• The economic growth rate slowed markedly in the first quarter of 1995; however, it was still 3,3% up on the first quarter of 1994.
  • Domestic spending continues to exceed domestic production, and the gap is being bridged by imports.
  • The seasonally adjusted annualised deficit on the current account of the balance of payments increased from R7,0 billion in the fourth quarter of 1994 to R7,8 billion in the first quarter of 1995.
  • Mainly short-term capital flows nevertheless caused net gold and other foreign reserves to increase by approximately R4,3 billion in the first six months of 1995 to a level of some R9,3 billion in June 1995.
  • To a large extent the rand kept up its rate of exchange value against the US dollar, but declined by 19% against the Japanese yen in the first half of 1995 and 15% against the German mark.
  • The increase in the prices of imported goods accelerated from 3,1% in April 1994 to 10,5% in April this year.
  • Domestic price increases have also surged because of the widening gap between spending and production, severe wage pressure, the weaker rate of exchange and sustained high food price increases. The inflation rate stood at 10,8% in May 1995.
  • The rate of decrease in total employment has been checked and has improved moderately.
  • As yet no consensus on the Labour Relations Draft Bill has been reached. This, together with the high violence and crime statistics, does not augur well for the confidence factor.


  • The after tax real income of individuals could remain under pressure because of an expected higher inflation rate, an increasing tax burden and the sluggish pick-up in employment.
  • The balance of payments remains vulnerable as capital inflows are mostly of a short-term nature.
  • A static gold price and poor gold and agricultural production inhibit economic growth.
  • The weaker rand could further increase import prices.
  • Domestic prices may rise further owing to poor agricultural conditions, increased domestic demand, capacity restrictions and low productivity.
  • Further interest rate hikes cannot be excluded.


The deficit on the current account of the balance of payments increased from R0,3 billion in the fourth quarter of 1994 to R2,2 billion in the first quarter of 1995. The deficit was mainly caused by the high level of imports - without the offsetting effect of a corresponding increase in exports.

The annualised value of goods imports rose from R65,6 billion in the first quarter of 1994 to R94,4 billion in the first quarter of this year, chiefly as a result of an increase in capital and intermediary goods imports. We do not expect the strong demand for imports to slacken in the foreseeable future. Poor agricultural conditions will inevitably boost the importation of certain food products. Higher import prices - fuelled by the weaker rand against the currencies of the major importing countries - will also keep the value of imports high.

An increase in the physical volume of exports caused the value of goods exports of R73 billion in the fourth quarter of 1994 to jump to R81,8 billion in the first quarter of 1995. The poor production performance of South Africa's goldmines and the disappointing prices obtained to date on the world markets for basic raw materials have damaged the export efforts.

These developments, together with an ever-widening deficit on the services account, could push the deficit on the current account to as much as R8 billion this year. Such a deficit on the current account could hinder the sustained nature of the economic recovery, unless there are compensating longer-term capital inflows, particularly in fixed investment.

Speculative capital flows drained the net gold and other foreign reserves by R4,1 billion in April this year. That was followed by an inflow of capital in May which brought about an improvement of R5,8 billion in the net gold and other foreign reserves. This serves to emphasise the tremendous volatility in the nature of the capital flows following the demise of the financial rand earlier this year. The gross gold and other foreign reserves stood at approximately R17 billion in May 1995, which translates into only two months' import cover. The level of net reserves, on the other hand, was only about R8 billion - far too low in view of the speculative nature of current capital flows.

The nominal effective exchange rate of the rand declined by 10% in March 1995 compared with a year ago. The real effective exchange rate weakened by 3% in the same period.


Issues for the first two months of the fiscal year were 13,2% up on a year ago. Receipts for the same period were 31,7% higher -considerably higher than the budgeted increase in receipts of 11,3% for the 1995/96 fiscal year.

The continued dissaving by the general government sector demands urgent attention; as a percentage of the gross domestic product it rose to 3,5% in the first quarter of 1995 following a gradual decline in 1994.


The rate of economic recovery slowed significantly in the first quarter of 1995, yet the growth in domestic production was still 3,3% higher than in the first quarter of 1994. The weaker growth performance of the domestic economy in the first quarter of this year was mainly brought about by a decline in production in the primary sectors. On the other hand the growth rate in the transport and manufacturing sectors showed some improvement. Consequently, the growth rate in those sectors with a higher import propensity has been rising. The lower production in agriculture is closely related to the drought conditions, while labour problems apparently caused goldmine production to fall.

Production in the manufacturing and commercial sectors has rallied to 1990 levels. Although production figures of South African factories levelled slightly in the first four months of this year after the sharp uptrend in the second half of last year, it is still regarded as the key in underpinning the overall economic growth performance.

