- The gap between expenditure and income diminished somewhat during the third quarter.
- Real private consumption expenditure, especially expenditure on durable and semi-durable goods, accelerated further.
- The rate of real inventory buildup slowed.
- The level of job creation remains low.
- Despite a major drop in agricultural production, the preliminary GDP-figures reflect a further acceleration of the growth rate.
- The deficit on the current account of the balance of payments was somewhat smaller in the third quarter. A positive capital inflow resulted in further improvement of the net reserves.
- The inflation rate dropped further.
- The growth in the money supply and in private bank credit tapered off somewhat, but it is still too high. The growth in the money supply is mainly supported by the higher liquidity preference of the private sector.
- Government expenditure is a matter of great concern - the deficit before loans may be greater than budgeted for.
- Capital market interest rates declined further in the third quarter, but money market interest rates are holding firm.
- After declining in the second quarter, both import and export volumes increased in the third quarter.
- The effective rand exchange rate increased.
- Industrial share prices on the JSE rose sharply.
- The rate of expansion of real domestic expenditure may slow somewhat.
- With an economy operating virtually at full capacity, the growth rate in the non-agricultural sectors is expected to decline moderately.
- The imbalance between domestic demand and domestic income may improve in the next two years, resulting in a smaller deficit on the current account of the balance of payments.
- The rate of inflation may accelerate in the coming months.
- A lowering of the Bank rate is not expected in the near future.
- Production capacity is expected to expand due to the continuous increase in gross fixed investment.
- The value of the US dollar may rise further in the coming year and the rand may weaken against the dollar.
- An increase in the demand for South African securities are expected due to the greater interest by off-shore portfolio managers.
BALANCE OF PAYMENTS
Table 2: Real output, trade and inflation 1994 1995F 1996F 1997F % % % % UNITED STATES Economic growth (GDP) 4.0 3.2 2.6 2.4 Balance on current account ($ billion) -151.3 -158.2 -148.1 -134.5 Inflation (CPI) 2.6 2.8 3.0 3.1 JAPAN Economic growth (GDP) 0.5 0.7 1.7 2.2 Balance on current account ($ billion -129.3 -110.0 -92.5 -87.7 Inflation (CPI) 0.7 0.0 0.4 1.0 GERMANY Economic growth (GDP) 2.4 2.4 2.5 2.7 Balance on current account ($ billion) -23.1 -19.0 -19.5 -15.6 Inflation (CPI) 3.0 2.1 2.4 2.6 UNITED KINGDOM Economic growth (GDP) 3.7 2.8 2.7 2.8 Balance on current account ($ billion) -2.6 -4.4 -4.2 -6.5 Inflation (CPI) 2.5 3.5 3.3 3.4 Table 3: Currencies and gold price (average for period) 1994 1995F 1996F 1997F 2nd 1st half half 1995FF 1996F $/DM 1.62 1.42 1.48 1.50 1.42 1.46 $/Yen 1.02 0.94 1.02 1.04 0.98 1.01 £/$ 1.53 1.58 1.55 1.53 1.57 1.55 $/R 3.55 3.63 3.80 3.97 3.65 3.75 R (trade weighted value:1990 = 100) 73.7 69.7 66.9 64.5 69.8 67.1 Gold ($/oz) 384 384 393 413 385 388 Table 4 : South African balance of payments (R or $ billion) 1994 % 1995F % 1996F % change change change Merchandise exports R 65.0 15.2 82.4 27.3 97.7 18.5 Net gold exports R 22.6 1.9 19.7 -13.3 18.3 -6.7 Merchandise imports R 76.3 27.1 100.2 32.3 111.6 11.3 Trade account R 11.3 1.9 4.6 $ 3.2 0.5 1.2 Net service payments R -13.7 -14.4 -15.4 and net transfers $ -3.9 -4.0 -4.1 Current account R -2.2 -12.4 -10.7 $ -0.6 -3.4 -2.8 Capital account R 5.4 17.8 13.6 $ 1.5 4.9 3.6 Change in net gold and foreign exhange R 3.1 5.4 2.9 reserves $ 0.9 1.5 0.8
The annualised deficit on the current account of the balance of payments, seasonally adjusted, amounted to R11,5 billion in the third quarter. This is somewhat down on the R12,5 billion recorded in the second quarter. A temporary disturbance in the import figures for September, owing to the abolition of the remaining surcharge on imports as from October, may have contributed to the improvement. In fact, the import figure for October showed a sharp increase. In addition, commodity prices are tending lower, which may adversely affect export earnings. The deficit on the services balance is also growing.
