LATEST DEVELOPMENTS
- The growth rate in 1995 was the highest in eight years, but it started losing steam in the fourth quarter.
- Domestic expenditure accelerated again in the fourth quarter and was increasingly financed by means of bank credit. Savings performed poorly and dropped as a percentage of GDP.
- Both import and export volumes were down in the final quarter of 1995.
- The deficit on the current account of the balance of payments increased sharply, but was more than neutralised by a net inflow of capital. As a result, the net and gross gold and other foreign exchange reserves grew sharply.
- The Government's Budget deficit for the 1995/96 fiscal year amounted to 6% of the GDP, despite receipts which exceeded budgeted amounts by a wide margin.
- The inflation rate declined further.
- Money market interest rates moved mainly sideways. Capital market interest rates, on the other hand, dropped until mid-February and then rose again sharply.
- The real effective exchange rate of the rand firmed in the second half of 1995 up to more or less mid-February 1996, after which it decreased.
PROSPECTS
- The higher growth rate levels may well continue for the current year, although growth in the non-agricultural sectors could tend lower.
- The rate of increase in real expenditure is expected to slow, as should credit extension.
- The deficit on the current account of the balance of payments may narrow but will simultaneously be financed by a lower net capital inflow.
- The exchange rate of the rand is extremely volatile following the events in February, the resignation of the Minister of Finance, and uncertainty about the government's proposed economic growth plan. However, no sharp decline in the exchange rate is foreseen for the remainder of the year.
- The inflation rate could accelerate somewhat in the coming months, but should slow again in 1997.
- We do not expect an early Bank rate cut. Capital market interest rates could fluctuate between 14,8% and 15,8%.
- Prices of industrial shares on the JSE are expected to tend sideways to slightly down.
BALANCE OF PAYMENTS
Exports fared satisfactorily in 1995, increasing to 8,1% despite a poor performance by the goldmining and agricultural sectors. Owing to the sharp increase in domestic expenditure, and particularly an encouraging increase in real gross domestic fixed investment of 10,4%, the volume of exports increased by 17,1%.
Both imports and exports slumped markedly in the last quarter of 1995. The slowdown in imports relates to a reduced rate of expansion of particularly fixed investment in plant and machinery, and relatively high inventory levels. The deterioration in exports can be ascribed in part to the fairly strong rand in this period, linked to lower export incentives and a drop in surplus production capacity.
The deficit on the current account of the balance of payments widened sharply to R12,7 billion last year. The deficit was more than neutralised by a R21,7 billion net inflow of capital of which R12,5 billion was long-term capital. This increased net reserves by R9,1 billion, enabling the Reserve Bank to reduce foreign loans by R5 billion.
The exchange rate of the rand was stable last year. Indeed, in real terms it strengthened by more than 5% during the last 6 months of the year, rising even further in the first 6 weeks of 1996. However, changed foreign perceptions on the South African economy by mid-February caused the exchange rate of the rand to weaken by more than 11% over the past two months.
This adjustment was not altogether unexpected (see the previous issue of the Monitor), and is not necessarily detrimental to the economy. It did lead to higher rates on the capital market in the short term, and price increases of imported goods and services may accelerate as a result. Foreign investors may also choose to adopt a wait-and-see attitude. But the other side of the coin is that South African exporters have been placed in a more competitive position, and locally manufactured products have been protected to some extent.
At around R3,90 to the dollar the exchange rate is valued at a more realistic level, given that our inflation rate is still higher than that of our major trading competitors; the remaining surcharge on imports has been abolished; import tariffs are gradually being reduced; and export subsidies are being phased out. No country can expect to remain competitive in such an environment if the real effective value of its currency is also increasing.
For 1996 we foresee that growth in domestic expenditure could slow, with a resultant easing in imports. Exports should perform reasonably well thanks to additional capacities arising from the completion of mega projects such as Columbus and Alusaf, as well as the much better agricultural crops. Although the deficit on the services account could become even larger, we nevertheless expect a reduced deficit on the current account.
GOVERNMENT FINANCE
The salient features of government finance for the 1995/96 financial year, relative to the GDP, are as follows:
- Expenditure: 31,2%
- Receipts: 24,9%
- Deficit before borrowing: 6%
- Dissaving: 3,6%
- Deficit to net savings of the private sector: 70%
- Government debt: 56%
The most disappointing aspect of government finance is that, despite almost three years of economic upswing which has led to substantial excesses over budgeted revenue, the deficit before borrowing is still at the unacceptably high level of 6% to GDP. In addition government dissaving could not yet be eliminated, and government debt and the interest burden relative to the GDP continued to rise.
Expenditure was budgeted to increase by 10,4% for the current fiscal year, while revenue would rise by 13,6% following a net increase in taxes and other revenue. The budgeted deficit decreases to 5,1% of the GDP, whereas the funding requirement increases to R45 billion. Discounting revenue from the sale of strategic oil stockpiles, the expected deficit increases to 5,5% of the GDP. There is some concern that these revenues may not be realised because of an expected decline in the growth rate of the non-agricultural sectors.
