits.

NOT SO FRAGILE

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 six percent of its economy, would be no problem, Gordhan said, citing healthy foreign demand for the country's debt.

Gordhan also told Reuters markets looked better prepared now 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.

Emerging economies have benefited hugely from the Fed's $85 billion-a-month money-printing and many policymakers have urged caution and asked the Fed for more clarity on its plans.

"The markets (now) actually have some sense of anticipation ... Some kind of pricing has taken place," Gordhan said referring to the emerging markets selloff triggered over the summer by the tapering hints.

"There is an understanding that we need a greater level of clarity ... in the way in which tapering takes place so we can minimise negative effects."

Analysts now see a cutback as unlikely before January, given data releases have been held up by the US government shutdown.

CONSTRUCTIVE ENGAGEMENT

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. Strikes hit the car and gold industries, two key exporting sectors, following on from last year's deadly clashes at platinum mines.

"Employers and unions need to change the culture and start embracing a culture of constructive engagement so you don't have long and extended strikes taking place," Gordhan said.

South African exports fell seven percent in August, data showed recently, signalling that the rand's 15 percent year-to-date losses against the dollar are yet to provide any relief.

Gordhan said weak demand for metals was partly to blame, with the US and euro zone recoveries still looking shaky.

He told the conference the authorities now consider the rand's weakness to be overdone.

"(The rand) has overcome the overvalued status it had a few years ago but we all know that a balance must be found between benefits to exporters and the inflationary impact of an over-depreciated rand," he told the conference.

"The market tends to overdo itself and that's what we are experiencing at the moment."

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