A smaller deficit on the current account is envisaged for the fourth quarter. The deficit may also tend lower in the course of 1996 and 1997 because of an expected deceleration in domestic demand and because of expected positive results of an improved agricultural year.
A net inflow of capital of R4 billion occurred in the third quarter. Of this, R1,28 billion was short-term capital, and R2,75 billion was recorded as net long-term capital. This means that the net reserves increased by R487 million in the third quarter. The gross reserves dropped by R83 million - mainly because of the redemption of foreign liabilities not related to reserves. The net reserves position over the twelve-month period up to end-September of this year showed an improvement of R7,7 billion with an increase in gross reserves of R4,2 billion.
In the third quarter the nominal effective rand exchange rate appreciated by 2,3% against the four major currencies. Against the US dollar the value of the rand remained practically unchanged, but it strengthened by 2,4% against the German mark, by 18,8% against the Japanese yen and by 1,3% against the British pound.
During October and November the external value of the rand held up well. The nominal effective value had weakened by only 0,2% since September, whereas the real effective value of the rand had strengthened somewhat. It appreciated by 0,4% and 1,9% against the US dollar and the Japanese yen respectively and weakened by 2,9% against the German mark. There has been virtually no change against the British pound.
It is unlikely that the strengthening of the rand over the past couple of months can continue for long without serious balance of payments problems. The inflation rate is still higher than that of South Africa's trading partners and, consequently, the real effective value of the rand is rising quite sharply. In addition, exporters are also faced with export incentives being phased out. Imports are becoming cheaper all the time owing to the rising real effective value of the rand, the abolition of the remaining surcharges on imports and the lowering of import tariffs. Also, foreigners will not be prepared to continue to finance huge deficits indefinitely. Given the nature of foreign investment in the country and the fairly low level of foreign exchange reserves, it is extremely risky to allow the deficit on the current account to become too large. Investments in mainly financial assets enlarge the liquidity of capital to a high degree.
Table 5: Government finances 1 (R billion) 1994/95 1995/96 Actual Budget Projected Disbursements 2 140.0 154.2 154.9 -% increase 2.3 9.5 10.7 Revenue 3 111.6 124.2 124.2 -% increase 13.5 11.3 11.3 Deficit 28.5 29.1 30.7 Less: surplus (-) / shortfall (+) -1.2 0.0 0.0 Plus: funding requirements 9.9 9.0 9.0 Funding requirement 37.2 38.1 39.9 Deficit/GDP (%) 6.4 5.9 6.2
1. Including Provincial expenditures and incomes
2. Includes transfer payments to government pension funds. stabilisation account and other accounts/institutions as well as surrender of surplus funds.
3. Includes extra-ordinary capital receipts and RDP grants.
In the first 7 months of the government's financial year central government expenditure was 10,9% higher than that of the corresponding period a year ago. There is a measure of concern about the increasing interest burden and the fiscal position at provincial level; official announcements indicate considerable overexpenditure. The scope of these excesses will only become apparent during January 1996.
Government receipts for the first 7 months are promising. An amount of R83,6 billion or a 14,6% increase, against a budgeted figure of 11,3%, were received. However, the rate of growth in receipts is gradually slowing down. With signs that the rate of economic growth and expenditure is tapering off, the rate of growth in receipts may slow still further during 1996 and 1997. Considering the aims of lowering of the budget deficit and the effectuation of tax relief for the middle-income earners, a VAT hike may be unavoidable.
