South Africa said on Tuesday it was relaxing its 2004 inflation target because of higher prices linked to the rand’s slide in 2001, which have prompted the central bank to raise interest four times this year.
But the Treasury revised its growth forecasts for 2002 and the next three years upward, saying that improved exports, production and domestic consumption kept the outlook bright despite uncertainty in the global economy.
South Africa was also set to record its first current account surplus since 1994 this year, due to a strong trade performance in the wake of the weaker rand, it said in a medium-term budget statement.
The policy statement for the three years to fiscal 2005/06 unveiled a widely anticipated decision to keep the target for the country’s CPIX inflation index at three to six percent in 2004 — the year it was supposed to narrow to three to five percent.
”This isn’t to suggest that we are going soft on inflation, it allows us to engage with the fact that we had a series of unprecedented events that lead to higher inflation,” Finance Minister Trevor Manuel told reporters.
The Treasury said the original target would still be missed in 2002 and 2003, but inflation would start to fall next year as the effects of the rand’s historic slide of 37,4% against the dollar late in 2001 dissipate.
”Under the circumstances, the Minister of Finance and the Governor of the Reserve bank have agreed that the inflation target should remain three to six percent for 2004,” it said.
”The three to five percent target falls away until further notice.” It predicted that CPIX would average 9,6% in 2002, 7,2% in 2003 and 5,5% in 2004 — falling to 4,9% in 2005.
Manuel told reporters there were no plans at present to revise the targeted CPIX basket, which excludes home loan costs but includes volatile food and fuel prices.
He has asked Statistics South Africa to examine whether the basket is appropriate and whether it responds to changes in monetary policy.
”I have asked Statistics SA to examine this, then we would be looking at it in discussions going forward. There are no indications of any change at this stage,” he said.
Financial markets had been keen to see if the Treasury would revise the inflation targeting framework set in 2000 and seen as key to South Africa’s financial credibility.
It was generally agreed that relaxing the target range in 2004 would be acceptable as the rand’s steep plunge last year — and its impact on domestic prices — were beyond the control of the country’s authorities.
Taking the step will also be seen as a sign that the central bank may not raise interest rates at its next policy meeting in late November, as monetary policy targets inflation 12-18 months ahead.
The bank has raised its key repo rate by four percentage points to 13,50% this year in a trend seen as worrying for the economy, given a punishing official jobless rate of 30% and meagre investment flows.
Central Bank governor Tito Mboweni — who took part in a press conference with the Treasury — told reporters he agreed with the changes to the inflation target range, but warned them against reading too much into the adjustment in terms of policy.
”We think in the current context it’s a very good adjustment. Nevertheless nobody must be under the impression that this means a relaxation of monetary policy or that we are going soft on inflation…” he said.
The Treasury said there was net foreign direct investment of R8,3-billion in the first half of 2002, reflecting inward investment by foreign multinationals and the repatriation of offshore investments by South African companies.
”Growth is expected to maintain its upward trend over the medium term, with rates of 3,5%, 3,7% and 3,9% projected for 2003, 2004 and 2005, respectively,” it said.
This compares with February budget forecasts for gross domestic product of 3,3% in 2003 and 3,6% in 2004. The Treasury also predicted growth in GDP would accelerate to 2,6% in 2002 from 2,2% in 2001 — compared with a 2002 budget forecast of just 2,3%.
South Africa’s current account was expected to improve to a surplus of 0,1% of GDP in 2002 — its first since 1994 — from a deficit of 0,2% in 2001, as export performance improves, import growth slows, and commodity prices strengthen.
”However, as domestic demand accelerates over the medium term, import growth will also increase, putting some pressure on the current account,” it said.
The current account was seen sliding back into the red with a deficit of 0,3% of GDP in 2003, widening to 0,6% in 2004 and 1,1% in 2005. – Reuters