Increased domestic production remains a condition for a sustained upswing in 1995 and 1996. However, preliminary indications are that the economic growth performance in the second quarter may also prove disappointing. Tenuous growth is expected in the agricultural and mining sectors, while the growth rate in the manufacturing sector may have slowed. Numerous holidays in the second quarter and strike action probably also played a part in the slow-down in production volumes. The construction industry remains sluggish but should pick up in the second half of the year if RDP-related housing projects get off the ground.

The slowdown in the quarter-on-quarter growth rates in investment and private consumption spending caused a slowdown in real gross domestic expenditure. The vigorous growth in seasonally adjusted annualised domestic spending of 10,5% and 10% in the third and fourth quarters respectively dropped to 2,5% in the first quarter of 1995.

Greater confidence and easier access to consumer credit have encouraged households to consume more durables and semi-durables. Their real spending is therefore accelerating at a faster rate than the increase in real personal disposable income, with the result that net personal savings have been eroded by nearly 50% during the past year.

An increase in the real gross domestic fixed investment was recorded for the eighth consecutive quarter in the first quarter of 1995. Therefore, fixed investment stood at 15% above the lower turning point of the first quarter of 1993. The growth rate of real fixed capital formation nevertheless was still well below the 18% and 19,5% in the last two quarters of 1991 as it registered 5% in the first quarter of 1995.

The salient feature of South Africa's present economic situation remains that of domestic spending exceeding domestic production, and the ensuing gap is to be bridged by way of increased imports or decreased exports. There are some encouraging signs, though, such as improved employment figures (especially in the manufacturing sector), rising capacity utilisation levels, while business confidence is improving. But the country's low level of competitiveness and inferior ability to compete in international markets are accentuated by certain negative aspects in the economy. These include mass action about matters such as privatisation and the Labour Relations Bill, increasing crime and violence, and too low productivity levels.


The rate of increase over a period of 12 months in the prices of imported goods increased from 2,7% in March 1994 to 10,5% in April 1995, mainly because of the sharp decline in the value of the rand against major currencies. In May the rand/Japanese yen exchange rate was 23% down on a year ago. The rand fell 19% against the German mark and 7% against sterling.

The prices of locally produced goods are also in an uptrend as a result of real unit labour cost increases and enhanced capacity utilisation arising from higher economic activity. Consequently the rate of increase in the production price index was 11,5% in April 1995, compared with 6,2% in April 1994. The seasonally adjusted annualised increase in prices in April compared to January stood at 13,1% for locally produced merchandise and 13,9% for imported products.

The major factors putting upward pressure on the inflation rate are the high rate of monetary growth, the weaker rand, severe food price increases, hikes in short-term insurance premiums, and the widening gap between spending and production. Certain traditional indicators of inflationary pressure have already started flashing. These include early signs of a shortage of highly skilled workers and tighter supply conditions on account of capacity constraints, slower productivity growth and wage increases - in many instances in excess of current inflation levels. We expect the inflation rate to reach 11% in 1995 and 12% in 1996, falling again moderately in 1997.


Although the annualised growth in the M3 money supply levelled off slightly in the first quarter of this year compared with the fourth quarter of 1994, it accelerated again in May 1995 to 15,8%. This figure is much higher than the guideline band of 6% to 10% stipulated by the Reserve Bank. The rate of credit extension to the domestic private sector is still escalating, reaching 19,5% in April 1995 on an annualised basis. The course of the net reserves in coming months will have a major impact on the direction of monetary policy at this stage.

The easier money market conditions in May 1995 can be attributed for the most part to a sharp increase in net foreign reserves. We foresee a sustained tight monetary policy - inevitably leading to higher short-term interest rates - owing to the volatility of short-term capital inflows into the country, the strong growth in bank credit, low levels of domestic saving and an uptrend in the inflation rate. Short-term interest rates are therefore expected to rise further. Significant new forces, which would pry long-term rates from their long sideways band in the foreseeable future, are not likely to arise. The yield curve will probably tend flatter.

The value of shares traded on The Johannesburg Stock Exchange declined from R20,7 billion in the first quarter of 1994 to R13,3 billion in the first quarter of 1995. The average level of share prices in April 1995 was 7,7% down on the high reached in November 1994. South Africa's financial markets are now much more exposed to the vicissitudes of the international markets; the drop in share prices was therefore largely the result of the ripple effect of the Mexican crisis and the low gold price. Although there are positive signs that portfolio investments could attract considerable funds to South Africa in the next year or two, the phase of the business cycle (especially because of expected higher interest rates) usually does not favour higher share prices.

Current gold share ratings are the lowest in years and labour unrest, depressed production figures and a static gold price would probably preclude an early improvement in the situation. The rating of industrial shares - excluding certain sectors - are also likely to weaken somewhat, although we suspect the reason would be improved earnings growth rather than dramatically lower prices.

Report completed 28 June 1995

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