- The imbalance between domestic expenditure and national income increased in the second quarter but, according to preliminary data, declined in the third.
- The deficit on the current account of the balance of payments rose sharply in the second quarter. A net outflow of capital was recorded and both gross and net reserves declined. Preliminary figures indicate a further decline in reserves in the third quarter.
- The increase in domestic expenditure in the second quarter was financed by a continued large increase in bank credit.
- Thus far the finances of the central government are within budget.
- The real growth rate is supported by favourable growth in agricultural production. Growth in the non-agricultural sectors is on a downtrend. Following a slight improvement in 1995, employment is decreasing.
- The inflation rate has accelerated.
- The nominal effective exchange rate of the rand weakened sharply in the second quarter but was more stable in the third.
- Both capital and money market interest rates have fluctuated within a fairly narrow range.
- The downturn momentum of the business cycle may increase in the period up to the end of 1997.
- The imbalance between domestic expenditure and income may narrow markedly in 1997.
- The deficit on the current account of the balance of payments may shrink over the next two years. The extent of capital flows and the course of net reserves remain uncertain.
- It is foreseen that the nominal effective exchange rate of the rand could continue to decline moderately but that the real effective exchange rate could stabilise.
- In this scenario the demand for bank credit may be expected to slow; the rate of growth in the money supply could also decline, and lower interest rates are possible.
- Because of special factors the inflation rate may accelerate further in the next few quarters. The rate of increase may stabilise during the latter half of 1997, with a decline in 1998.
Table 1: The economic outlook in a nutshell (average for period) 1995 1996F 1997F 1998F G3 countries Economic growth (GDP%) 1.7 2.3 2.1 2.6 Inflation (CPI%) 1.6 1.7 2.0 2.1 0.1 Currencies and gold Gold ($/oz) 384 389 381 398 Gold (R/oz) 1393 1661 1782 1947 $/DM 1.43 1.50 1.58 1.63 $/R 3.63 4.28 4.68 4.90 South Africa Economic growth (GDP%) 3.3 3.1 2.2 3.2 Private consumption expenditure (%) 4.9 4.4 2.7 3.2 Durable goods (%) 9.0 6.4 2.7 3.2 Semi-durable goods (%) 4.3 4.5 2.9 3.3 Government consumption expenditure (%) 0.3 1.8 0.5 1.2 Fixed investment (%) 10.4 6.4 5.9 5.5 Change in inventories (% of GDP) 2.5 1.7 0.4 -0.1 Gross domestic expenditure (%) 5.6 3.1 1.6 2.9 Exports (%) 8.1 6.7 6.7 5.9 Imports (%) 17.5 6.6 4.8 4.8 Current account (R billion) -12.7 -11.0 -6.8 -2.1 Current account ($ billion) -3.5 -2.6 -1.5 -0.4 Prime rate (%) end of period 18.5 19.3 17.3 17.3 Inflation (CPI%) 8.7 7.2 9.6 8.8
BALANCE OF PAYMENTS
(See graphs 1.1-1.8 and tables 2-4)
Table 2: Real output, trade and inflation 1995 1996F 1997F 1998F UNITED STATES Economic growth (GDP%) 2.0 2.3 2.4 2.5 Balance on current account ($/billion) -152.9 -127.3 -130.3 -126.8 Inflation (CPI%) 2.8 2.8 2.8 2.6 JAPAN Economic growth (GDP%) 0.7 3.5 1.8 3.1 Balance on current account ($/billion) 110.8 37.4 47.6 65.1 Inflation (CPI%) -0.1 0.3 1.1 1.5 GERMANY Economic growth (GDP%) 2.1 1.2 2.2 2.4 Balance on current account ($/billion) -17.4 -14.0 -8.6 -3.9 Inflation (CPI%) 1.8 1.7 1.8 1.9 UNITED KINGDOM Economic growth (GDP%) 2.6 2.0 3.3 2.6 Balance on current account ($/billion) -4.6 -5.6 -7.3 -2.0 Inflation (CPI%) 3.4 2.4 3.0 3.3 Table 3: Currencies and gold price (ave. for period) 2nd 1st half half 1995 1996F 1997F 1998F 1996F 1997F $/DM 1.43 1.50 1.58 1.63 1.51 1.56 $/YEN 93.9 107.5 110.7 111.1 108.4 109.5 Sterling/$ 1.58 1.54 1.50 1.41 1.55 1.52 $/R 3.63 4.28 4.68 4.90 4.52 4.63 R (trade weighted value) (1990 = 100) 69.5 59.7 53.8 52.2 55.0 54.1 Gold ($/oz) 384 389 381 398 382 379On account of the sharp depreciation of the rand, the value of both imported and exported goods rose sharply in the second quarter compared with the previous quarter as well as with a year ago.