REAL ECONOMIC ACTIVITIES
Table 1: The economic outlook in a nutshell (average for period) 1994 1995F 1996F 1997F G3 countries Economic growth (GDP %change) 2.5 2.2 2.3 2.4 Inflation (CPI % change) 2.1 1.8 2.0 2.3 Currencies and gold Gold ($/oz) 384 384 393 413 Gold (R/oz) 1363 1394 1491 1639 $/DM 1.62 1.42 1.48 1.50 $/R 3.55 3.63 3.80 3.97 South Africa* Economic growth (GDP % change) 2.8 3.3 3.0 2.6 Private consumption expenditure (%change) 3.0 5.3 3.4 2.7 - Durable goods (%change) 1.9 12.8 3.8 3.6 - Semi-durable goods (%change) 5.3 6.1 4.4 3.7 Government consumption expenditure (%change) 4.2 0.5 2.1 2.0 Fixed investment (%change) 8.7 9.6 8.7 7.7 Change in inventories (R billion) 4.7 11.3 3.3 1.7 Gross domestic expenditure (%change) 6.7 5.7 3.7 3.3 Exports (%change) 0.5 8.8 5.2 4.5 Imports (%change) 15.9 17.9 7.6 6.7 Current account (R billion) -2.2 -12.4 -10.7 -9.4 Current account ($ billion) -0.6 -3.4 -2.8 -2.4 Prime rate (%) (end of period) 16.3 18.5 17.5 16.5 Inflation (CPI % change) 9.0 8.6 9.2 8.9
* Revised National Account figures have been used in this publication.
Recently published statistics on the growth rate are confusing. On the one hand the short-term series indicate that the rate of expansion of economic activity is slowing. On the other hand the published GDP figures, derived from the short-term series, reflect a further acceleration in the economic growth rate in the third quarter. (Note that the quarterly economic growth figure is a preliminary estimate which could be subject to revision later on.) In view of published information, the growth figure for the third quarter should therefore be interpreted with some circumspection.
As stated in the previous issue of the Economic Monitor, it would appear that the business cycle has peaked. Quarter-on-quarter increases in seasonally adjusted annualised series are as follows:
1st q 2nd q 3rd q Real wholesale sales * 19,3% -5,1% Real retail sales * 25,3% -1,8% Nominal operating income of the motor trade * 44,8% -2,7% Real value of buildings completed - 41,5% 2% 1,4% Units of electricity sold 4,7% 0,4% -4,8% Physical volume of production 11,4% 14,6% -2,3% Transnet: income-bearing traffic 18,1% -1,9% -10,1%
* Since January 1995 information regarding the former TBVC states is included and figures are thus not comparable with the previous quarter.
The above figures indicate a slowing of activities in the third quarter after excellent performance in the first half of the year. Owing to the favourable trends in the economy in the first half of the year it would appear that the growth rate for the year, calculated at factor cost, could be just less than 3%, against a figure of more than 3% if calculated at market prices. This is satisfactory in view of the poor performance of the agricultural sector. In fact, excluding agriculture, a growth rate of 4% seems feasible.
A moderate decline in the growth rate is forecast for 1996 and 1997. Domestic expenditure will probably slow owing to high individual levels of debt, the high real interest rates and relatively high inventory levels in trade and industry. In addition, imports are becoming less expensive all the time, and a larger part of domestic expenditure could be on imports. Lower commodity prices could jeopardise the value of exports and could limit the growth of the gross domestic product or of income.
Currently, conditions in agriculture are very promising. However, more information on crop forecasts will be available only towards the end of February. An average agricultural yield is expected, which could arrest a possible slowdown of economic activity and prevent a significant decline of the growth rate in 1996.
Table 6: Inflation rates for South Africa (average for period) 1994 1995F 1996F 1997F 2ND 1ST Half Half 1995F 1996F Producer prices 8.2 9.4 9.2 8.7 8.0 9.0 - Imported prices 5.5 7.1 6.2 8.1 5.0 6.6 - Domestic prices 8.8 9.8 9.8 8.9 8.6 9.4 Consumer prices 9.0 8.6 9.2 8.9 7.0 8.7 - Food prices 13.6 8.7 5.8 9.3 1.3 3.7 - All items excluding 7.8 8.7 10.2 8.8 8.7 10.2 food
The annual inflation rate, as measured against the CPI, dropped to 6,3% in October. The rate of increase in the PPI is also tending lower, coming to 7,6% in September.
