Johannesburg - South Africa cannot afford to run continual budget deficits for funding social expenditure while not tackling unemployment.
In a monthly newsletter to clients, stockbrokerage Imara SP Reid said South Africa has to take heed of what is happening in Europe and not make the same mistakes.
"The lesson they [the South African government] need to learn from Europe, is that no one will lend to you when you are on the ropes," the firm wrote.
Instead, South Africa needs to emulate high-growth emerging market Chile and run budget surpluses in good years. Holding real interest rates high and attracting carry trade money "should absolutely be avoided", the firm suggested.
European budget deficits are in the spotlight with a number of economies - including those of Portugal, Italy, Greece and Spain - having to adopt a variety of austerity measures.
They include reduced government spending, pay freezes and public service job cuts. With these governments being major employers and also expected to spend on infrastructure to bolster sagging economies, Europan policy makers are working a fine line.
SA's 'virtuous cycle' When Finance Minister Pravin Gordhan presented his inaugural Budget earlier this year, he said he expected the deficit to come in at 7.3% of gross domestic product (GDP) on the back of lower tax revenue collection and a variety of social and infrastructure projects.
One firm which is upping its expecations for South Africa is Credit Suisse Standard Securities.
In a recent note to clients, the firm said the country could once again fall into a "virtuous cycle" of continued foreign capital inflows, a strong rand and low inflation. This will encourage higher fixed investment, higher GDP growth, smaller fiscal deficits, and an upgrade of the country's sovereign credit outlook.
Credit Suisse advised clients it has raised its expectations of another 50 basis-point interest rate cut this year. It has also upped its 3.3% estimate for real GDP growth, while reducing the estimate for the budget deficit to 4.6%.
Investec's economic unit said it also expects a 50 basis-point interest rate cut in July. Commenting after the release of the South African Reserve Bank's quarterly bulletin, the firm said while the latest bulletin shows an improvement on the expenditure side of the economy due to inventory rundown, it cautioned that the sustainability of the recovery remained "uncertain".
"Early indications are that economic activity slowed in the second quarter of 2010 as high debt levels and poor employment prospects remain a major constraint on the recovery. We continue to expect an interest rate cut at the July Monetary Policy Committee meeting."
- Fin24.com