South Africa: Quarterly South African Monitor First Quarter 1997

Last Updated: 17 January 1997
Latest developments

The low and falling level of foreign exchange reserves dominates the economic scene during recent months.

In October and November the exchange rate of the rand came under renewed pressure; capital and money market rates rose further while the inflation rate accelerated.

Domestic expenditure relative to income remains too high, which tempers the reduction of the deficit on the current account of the balance of payments. The relatively high increase in expenditure is accompanied by a continued high rate of increase in bank credit to the private sector in particular. Economic growth is tending lower.

The increase in government expenditure is rising faster than the budgeted figure. Receipts may also exceed the Budget. The deficit before borrowing may well exceed the budgeted figure.

These matters compelled the Reserve Bank to take further steps to protect the foreign exchange reserves and to combat inflation. As a result the Bank rate was raised by one percentage point to 17% on 21 November. ABSA Bank followed this example on the following day, raising its prime rate to 20,25%.

Prospects

The increase in real gross domestic expenditure will probably slow down further in the coming year. The real growth rate may also decline further.

The deficit on the current account of the balance of payments may shrink considerably over the next two years. An expected net inflow of capital, bolstered by expected privatisation receipts, should cause net reserves to increase.

The inflation rate may accelerate during the months ahead; however, it is likely to slow again by late 1997.

These developments may well result in greater stability, and even moderate firming in real terms, returning to the rand exchange rate.

The fiscal deficit relative to the GDP may continue declining moderately if the privatisation of public assets is accounted for as revenue.

Capital market interest rates may discount these developments and should decrease. A cut in the Bank rate should not materialise before late in the second quarter of 1997 at the soonest, with further small cuts thereafter not excluded.

Balance of payments
(See graphs 1.1 - 1.8 and tables 2 - 4)

The deficit on the current account of the balance of payments declined in the third quarter of 1996. Seasonally adjusted at an annual rate, the deficit decreased from R16,8 billion in the second quarter to R11 billion in the third quarter. The deficit on the current account for the first three quarters of 1996 amounts to R10,5 billion.

The trade surplus is increasing gradually, and this trend is expected to continue. This should lead to a much smaller deficit on the current account in 1997 and 1998 - anticipated at R5,5 billion and R5,6 billion respectively.

The net inflow of capital decreased markedly in 1996. Net inflows of R0,26 billion and R2,62 billion were recorded for the first two quarters respectively, followed by a modest net outflow of R0,2 billion in the third quarter.

This gave rise to the net foreign exchange reserves falling by R2,03 billion, R2,09 billion and R3,73 billion in the first three quarters respectively - a total of R7,85 billion. A further negative development was that the gross reserves of the monetary bank sector declined from R19,9 billion at the end of 1995 to R15,7 billion at the end of September 1996, while short-term foreign liabilities increased from R27,4 billion to R32,5 billion.

Against this background the sharp decline in the external value of the rand is not surprising. Based on a basket of currencies the average decline in the nominal value of the rand from January to September amounted to 18,9%, while the rand weakened in the period September to November by a further 4,5% - a total decline of 22,6%. In the period January to November the rand weakened 27,9% against the American dollar (direct quotation), 39% against pound sterling, 23,6% against the German mark and 20,3% against the yen.

The rand is currently undervalued. In 1997 and 1998 the deficit on the current account will probably decrease and a net inflow of capital may again be possible - especially in view of the envisaged privatisation of public assets. Some of these assets will also be sold to non-residents. We therefore foresee a more stable course for the rand exchange rate in the coming year, perhaps even an increase in real terms.

Government finance
(See graphs 2.1 - 2.8 and table 5)

In the first eight months of fiscal 1996/97 both government expenditure and receipts have outstripped budgeted figures.

Expenditure for the year was budgeted to increase by 10,4%. After three months of the current financial year the increase came to only 5,1%, but since then it has accelerated considerably to 14,5% after eight months. Given among other things the higher level of capital market interest rates, the deterioration in the rand exchange rate, forex cover losses, and an accelerating inflation rate, we foresee that government expenditure could exceed the budgeted figure by two to three billion rand.

Revenue has also surpassed expectations. An increase of 13,8% was budgeted for; however, the increase came to 17,3% after eight months. A marked acceleration in receipts has been recorded since July, probably as a result of improved collection. It is therefore safe to say that receipts will be approximately R1 billion higher than foreseen - even if the rate of increase should decline in coming months.

The expected net result, as indicated in table 5, is that the deficit before borrowing will exceed the budgeted figure marginally. However, it's uncertain whether all government expenditure (eg forex cover losses and the proportional provision for government stock issued at a discount) will be disclosed; this could affect the deficit materially. Depending on how these figures will be treated as well as the expected excesses on the part of local and provincial authorities, we foresee the published deficit before borrowing as a percentage of the GDP to be somewhere between 5,4% and 7%.

Real economic activities
(See graphs 3.1 - 3.8 and table 1)

The advance in real economic activities is tending weaker. This is evident from both GDP and GDE figures, with expenditure decreasing faster than production. This trend is expected to continue for the whole of 1997 at least.

Agriculture is having a good year, with summer grains yielding above-average crops. This, together with the decline in real agricultural output of 14,9% in 1995, explains this year's substantial increases in production. Compared with 1995, agriculture recorded an increase of 18% in real GDP in the second quarter of 1996 and 44,6% in the third quarter.