Of the most important components of the CPI, the price of food products declined by 1,5% against October last year, whereas the services component was up 10,2% and merchandise, excluding food, was 6,8% more expensive. The recent modest increases in the CPI is highly encouraging. Excluding food, the annualised figure for October was only 6,7%.
Regarding the PPI, it is mainly import prices that receded from a high of 10,5% in April to 4,9% in September. In the third quarter annualised import prices, seasonally adjusted, declined by 1,6% compared with the second quarter.
The increase in the prices of locally produced products included in the PPI have, on balance, been tending lower since April of this year, coming to 8,3% in September. Excluding food prices, this gives an increase of 9%.
A moderate rise in the inflation rate is foreseen for the coming months. The low increase in import prices could continue provided the rand remains stable. The stability of the rand is mainly a function of foreign capital flows.
Table 7: Interest rates in the G3 countries and South Africa 95Q2 95Q3 95Q4F 96Q1F 96Q2F 96Q3F 96Q4F USA Prime rate nominal 9.0 8.8 8.8 8.8 9.0 9.0 9.0 real 5.9 6.1 6.2 6.1 6.0 5.9 5.8 Capital market rate nominal 6.2 6.3 6.0 6.3 6.5 6.8 6.8 real 3.1 3.7 3.4 3.6 3.5 3.7 3.6 JAPAN Prime rate nominal 1.0 1.6 1.6 1.6 1.6 1.8 1.8 real 1.0 1.6 1.6 1.5 1.3 1.3 1.1 Capital market rate nominal 2.9 2.8 2.9 3.0 3.0 3.2 3.2 real 2.9 2.8 2.9 2.9 2.7 2.7 2.5 GERMANY Prime rate nominal 6.5 6.5 6.5 6.5 6.8 6.8 6.8 real 4.2 4.6 4.5 4.3 4.3 4.4 4.2 Capital market rate nominal 6.8 6.4 6.5 6.8 7.0 7.0 7.1 real 4.5 4.5 4.5 4.6 4.6 4.6 4.6 UNITED KINGDOM Prime rate nominal 7.8 7.8 7.8 7.8 7.8 7.5 7.5 real 4.3 4.1 4.1 4.2 4.6 4.3 4.3 Capital market rate nominal 8.4 8.0 8.0 8.0 8.0 8.0 8.0 real 5.0 4.3 4.4 4.5 4.8 4.8 4.8 SOUTH AFRICA Prime rate nominal 17.5 18.2 18.5 18.5 18.5 17.5 17.5 real 6.9 10.7 11.9 9.9 9.7 7.9 7.7 RSA 15 year stock nominal 16.8 15.5 14.6 13.8 13.5 14.0 14.3 real 6.2 8.0 8.0 5.2 4.7 4.5 4.4
Although recent months saw the rate of increase in bank credit to the private sector and the money supply (M3) slowing, this rate, viewed over a 12-month period, is still too high. In September bank credit grew to 18,0% compared with last year - somewhat down on the high rate of 19,5% seen in April. The M3 increased by 14,8% in October, against 16,8% in June. This is still considerably in excess of the upper guideline of 10% set by the Reserve Bank.
A restrictive monetary policy is still being pursued as is evidenced by the high real Bank rate of 8,7% in October. This strict policy stance is mainly the result of increasing bank credit, the deficit on the current account, the fact that foreign capital inflows include little fixed investment, as well as the fiscal situation already referred to.
Capital market interest rates declined sharply in the third quarter. For example, the yield on RSA R150 stock dropped from levels of about 16,7% at the end of June to some 14% early October. A high real Bank rate, more favourable inflationary expectations, optimism about an improved international credit rating and large foreign purchases have contributed to the rise in stock prices and a decline in rates. In recent weeks capital market interest rates have again firmed somewhat to approximately 14,5%. Certain taxation proposals by the Katz Commission and the fact that Standard and Poor did not up South Africa's credit rating to full investment grade, contributed to this rise in capital market rates.
Both the overall index and the industrial index of the JSE reached record highs during the past quarter. Good company results as well as greater foreign interest played a role in this regard.
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