South African banks were well equipped to face what is seen as the world's worst financial upheaval since the 1930s, but they might be affected by restricted global access to foreign exchange, Finance Minister Trevor Manuel said yesterday.

He told Business Day in an interview that the crisis, which knocked the rand to a near seven-year low against the dollar, might also boost the cost of SA's ambitious infrastructure expansion plans.

But spending on stadiums and transport for the 2010 Soccer World Cup should be contained, as the price tag was now mainly denominated in rands. "Building costs are a huge threat to what we want to do. I'm not too concerned but we need to be watching it," he said.

2010 commitments

The government has committed about R28bn to build stadiums and other projects related to the World Cup, which is expected to give SA's economy a boost with an influx of tourists.

Officials plan to spend more than R500bn over the next three years on transport and power infrastructure, which will raise the economy's growth potential.

Weakness in the rand, which plunged five percent to R9.45/ yesterday, will raise the cost of imports needed for the expansion. But the local unit's woes were mirrored by other emerging market currencies, including the Mexican peso, which fell nearly 14 percent versus the dollar.

Manuel said difficulties in raising foreign exchange would be discussed at the annual meetings of the International Monetary Fund (IMF) and World Bank in Washington this weekend. He was speaking before leaving for the talks yesterday.

"If liquidity dries up, how do you finance cross-border deals — be it in trade, investment, or links into the global payments system? Raising foreign exchange will be very tough in an illiquid market," he said.

Borrowing plans by power utility Eskom — which has begun a five-year expansion programme — were likely to be affected, Manuel said.

A lot tougher

"It's going to be a lot tougher and may impact on the cost of infrastructure."

In its world economic outlook yesterday, the IMF warned that the global economy was set for a major downturn this year, with the US and Europe either in, or on the brink of, recession already.

But it said there was little chance of a global depression, provided that finance leaders acted quickly to address market distress. Manuel said that the extent of the crisis — which began last year with problems in the risky US mortgage market — was "mind-boggling" and required a major rethink of financial models that have existed for 20-30 years.

"The bottom line is that in the next while — and it's not going to be six months or a year but probably two years — there will probably be enormous recalibration of what we do and how we finance it," he said.

Rising risk aversion hammered global share markets yesterday despite a co- ordinated round of interest rate cuts in the US, Europe and China. European shares sank to near five-year lows as fears rose about the global economy's slowdown.

"We've never lived through such a period of uncertainty," Manuel said.

The global turmoil hardened the case for continuity in economic policy, which would be quickly recognised by the new leaders of the African National Congress (ANC) — either before or after the fact, he said. ANC president Jacob Zuma and President Kgalema Motlanthe have repeatedly said the policies that have earned SA credibility in financial markets will remain in place, but there is still speculation of a shift to the left after elections next year.

Room for rejigging

Manuel said there was room for some "rejigging" of policies that had not succeeded, without giving details.

But he said suggestions for SA from an international group of economists, popularly known as the Harvard panel, provided ample scope for policy debate.

These included calls for SA to intervene in the foreign exchange market to keep the rand stable and "competitive" and keeping inflation targeting, which has been fiercely criticised by some after a series of interest rate hikes.

The group also suggested a budget surplus of between one and two percent of gross domestic product, and urged that exchange controls be scrapped.

Those constraints are now seen to have helped protect SA's financial sector from the fallout of the global credit crisis.

Business Day