SA'S motor industry is in dire straits, and in negotations for a government bail-out. The situation of the motor industry tells us a lot about what has been going wrong and right with economic policy - in the past and now.
It's clear that the sector can't expect a bail-out anywhere near the size that went to the US automakers, although there have been rumours that component makers were asking for R10bn. The budget came and went - without any big bail-outs for carmakers.
One could ask whether Finance Minister Trevor Manuel shouldn't have spent some money on the vehicle manufacturers, as this would protect jobs already in existence instead of trying to create new ones through money spent on public works programmes.
But one of the responses to that is the fact that the motor industry already receives billions of rands per year in state sponsorship. This is done via the motor industry development programme (MIDP), which gives the industry free imports as long as certain criteria, such as manufacturing for export, are met.
Manuel is understandably wary of giving an industry already using up a lot of government resources further cash. His decision not to budget for a bail-out was the right one.
But it must be said that critics of the MIDP, and the policies that will succeed the programme when it expires, miss the point that more than 300 000 people are employed in the industry (most of them in sales).
In addition, a programme encouraging exports is good for SA's balance of payments, which would otherwise feel the pinch of a much higher trade deficit for the motor industry. So the MIDP, and its successor, are the right policies for the industry.
Demand in free-fall
It seems some companies in the industry will get a bit of help in the form of a soft loan from the Industrial Development Corporation (IDC). This could be fairly substantial, as Business Day reported this week that one manufacturer alone had asked for more than R200m. Still, amounts will fall far short from the scale seen overseas.
IDC loans would be a good thing as they could protect jobs at risk. But the crucial question is to what extent IDC financing of manufacturers will save the industry.
Demand for motor vehicle exports have fallen off a cliff, and that won't change because manufacturers will have extra money. More importantly, local demand has been wiped out - and financing at the manufacturer level won't change that. Demand is the problem, and that must be addressed.
It's clear that the key to helping the motor industry is cutting interest rates. Only once demand is boosted will the benefits be felt by the manufacturers, and will jobs be saved.
Reserve Bank governor Tito Mboweni should take a long, hard look at the monthly vehicle sales figures when next the monetary policy committee (MPC) looks at economic indicators.
Local vehicle sales have been hard hit by tight monetary policy, and - though it's too soon to tell - there's no sign yet that the start of the downward cycle in interest rates is making any difference at all.
Not in dribs and drabs
New passenger vehicle sales fell more than 34% year-on-year in February 2009, slightly worse than January and the worst year-on-year contraction in 25 years. The decline for 2008 as a whole was 23%.
It simply doesn't make sense to decimate the motor industry through high interest rates only to provide soft loans for companies when these interest rates bite too hard.
The dire straits of the motor industry provide ample evidence of how monetary policy went wrong last year, with interest rates rising too high.
The question is whether further interest rate cuts - three to four percentage points are expected - will pull the industry out of the doldrums. Of course they will help. But progress will be slow. At first consumers will respond to interest rate cuts by hanging on to their cars and homes, rather than going out and buying new cars.
This is all the more reason why interest rate cuts should be front-loaded, so that the immediate relief doesn't come in dribs and drabs but is substantial. It's disappointing that it now looks as if the extraordinary meeting of the MPC that Mboweni promised in February won't materialise.
Industrial policy to support the motor vehicle industry through the MIDP and the IDC is the right action by government. Unfortunately, other policy areas aren't playing ball.
The vehicle industry's woes illustrate starkly how badly monetary policy was run during the upward cycle in interest rates.
- Fin24.com