The balance of trade for the first eight months of this year recorded an average surplus of R462 million a month, as against R251 million for 1995. Last year's average monthly net services payment came to R1 291 million, increasing to R1 329 million in the first half of this year.
The deficit on the current account of the balance of payments remained sizeable in the first half of the year. In the second quarter it rose to R16,4 billion - seasonally adjusted and annualised - or 3,1% of the GDP, against a deficit of R10,4 billion or 2% of the GDP in the first quarter.
Real goods exports and non-factor services weakened in the second quarter, following an improved performance in the first. In the second quarter they were down an annualised 1,9% on the first quarter, although still showing a satisfactory increase of 8,5% on a year ago.
Table 4: South African balance of payments (R or $ billion) 1995 % 1996F % 1997F % Merchandise exports (R) 81.0 24.7 93.8 15.8 112.2 19.6 Net gold exports (R) 20.2 -11.0 21.2 5.4 20.8 -2.2 Merchandise imports (R) 98.4 29.1 110.4 12.2 125.1 13.3 TRADE ACCOUNT(R) 2.7 4.6 7.9 ($) 0.8 1.1 1.7 Net service payments(R) -15.5 -15.7 -15.1 and net transfers($) -4.3 -3.7 -3.2 CURRENT ACCOUNT(R) -12.7 -11.0 -6.8 ($) -3.5 -2.6 -1.5 CAPITAL ACCOUNT(R) 21.7 6.2 8.6 ($) 6.0 1.4 1.8 CHANGE IN NET GOLD & FOREIGN EXCH.(R) 9.1 -4.8 1.8 Reserves ($) 2.5 -1.2 0.4
The volume of imports remained high. Following increases of 16,2% in 1994 and 17% in 1995, it was 4,3% up on a year ago in the first quarter of this year and 9,1% in the second quarter.
The trade figures do not give a clear pointer to what happened in the third quarter. The trade balance seems to have improved and the deficit on the current account may also be lower than in the second quarter. A sizeable deficit on the current account of some R11 billion is still foreseen for the year as a whole.
Net capital inflow is moderate for the year thus far. In the first quarter it amounted to only R0,2 billion, increasing to R2,5 billion in the second quarter.
Sharp declines in net reserves of R2,0 billion and R2,2 billion were recorded for the first and second quarters respectively. For 1996 the net reserves could decline by almost R5 billion.
With an expected smaller deficit on the current account of R7 billion for 1997 and assuming a net inflow of foreign capital of R8 billion - inter alia because of the capital inflow arising from the expected privatisation of public assets - net reserves may grow again next year.
(See graphs 2.1-2.8 and table 5)
Table 5: Government Finance (R billion) 1995/96 1996/97 BUDGET ACTUAL BUDGET EXPECTED Disbursements 153.2 156.2 173.7 175.5 % change 9.5 13.7 10.4 12.4 Revenue 124.2 128.5 143.0 142.5 % change 11.3 14.3 11.3 10.9 Deficit ( before special revenue) 29.1 27.7 30.7 33.0 Special Revenue* 1.9 1.9 Actual Deficit 29.1 27.7 28.8 31.1 Deficit/GDP (%; Before special rev.) 5.8 5.5 5.5 5.9 Actual Deficit/GDP (%) 5.8 5.5 5.1 5.6 * Strategic oil sales; privatisation proceeds etc.
