LATEST DEVELOPMENTS
- The consequences of the slide in the rand exchange rate dominated the economic scene over the past months.
- The exchange rate of the rand against the major foreign currencies declined sharply from mid-February to end April, but has stabilised since.
TABLE 1: The Economic Outlook In A Nutshell (Average For Period)
1994 1995 1996F 1997F
G3 COUNTRIES
Economic growth (GDP%_) 2.5 1.7 1.9 2.5
Inflation (CPI%_) 2.1 1.6 1.7 2.0
CURRENCIES AND GOLD
Gold ($/oz) 384 384 391 403
Gold (R/oz) 1363 1393 1649 1821
$/DM 1.62 1.43 1.51 1.60
$/R 3.55 3.63 4.22 4.52
SOUTH AFRICA
Economic growth (GDP%_) 2.8 3.3 3.2 2.2
Private consumption
expenditure (%_) 3.1 4.9 3.7 1.9
Government consumption
expenditure (%_) 4.2 0.3 1.4 1.5
Fixed investment (%_) 8.7 10.4 8.0 6.5
Change in inventories
(R billion) 4.7 7.7 4.1 0.9
Gross domestic
expenditure (%_) 6.7 5.6 2.9 1.6
Exports (%_) 0.4 8.1 4.2 4.8
Imports (%_) 16.0 17.5 3.0 2.9
Current account (R billion) -2.2 -12.7 -8.8 -7.2
Current account ($ billion) -0.6 -3.5 -2.1 -1.6
Prime rate (%) end of
period 16.3 18.5 18.5 17.5
Inflation (CPI%_) 9.0 8.7 7.3 9.2
- Because of the above, there was a huge decrease in both net and gross foreign exchange reserves. The position stabilised in May and improved in June.
- The decline in reserves increased the pressure on domestic liquidity so that, initially, money market rates rose sharply, but decreased again over the last few weeks. The pattern was followed in the capital market.
- These developments affect the real economy. Real GDE, in particular, is tending lower.
- Real GDP growth is stable owing to favourable agricultural growth. However, the growth rate of the non-agricultural component of the GDP is losing momentum.
- The improvement of the imbalance between domestic spending and income has resulted in a smaller deficit on the current account of the balance of payments.
- The inflation rate remains relatively low, thanks in the main to favourable agricultural prices. However, the prices of non-agricultural goods and services are accelerating.
PROSPECTS
- Real GDE increases are expected to slow even more, but real GDP growth may hold steady this year owing to a sharp rise in agricultural production and lower imports.
- The deficit on the current account of the balance of payments could decrease further. The expected net capital inflow for the rest of the year should be adequate to halt any further deterioration in both gross and net reserves.
- The above developments in the real sectors and the balance of payments could stabilise the external value of the rand for the rest of the year. In real terms, it could also remain stable in 1997.
- The deficit on government accounts may run over budget.
- The inflation rate may accelerate in the next 12 months but should remain short of double digits. A downward trend is foreseen for the second half of 1997.
- Both money and capital market interest rates may come down in the next 18 months.
- The government's newly announced growth plan could benefit the economy if implementation is successful. However, the effect of this plan on the economy will probably only be evident in the longer term.