REAL ECONOMIC ACTIVITIES
Because of the weak performance of agriculture and goldmining in 1995, the real growth rate of 3,3% at market prices and 2,8% calculated at factor costs can be regarded as satisfactory. The non-primary sectors grew faster than 4%, with manufacturing as the star performer growing at a rate of 7,6%. The tourism sector also fared well.
On the demand side, where gross domestic expenditure rose by 5,6%, the outstanding feature is the marked increase of 10,4% in real fixed investment, with investment in plant and machinery in the lead with an increase of 19,9%. As a percentage of the GDP, fixed investment amounted to 16,9% last year, as against 16% in 1994. Although this is a positive development, it should be borne in mind that these increases came from a low base. As a result the net real fixed capital stock rose by only 1,3% last year. This is still too low to help lift the growth ceiling in the economy substantially. The net real fixed capital stock in manufacturing increased by 4,6% last year.
For all practical purposes the economy reached full production capacity levels in 1995. This, together with the events as described in the section on the balance of payments, led to a significant slowdown in the growth rate during the second half of 1995 (the final quarter in particular).
Abundant rains during the summer months not only filled up the country's dams, but there is little doubt that the agricultural sector is going to make a significant contribution to the overall economic growth rate. The maize crop estimate has already been adjusted upward to 10 million tons. Moreover, international grain prices in dollar terms are currently some 60% higher than a year ago. This, further enhanced by a drop in production costs per ton produced because of the higher yield per hectare, should translate into healthy profits for grain farmers.
Based on current crop estimates, a real growth rate for the current year of approximately 3,5% is foreseen. One should bear in mind, however, that the growth rate of the non-agricultural sectors could be lower - probably about to 2% to 2,5%.
INFLATION
The inflation rate, as measured on the basis of the CPI, last year reached its lowest rate of increase since 1972 and rose by 8,7%. This figure dropped further to 6,5% in the fourth quarter.
Given the current stance of the business cycle, the fact that the economy is virtually operating at full capacity, the continued relatively strong surge in wages and the worsening imbalance between expenditure and production/income, the favourable inflation performance remains a fascinating phenomenon. Indeed, many quarters question the accuracy of the inflation figures. We have no quarrel with the official measurement of the inflation rate. We accept the methodology as scientific and the result as a realistic reflection of actual price changes.
However, some points in this regard do justify special mention. Firstly, last year saw some dumping of foodstuffs from overseas, which caused food prices to decrease in the third quarter. The second and more important point relates to the strengthening in the external value of the rand, the abolition of the remaining surcharge on imports, and the scaling down of import tariffs. This combination of factors, together with the relatively low inflation rates in the exporting countries, resulted in a seasonally annualised decline of 0,5% in the prices of imported goods as measured on the basis of the PPI in the third quarter, increasing by only 2,8% in the fourth quarter. Thirdly, one should bear in mind that the more effective utilisation of production factors on account of the upswing in the economy helped curb the increase in unit production costs.
A modest acceleration in the inflation rate is foreseen for the months ahead, but double-digit levels are unlikely. Furthermore, one may expect the inflation rate to resume its downward trend later in 1997.
MONETARY DEVELOPMENTS
Growth in the M3 money supply increased by slightly more than 15% in 1995 - much faster than the upper guideline of 10%. Rapid growth of 17,5% in credit to the private sector, with a high of 19,5% in April last year, was the major source of the M3 increase. In the course of 1995 the growth rate of credit to the private sector slowed, but it started accelerating again in the fourth quarter - fueled by an increase in consumption expenditure on durables.
Monetary policy naturally had to remain tight throughout. Money market interest rates remain high in real terms and have mostly been moving sideways over the past months.
Capital market interest rates, however, were a horse of altogether another colour. These rates, under pressure from the stable political and economic environment and lower inflation rate in the second half of last year and even the first few weeks of 1996, dropped sharply by more than 3 percentage points. After the exchange rate fracas in February, long-term rates rose by 1,5 percentage points.
Share prices on the JSE further improved last year for the same reasons as those described above, but in addition were boosted by solid increases in corporate profits. The prices of industrial and commercial shares rocketed by 88% from May 1993 to January 1996, and share prices of banks and insurers by 134% in the same period. Share prices in the mining sector were lacklustre in comparison; in fact, gold shares slumped for most of 1995.
The current investment climate is rather less certain than a year ago. Consequently, stock and share prices have dropped marginally. For the time being investors - especially foreigners - may prefer to stay out of the market, and the JSE can be expected to move sideways. Strong downward trends are not excluded, however, should the gold price fall or Wall Street collapse. The latter will become a strong possibility once the current trend of monetary policy relaxation has run its cause.
Given current economic conditions, an early cut in the Bank rate is not expected. However, a percentage point cut later this year, followed by another cut in 1997, remains a possibility - provided the gap between consumption and income narrows and the capital account of the balance of payments offers sufficient compensation for the projected deficit on the current account.
Report completed on 2 April 1996