In the first five months of the current fiscal year both income and expenditure of the central government deviated only slightly from budget.
Given the deterioration in the economy, income is unlikely to reach the budgeted figure. The true extent of expenditure will be seen in coming months as the effect of the lower exchange rate on certain departments is revealed. However, a complete picture will only emerge once information is available on RDP expenditure for 1996, the effect of interest payments on public debt, and the possibility of some local authorities being assisted financially by the central government.
There is some concern that the non-payment of services coupled with protests against sharp rate hikes, will make it difficult for local authorities to achieve budgeted incomes. The situation regarding expenditure is presently also not clear.
Except for the amount yielded by crude oil sales, as budgeted, we do not foresee that income from the privatisation of public assets will make a material contribution to receipts this year already. Next year, however, larger amounts may come into play which, if properly used, could reduce the government's borrowing requirements in the capital market. The question as to who the beneficiary of the privatisation yields should be remains in some instances also unresolved.
REAL ECONOMIC ACTIVITIES
(See graphs 3.1-3.8 and table 1)
The real GDP in the second quarter, calculated at market prices, was up 3,5% on a year ago. Calculated at factor costs, the increase in the real GDP in the first two quarters of this year was 2,1% and 2,5% respectively.
The growth rate is supported by favourable agricultural production, but growth in the non-agricultural sectors is tending weaker. On a year-on-year basis at factor costs, the non-agricultural sectors grew by 4,3% in the second quarter of 1995; subsequently slowing to 4,1%, 3,5%, 2,6% and 1,7% in the next four quarters. Growth in the manufacturing sector is particularly disappointing.
On the other hand, real GDE in the second quarter accelerated. The seasonally adjusted and annualised increase for the quarter came to 9,1%, following a decline of 1,5% in the first quarter.
An analysis of the spending components for the second quarter indicates a faster rate of real private consumption expenditure, with especially expenditure on durables having increased by an annualised 13,5%. This may be ascribed to advance buying after the sharp depreciation of the rand, with a view to beating possible price hikes. In the third quarter of this year the sales of passenger cars slowed, and this trend will probably continue until the end of 1997.
Some further inventory buildup took place, while an acceleration in consumption expenditure by the general government was recorded. As against this, the growth in real gross domestic fixed investment (GDFI) tended lower. The year-on-year percentage increase in the real GDFI gradually slowed from 10,0% in the second quarter of 1995 to 5,3% in the second quarter of this year. The result is that the real net capital stock will probably increase by less than 1% this year.
The decline in employment is a cause for grave concern. Job opportunities in the formal non-agricultural sectors of the economy declined by 2% in the years 1993 to 1995, which was an upturn phase in the business cycle. Although job creation picked up slightly last year (0,7%), that increase has since been wiped out.
It seems unlikely that the slowdown in the growth rate will be arrested before the end of 1997. It would seem that the economy has entered the second leg of the downturn and, judging from previous experience, the following developments could be expected in the coming year:
- Production and sales tend to weaken.
- Capacity utilisation declines.
- Inventory buildup outside of agriculture slows.
- The rate of fixed investment decreases.
- Company profits decline.
- Imports tend to weaken.
- Exports pick up.
- The deficit on the current account narrows.
- The real effective exchange rate stabilises and may even increase.
- The demand for bank credit slows and growth in M3 decreases.
- Interest rates may drop.
- Increases in the inflation rate are checked.
- Insolvencies and liquidations increase.
