South Africa Considers Policy Options as World Faces ‘Lehman-Type’ Event

South Africa is considering policy choices to help support the economy as the European debt crisis stalls the global recovery and a rout in financial markets points to a possible banking collapse.

“The world is in a danger zone,” Reserve Bank Governor Gill Marcus said in an editorial comment in Johannesburg-based Financial Mail today. The sell-off in financial markets last week is “indicative of how perilously close we are to another ‘Lehman-type’ moment.”

South Africa, which sells about a third of its manufactured goods to Europe, faces policy implications because of the global slowdown, threatening the government’s growth and jobs goals, Finance Minister Pravin Gordhan told reporters in Pretoria today. Gordhan, who will give revised fiscal targets on Oct. 25, is aiming to narrow the budget deficit to 4.8 percent of gross domestic product in the year through March 2013 from 5.3 percent this year.

“The normal recoveries aren’t happening,” Gordhan said. “Given the abnormalities and tumultuousness, how do you manage fiscal credibility and how do you ensure your economy grows. That’s the mix some countries aren’t getting right.”

Global markets tumbled last week as concern mounted that the debt crisis in Europe may spread beyond Greece, threatening banks in the region. Currencies, including the rand, dropped the most since Lehman Brothers Holdings Inc. filed for bankruptcy in 2008, an event that helped plunge the global economy into recession.

Currency Overshoot

Marcus said the depreciation in emerging-market currencies represent an “overshoot” and it may ease as risk appetite improves. The rand’s decline, if sustained, will add to inflation, and policymakers are “scratching our heads” on how to deal with it, Gordhan said.

The rand had the biggest weekly decline since October 2008 last week, falling to as low at 8.6165 against the dollar before paring losses. It is 15 percent weaker this year, the worst performer of the 16 major currencies tracked by Bloomberg. The rand strengthened 0.3 percent to 7.8323 at 4:51 p.m. in Johannesburg.

South Africa’s economy expanded an annualized 1.3 percent in the second quarter, the slowest pace in almost two years as manufacturing and mining output plunged, the statistics office said on Aug. 30. The government estimates it needs growth of 7 percent a year over the next decade to slash the jobless rate to 14 percent from 25.7 percent.

“Growth also needs a domestic focus and there is an urgent need to revive domestic investment,” as gross fixed capital formation remains below the peak reached before the 2008 global crisis, Marcus said.

The Reserve Bank left its benchmark interest rate unchanged at a 30-year low of 5.5 percent for a fifth consecutive meeting on Sept. 22.

To contact the reporter on this story: Andres R. Martinez in johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net