BALANCE OF PAYMENTS
(see graphs 1.1-1.8 and tables 2-4)
TABLE 2: Real Output, Trade And Inflation
1994 1995 1996F 1997F
UNITED STATES
Economic growth (GDP%) 3.5 2.0 2.1 2.3
Balance on current account
($/billion) -151.2 -152.9 -143.8 -141.4
Inflation (CPI%) 2.6 2.8 2.8 2.7
JAPAN
Economic growth (GDP%) 0.6 0.7 2.6 2.9
Balance on current account
($/billion) 129.1 111.1 77.5 70.5
Inflation (CPI%) 0.7 -0.1 0.1 1.1
GERMANY
Economic growth (GDP%) 2.9 2.1 1.0 2.3
Balance on current account
($/billion) -21.1 -17.4 -15.1 -9.9
Inflation (CPI%) 2.7 1.8 1.7 2.1
UNITED KINGDOM
Economic growth (GDP%) 3.8 2.6 2.2 3.0
Balance on current account
($/billion) -3.2 -10.5 -8.6 -8.8
Inflation (CPI%) 2.5 3.4 2.5 3.1
TABLE 3: Currencies And Gold Price (Ave. For Period)
2nd 1st
half half
1994 1995 1996F 1997F 1996F 1997F
$/DM 1.62 1.43 1.51 1.60 1.53 1.57
$/YEN 102.2 93.9 109.1 114.3 111.5 113.5
Sterling/$ 1.53 1.58 1.50 1.44 1.48 1.45
$/R 3.55 3.63 4.22 4.52 4.39 4.47
R (trade
weighted value) 73.7 69.5 60.6 56.8 57.8 57.3
Gold ($/oz) 384 384 391 403 388 398
TABLE 4: South African Balance Of Payments (R Or $ Billion)
1995 % 1996F % 1997F %
Merchandise
exports (R) 81.0 24.7 95.2 17.5 112.5 18.2
Net gold exports (R) 20.2 -11.0 21.0 4.4 20.6 -1.9
Merchandise
imports (R) 98.4 29.1 109.2 10.9 124.8 14.3
TRADE ACCOUNT (R) 2.7 7.0 8.3
($) 0.8 1.7 1.8
Net service
payments (R) -15.5 -16.0 -15.8
and net transfers ($) -4.3 -3.8 -3.5
CURRENT ACCOUNT (R) -12.7 -8.8 -7.2
($) -3.5 -2.1 -1.6
CAPITAL ACCOUNT (R) 21.7 7.6 10.0
($) 6.0 1.7 2.2
CHANGE IN NET GOLD
& FOREIGN EXCH. (R) 9.1 -0.6 2.8
Reserves ($) 2.5 -0.2 0.6
The rate of increase in the value of goods exports slowed
markedly. The year-on-year rate of increase declined from 34,3% in
the first quarter of 1995 to 17,4% in the last quarter of 1995 and
9,8% in the first quarter of 1996.
Owing to production problems the value of net gold exports in 1995
was down 11%. In the first quarter gold production declined still
further, but there are some signs of an improvement. The decline in
the exchange rate of the rand impacted favourably on the value of
gold production, having resulted in an increase of 6% in net gold
exports in the first quarter compared with a year ago.
Receipts for services were lower in the first quarter. A decline in
the number of foreign tourists was a contributing factor
here.
Last year the value of goods imports rose by 29,1% following an
increase of 27,4% in 1994. Because of a slowing in real GDE,
imports rose more slowly in the first quarter - 7,6% down on a year
ago. Payments for services in the first quarter were up only 2,4%
on a year ago.
The net result of the above developments was a declining tendency
in the deficit on the current account of the balance of payments.
The annualised seasonally adjusted deficit decreased from R15
billion in the last quarter of 1995 to R10,4 billion in the first
quarter of this year.
In the first quarter the net inflow of capital was considerably
less than in previous quarters and amounted to only R56 million.
This resulted in net gold and other foreign exchange reserves
declining by R2,2 billion in the first quarter - the first decline
since the second quarter of 1994. In April there was a further
sharp decline of R4,3 billion. In May, however, it increased by
R0,3 billion.
These developments led to a sharp decline in the external value of
the rand from mid-February to end April, after which it moved
mainly sideways during May and June. The monthly average value of
the rand against the US dollar recorded a decline of 15,5% for the
period February to April, with the nominal average value of the
exchange rate down by 12,8%.
The weaker rand could contribute to the deficit on the current
account of the balance of payments being considerably reduced this
year. The increase in the import bill, in particular, could be
considerably lower. Volume of exports may tend upward owing to the
price advantage arising from the lower rand exchange rate, new
production capacity in the manufacturing industry, higher
agricultural exports and signs of more rapid growth in the OECD
member countries.
Against this background, the external value of the rand should
remain stable in the coming months, and move sideways, in real
terms, next year.
GOVERNMENT FINANCE
(see graphs 2.1-2.8 and table 5)
TABLE 5: Government Finance (R Billion)
1995/96 1996/97
Budget Actual Budget Projected
Disbursements 153.2 156.2 173.7 175.5
% increase 9.5 13.7 10.4 11.6
Revenue 124.2 128.5 144.9 144.0
% increase 11.3 14.3 13.8 13.1
DEFICIT 29.1 27.7 28.8 31.5
Less: Balance brought forward 0.0 3.4 0.0 0.0
Plus: Loan redemptions 8.9 11.8 16.3 16.3
Funding requirement 38.0 38.4 45.1 47.8
DEFICIT/GDP (%) 5.8 5.5 5.1 5.6
The slide of the exchange rate, which has a major impact on the
real economy, may result in the budgeted deficit to GDP of 5,1% not
being achieved in the 1996/97 financial year.
The inflation rate may be higher than foreseen in the Budget,
leading to higher expenditure. The interest burden may also be
greater. In addition, revenues will be down owing to the
slowing-down of the GDE and the non-agriculture growth rate.
The above developments may contribute to the deficit for the year
approaching 6% unless privatisation generates additional
takings.
Another complication is a sharp rise in expenditure at local
government level. Current expenditure by local governments for the
1995/96 financial year shows an increase of 15,2% as against the
13,5% of the central government. Developments in this field, as
well as in the case of extra-budgetary institutions, could have a
compounding effect on the economy in times to come.
REAL ECONOMIC ACTIVITIES
(see graphs 3.1-3.8 and table 1)
The salient features are the sharp rise in agricultural production,
a weaker trend in the non-agricultural sectors and signs that the
real GDE growth is slowing.
The favourable agricultural conditions of the past season are
apparent from the production figures for the first quarter. The
seasonally adjusted annualised real production is up 82% on the
last quarter of 1995.
This welcome improvement in agricultural production resulted in the
seasonally adjusted annualised increase in the GDP at factor cost
improving (3,2%) compared with the growth rate recorded in the last
quarter of 1995 (1,7%). However, the non-agricultural sector growth
rate is slowing - from 5,5% in the third quarter of 1995 to 1,9% in
the fourth, and to only 0,6% in the first quarter of this
year.
Two important supporting factors could leave the real growth rate
this year close to last year's. The first is the contribution
by agriculture and the second the favourable effects on the real
sectors owing to the decline in the external value of the rand
which could lead to higher exports and lower imports. The
manufacturing industry, mining, agriculture and tourism could be
the main beneficiaries.
The flip side of the coin is that the firming of interest rates and
rising inflation could adversely affect the already poorer GDE
performance for the rest of the year. Individuals' real
after-tax purchasing power, in particular, could be put under
additional pressure, which, together with the average high level of
personal debt, could lead to a considerable decline in real private
consumption expenditure. This, in turn, could result in a slower
increase in commercial and industrial inventory accumulation.
Real fixed investment is still rising faster than both GDP and GDE.
However, here also there are signs of a slowing-down which could
gain momentum in the next two years.
It is unlikely that government's recently revised growth
strategy will materially affect the real sectors in the short to
medium term. Without going into the details of the plan, the
following remarks are important:
- We welcome the plan as it could help to increase productivity, saving and investment - the foundations needed for higher economic growth.
- However, the framework will need to be applied in practice, and consumption expenditure by general government, in particular, will have to be curtailed, as envisaged; tangible progress will have to be made with privatisation and the proceeds wisely utilised; real wage increases will have to be in line with or lower than improvements in labour productivity; the escalating crime situation in the country will have to be arrested; market-driven policies will have to be accepted and adhered to and a stable macroeconomic climate will have to be created to enhance domestic and foreign investor confidence.
- Two special problems foreseen revolve around the availability of domestic savings funds to finance the proposed increases in fixed investment and to obtain sufficient foreign exchange. In addition, the proposed fixed investment rates are still too low to achieve the 6% real growth objective in the year 2000, unless a considerable increase in productivity can be brought about.
INFLATION
(see graphs 4.1-4.3 and table 6)
TABLE 6: Inflation Rates For South Africa (Ave. For Period)
2nd 1st
half half
1994 1995 1996F 1997F 1996 1997
Producer prices 8.2 9.7 8.3 9.5 9.6 9.4
- Imported prices 5.5 7.9 9.5 8.5 11.8 8.5
- Domestic prices 8.8 10.0 8.0 9.8 9.0 9.6
Consumer prices 9.0 8.7 7.3 9.2 8.0 8.9
- Food prices 13.6 9.1 4.1 6.3 5.0 6.3
- All items
excluding food 7.8 8.6 8.2 10.0 8.9 9.6
In April this year the inflation rate reached its lowest level
since April 1972, with an annualised increase of only 5,5%. The
effect of lower price increases on imports, and food prices rising
only 2,1% in April, were the main factors contributing to this
favourable state of affairs.
