Nene places greater value on economists

Nene places greater value on economists

2014-07-01 12:22

Johannesburg - Economic forecasters are going to play an increasingly important role in South Africa's budget process amid a necessity to build better forecasting models, Finance Minister Nhlanhla Nene said in a prepared speech at a Thomson Reuters event in Johannesburg on Tuesday.

The fiscal outlook, he said, has been put under increasing pressure by the weakening economic outlook. “The introduction of the expenditure ceiling was partly a response to downward revisions to the growth and revenue outlook.”

Nene said that as we move into an increasingly constrained fiscal environment, the credibility of forecasts becomes important, and the margin for error smaller. “Forecasts published by the economists in this room already play a very important role in the budget process of South Africa,” he told economists.

As such, the Finance minister said policies and actions that regulate and incentivise innovation are needed to capitalise on recent trends and enhance the capacity to address global challenges.

These actions would be needed amid an explosion of urbanisation, revolutionary innovations in science and technology, climate change, global financial and monetary trends, and the balancing of economic power from developed to developing countries.

How the government – in the context of the National Development Plan – handles these developments would be determined by their insight into these circumstances and the foresight they develop about trends and possible futures.

Battle to narrow deficits

It is in this light that the role of economic forecasting must be viewed. “The world is far less stable and predictable than most of us thought, and this truth has great consequences for forecasters, both in government and the private sector,” said Nene. “The economics profession as a whole has been going through a period of soul-searching about the usefulness of existing models.”

Nene said South Africa is in an unusual situation because it has both a wide current account and budget deficit, even though our economy has not rebounded and consumers are pessimistic about the future. “Any standard economic model would predict that a weak domestic economy and weakening currency would quickly result in narrowing of the current account deficit. Instead, it has remained stubbornly high,” he said.

Nene said the country found itself in a conundrum as it attempted to narrow these deficits, while giving continued support to the economic recovery in a period of high interest rates and lower commodity prices. “In the past, easy credit and a commodity boom helped South Africa greatly to raise revenues and lower the costs of borrowing.”

Treasury's focus on forecasts

Nene said the Treasury’s forecasts are mostly in line with those of the private sector. “Where they differ significantly we interrogate the numbers to see what aspects need to reconsidered, or what additional information we may have that was not taken into account in the private sector forecasts,” he said.

Forecasts with the widest range of outcomes are particularly interesting, he said, because they encourage the Treasury to think about what is driving the outlying numbers. “Typically, private forecasters have a greater insight into the outlook of a particular sector,” he said.

“Although we only publish two economic forecasts, we update our forecasts four times a year and continuously track the changing direction of your estimates to inform our projections.”

Forecasters perform better over two-year period

Forecasters perform significantly better than a pure trend forecast over a two-year period, Nene explained, pointing to a review by the Bureau of Economic Research at the University of Stellenbosch. It compared forecasts of the Bureau with those of National Treasury, the International Monetary Fund (IMF), and a consensus forecast from the private sector.

“They also found that all the forecasters’ models come remarkably close to each other in terms of accuracy, at least in the short term,” he said. “But over the medium term, the accuracy drops off rapidly. From a budgeting perspective, three- to five-year forecasts are very important for making policy choices.”

“If South Africa were to introduce a fiscal rule, for example, then greater emphasis would be placed on the credibility and accuracy of our longer-term forecasts,” said Nene. “Choices made now on the basis of these insights will largely determine whether or not South Africa will by 2030 have a stronger economy and a more socially equitable society.”

  • John Williamsii - 2014-07-01 12:52

    Where's his tip for Nhlanhla Nene page?

  • Claire Rees645 - 2014-07-01 12:59

    I have a suggestion, ban trade unions then you will see how our economy flourishes.

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