Mining output is generally not shaping well. A decline of 3,1% in 1995 was followed by a decline of 1,2% in the first nine months of 1996. The culprit is the goldmining sector (the amount of gold produced in the first ten months has dropped a further 7%).

Growth in the manufacturing industry is disappointing. Despite additional production capacity on account of the completion of megaprojects, production volumes decreased in the first nine months. The GDP figures for the manufacturing industry also reflect the sharp deterioration in production. Calculated on a year-on-year basis, the rate of increase for the latter declined from 9,5% in the second quarter of 1995 to 1,4% in the first quarter of 1996, followed by actual declines of 1% and 0,8% in the second and third quarters respectively.

The construction sector is void of any fireworks, and the increase for the first three quarters of 1996 came to just more than 1%. Some slowdown in the growth rate of the tertiary sectors was also observed: from 4,1% in the fourth quarter of 1995 to 2,2% in the third quarter of 1996. Judging by the number of foreign visitors it would seem that the tourist industry is still performing satisfactorily. Following a sharp increase in the number of foreign visitors in 1995, the first nine months of 1996 saw a further improvement of 7,1%. The number of visitors from abroad in September was 16,9% up on the figure for September 1995. The hotel industry is also reporting healthy reservation figures for the months ahead.

The real growth rate in private consumption expenditure is steadily declining. Consumption expenditure by the government sectors for 1996 may well exceed that of 1995. The rate of increase in real gross domestic fixed investment is on a downtrend, while the buildup of trading and industrial inventories is declining. In total the real GDE in 1996 will probably advance by approximately 3% (5,2% in 1995) and it could decline further over the coming year (see table 1).

This will probably lead to a further rate decrease in real imports. Export growth may improve over the next year on account of expected more favourable international growth rates, weaker domestic demand and South Africa's more competitive position because of the decline in the exchange rate.

We anticipate a growth rate of some 2% for 1997 and 2,8% for 1998. Whereas domestic expenditure featured as the growth engine for the past two years, it is expected that exports will take over this role in the following two years.

Job opportunities in the formal sector are expected to decrease owing to weaker growth prospects and the continued sharp uptrend in salaries and wages. The number of insolvencies and liquidations is foreseen to rise markedly further.

Inflation
(See graphs 4.1 - 4.3 and table 6)

As predicted previously, the inflation rate has accelerated. From a low of 5,5% in April the CPI jumped to 9,1% in October, calculated on a year-on-year basis. The PPI increased from 5,3% to 8,3% during the same period. Regarding inflation three matters need to be highlighted.

Firstly, the sharp increase in the CPI is driven by food price increases. Food prices went up from 3,2% in the first quarter 1996 to 12,4% in October.

Secondly, the relatively low increase in the imported component of the PPI up to and including September, despite the sharp weakening in the exchange rate, remains a mystery. However, the October figure went up sharply, pointing to a new turn in the battle against inflation.

Thirdly, a sharp increase in the local component of the PPI has occurred. This is particularly evident from the seasonally adjusted monthly increases. Annualised, this component rose from 3,9% in the months February to April, to 12,9% in the months August to October.

We foresee a further acceleration in the inflation rate over the coming months. A peak in the rate of increase of nearly 11% is anticipated in the third quarter of 1997, after which it should come down to approximately 8% by the end of 1998.


Monetary developments
(See graphs 4.1 - 4.8 and table 7)

The growth in the M3 money supply is surging ahead at a rate of some 15% since mid-1994. In October the rate of increase came to 15,9%. With net reserves falling since February 1996, bank credit to the private sector was mainly responsible for the increase in the M3. In October the increase in bank credit to the private sector came to no less than 18,86%. Similarly, total bank credit granted increased from 11% in October 1995 to 17,82% in October 1996, which is an indication that bank credit granted to the public sector has also accelerated.

This development, together with the low and still declining level of net foreign exchange reserves (with the exception of October, when foreign loans by government resulted in a small increase), the acceleration in the inflation rate and a still too large fiscal deficit, has compelled the Reserve Bank to maintain a tight monetary policy as reflected in the level of interest rates.

The money market deficit has remained substantial during the past couple of months, and money market interest rates have risen further since mid-October. The call rate firmed by approximately 1,75 percentage points to 17,25% at the end of November. The 12-month NCD rate went up by 1,2 percentage points and the 3-month BA rate by some 1,35 percentage points. These events were the logical forerunner of the Bank rate hike of one percentage point to 17% on 21 November 1996.

Capital market interest rates increased as well. The RSA R150 rate advanced from 14,96% at 13 September to above 16% in November but, mainly because of the Bank rate increase, fell back slightly to 15,88% on 29 November. Since then, it has increased to higher than 16% again.

Share prices on the JSE are tending lower. The prices of industrial shares reflect the rise in interest rates and the poorer growth prospects for 1997, while the prices of goldmining shares react in the main to the weaker-tending dollar gold price and the diminished gold output. These trends are likely to continue over the next couple of months, followed by an improvement in industrial share prices by mid-1997 - if interest rates decline in line with our expectations.

Report completed on 13 December 1996


The information in this publication is of a general nature only, does not constitute advice and may not be applicable to all circumstances. Detailed advice should be obtained in individual cases. No responsibility for any loss sustained by any person acting or refraining from acting as a result of material in this publication is accepted by ABSA Bank Limited and/or the authors of such material.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions