The four interest rate increases this year as well as the notable appreciation of the rand in 2002 will in due course brake the inflation spiral decisively, South African Reserve Bank (SARB) governor Tito Mboweni told foreign diplomats on Tuesday evening.
The SARB raised interest rates in January, March, June and September by 100 basis points each time to deal with rising inflation resulting largely from the depreciation of the rand in the fourth quarter 2001 as it depreciated to a worst level of R13,86 per dollar on December 20, 2001.
The rand by contrast has been the best performing currency against the US dollar this year and on December 10 hit a new best level of R8,93 per dollar.
“Our assessment is that this will be sufficient to bring inflation down in a fairly dramatic fashion during the course of next year,” Mboweni told the diplomats.
Mboweni said the rand has been at the centre of most discussions of economic developments this year. Against a basket of currencies the rand lost 34% of its value during 2001 — mostly in the final two months of the year. Its gyrations were the topic of an official enquiry led by Judge Myburgh.
“Not surprisingly, it was found that quite a number of factors could have contributed to its sharp depreciation,” Mboweni said.
Although the Myburgh commission handed its report to President Thabo Mbeki at the end of June, no official action has as yet been taken on the recommendations.
Mboweni said the competitiveness gained by the South African economy on account of the (overdone) exchange rate depreciation in 2001 helped to smooth domestic production and income during a period of general weakness in the world economy.
“Import substitution progressed and South African exports penetrated various markets quite successfully. This was helped along by improved market access. In this regard, the Africa Growth and Opportunity Act of the United States should be mentioned, along with the European Union Free Trade Agreement and the Southern African Development Community Free Trade Agreement.
“Most importantly, numerous South African companies are reorienting their strategies, aiming to structurally raise their share of output flowing to the export market. In the process, upcoming markets such as China and India are also receiving due attention,” he said.
“Tourism is also doing well in spite of, and perhaps even because of, the unease following the September 11 attacks. South Africa is a pleasant destination. The number of non-residents visiting South Africa rose from 4,8 million in the first 10 months of 2001 to 5,3 million in the same period of 2002.
“Under these circumstances, South Africa maintained a healthy growth rate in the first three quarters of 2002. It seems likely that growth in real gross domestic product this year will amount to around 3% compared with 2,8% in 2001. It is also heartening that the growth is spread across virtually all sectors of the economy,” Mboweni said.
Mboweni said an extremely positive element of our financial situation was the reduction in the SARB’s exposure to foreign exchange rate risk, as captured in the decrease in the our net open foreign currency position (NOFP). This has receded from $23,2-billion in September 1998 to $4.8 billion at the end of 2001 and $1.7 billion at present.
At the same time, South Africa’s foreign exchange reserve level is quite strong at around 20 weeks’ worth of imports, double that of five years ago.
“In short, then, the South African economy is in fairly good shape, with the exception of the inflationary consequences of the 2001 exchange rate depreciation,” Mboweni concluded. – I-Net Bridge