Regarding the course of the inflation rate, an acceleration is to
be expected for the remainder of this year and the first half of
1997. The strong real growth of the money supply, the weaker
exchange rate, an expected increase in unit labour costs, higher
taxation at local government level, levies on petroleum products to
finance road-building programmes and the fact that the very low
increase in agricultural prices - particularly meat - cannot
continue for too long are examples of factors that could cause the
inflation rate to rise. On the other hand, the economy is now in a
downswing phase of the business cycle, which will inhibit price
increases to some extent.
On balance, we foresee that the inflation rate will accelerate to
some 9% in the next couple of months, but will again come down in
the course of 1997.
MONETARY DEVELOPMENTS
(see graphs 4.1-4.8 and table 7)
The rate of increase in the demand for bank credit by the private
sector remains high, and rose by 18,5% in May compared with last
year. Consequently, the money supply is still growing too fast,
remaining above the monetary guidelines.
This scenario, together with a decline in the net reserves of more
than R7 billion in the first four months of the year, resulted in
interest rate pressure in both the money and capital markets. The
three-months BA rate, for instance, rose from 14% to 16,4% from
mid-February to end May, and the R150 government stock rate firmed
from 13,7% in mid-February to more than 16,5% early in May.
TABLE 7: Interest Rates In The G3 Countries And South Africa
95q3 95q4 96q1 96q2F 96q3F 96q4F 97q1F
USA
Prime rate Nominal 8.8 8.7 8.3 8.3 8.3 8.3 8.3
Real 6.1 6.0 5.6 5.5 5.4 5.4 5.5
Bond yield Nominal 6.3 5.9 6.0 6.7 7.0 6.9 6.7
Real 3.6 3.2 3.3 3.9 4.1 4.0 3.9
JAPAN
Prime rate Nominal 1.6 1.6 1.6 1.6 1.6 1.7 1.7
Real 1.5 2.1 1.8 1.6 1.4 1.3 1.0
Bond yield Nominal 3.0 3.0 3.3 3.3 3.3 3.5 3.5
Real 2.9 3.5 3.5 3.3 3.1 3.1 2.8
GERMANY
Prime rate Nominal 6.5 6.3 6.0 6.0 6.0 6.3 6.5
Real 4.7 4.9 4.4 4.4 4.2 4.4 4.5
Bond yield Nominal 6.4 5.9 6.1 6.4 6.6 6.8 6.8
Real 6.3 6.4 6.3 6.4 6.4 6.4 6.1
UNITED KINGDOM
Prime rate Nominal 7.8 7.5 7.2 6.9 6.8 6.8 7.0
Real 4.1 4.4 4.4 4.6 4.5 4.3 4.3
Bond yield Nominal 8.0 7.4 7.8 8.0 8.0 8.1 8.2
Real 4.3 4.3 5.0 5.7 5.7 5.6 5.5
SOUTH AFRICA
Prime rate Nominal 18.5 18.5 18.5 20.5 19.5 18.5 18.5
Real 11.0 11.8 11.9 14.4 11.9 10.4 9.8
Bond yield Nominal 15.5 14.6 15.0 14.7 14.5 14.3 14.5
Real 8.0 7.9 8.4 8.6 6.9 6.2 5.8
Both capital and money-market interest rates have been tending
lower since and this trend should continue, mainly owing to forces
arising from the downswing in the business cycle. Imbalances in the
economy will not disappear overnight, however. There is a fair
chance that the Bank rate will come down this year already. If this
does not materialise, declines amounting to 2 percentage points are
foreseen in 1997.
Since its peak in January, the JSE Industrial Index shed around 6%
of its value (21% in dollar terms) until the end of June. The
resulting drop in the index's Price/Earnings multiple is,
however, also an indication of the more subdued economic outlook
for the remainder of this year. The lower rand will not only mean
higher import prices and somewhat higher inflation, but combined
with higher average credit costs and a less rosy outlook for
consumption expenditure, may impact adversely on earnings growth.
Factors such as higher export revenues, lower company taxes and
further tariff reductions, may counter the impact of these
developments in certain sectors to some extent, but overall
earnings growth will be hard-pressed to exceed the 20% mark.
Considering that a PE ratio of around 16 should be easily
sustainable for the next 12 months, a total real return on
industrial shares of some 8% still looks feasible.
Report completed on 28 June 1996 Economic Research Department
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
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