(See graphs 4.1-4.3 and table 6)
Table 6: Inflation rates for South Africa (ave. for period) 2nd half 1st half 1995 1996F 1997F 1998F 1996 1997 Producer prices 9.7 6.8 9.6 9.0 7.6 9.4 Imported prices 7.9 5.6 9.1 9.3 6.9 9.3 Domestic prices 10.0 7.2 9.7 8.9 7.8 9.4 Consumer prices 8.7 7.2 9.6 8.8 8.2 9.4 Food prices 9.1 5.1 8.0 9.0 7.3 8.0 All items excluding food 8.6 7.8 10.0 8.8 8.4 9.8The inflation rate remains relatively favourable, viewed in the light of the depreciation of the rand of more than 20%, the high rate of increase of 15% in the money growth over the past two years, and the continued relatively rapid increase in the wage bill.
The CPI is tending higher. It came to 7,5% in August against the low of 5,5% in April. Despite the weak rand the imported component of the PPI continues to hold up well, rising only 4,5% in August.
An acceleration in both the CPI and the PPI is expected in the next nine months, to be followed by a slowdown in the rate of increase.
(See graphs 4.1-4.8 and table 7)
Table 7: Local and International Interest Rates 95q4 96q1 96q2 96q3F 96q4F 97q1F 97q2F USA Prime rate Nominal 8.7 8.3 8.3 8.3 8.3 8.3 8.0 Real 6.0 5.6 5.5 5.4 5.4 5.4 5.2 Bond yield Nominal 5.9 5.9 6.7 6.8 6.5 6.2 6.1 Real 3.2 3.2 3.9 3.9 3.6 3.3 3.3 JAPAN Prime rate Nominal 1.6 1.6 1.6 1.6 1.6 1.6 1.6 Real 2.1 1.8 1.4 1.2 1.0 0.9 0.6 Bond yield Nominal 3.0 3.3 3.3 3.2 2.9 3.0 3.3 Real 3.5 3.5 3.1 2.8 2.3 2.3 2.3 GERMANY Prime rate Nominal 6.3 6.0 6.0 5.8 5.5 5.5 5.5 Real 4.9 4.4 4.4 4.1 3.8 3.7 3.7 Bond yield Nominal 5.9 6.1 6.4 6.3 6.2 6.3 6.3 Real 6.4 6.3 6.2 5.9 5.6 5.6 5.3 UNITED KINGDOM Prime rate Nominal 7.5 7.2 6.9 6.8 6.8 7.0 7.0 Real 4.4 4.4 4.6 4.5 4.3 4.3 4.1 Bond yield Nominal 7.4 7.8 8.0 7.9 7.9 8.1 8.3 Real 4.3 5.0 5.7 5.6 5.4 5.4 5.4 SOUTH AFRICA Prime rate Nominal 18.5 18.5 19.8 19.3 19.3 18.3 18.3 Real 11.8 11.9 13.9 11.7 10.5 9.1 8.7 Bond yield Nominal 14.6 15.0 15.8 15.3 15.3 14.8 14.5 Real 7.9 8.4 9.8 7.8 6.5 5.6 4.9Interest rates remain high owing to the large imbalance between spending and income, the high growth rate in the money supply, and the decline in net reserves. This situation is aggravated by uncertainty about foreign capital flow, the fiscal position, and the course of the inflation rate. The yield curve is currently an inverse one, indicating a tight monetary policy.
Until the above scenario changes for the better, a decline in interest rates would be neither soon nor sharp. And even then the Reserve Bank would probably steer a conservative course on account of the low level of net foreign exchange reserves, the fiscal situation, and uncertainty about foreign capital flow. We do not expect a Bank rate cut until late in the first quarter of 1997, with the possibility of a further cut of one percentage point later in 1997. However, capital market rates may tend lower before then.
Industrial shares on the JSE are expensive and the current profit outlook in the industrial sector is somewhat less than rosy. Following on US share price movements, share prices have recently firmed after a decline earlier this year. However, should US share prices tend to soften (a possibility in view of the sharp rise in the Dow Jones index over the past two years and considering the possibility that American interest rates could rise after the presidential election), local share prices may well follow the American pattern.
The dollar price of gold is performing poorly and deep uncertainty surrounds the future course of the gold price. Gold share prices are therefore not expected to produce any fireworks.
Report completed on 11 October 1996
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