Given recent economic developments, South Africa’s domestic growth prospects seem positive and in general most factors favour a containment of inflation within the target range, according to South African Reserve Bank (SARB) Governor Tito Mboweni.
Speaking at the University of Pretoria on Thursday night, Mboweni cautioned that the rate of increase in CPIX could temporarily breach the upper level of the target range towards the end of 2004 and the early part of 2005 due to the high oil prices.
“The exchange value of the rand remains firm, and the improved foreign-exchange reserve position could contribute to rand strength and stability. In general most factors favour a containment of inflation within the target range and market participants also seem to be scaling down inflation expectations.
“However, in the short term, developments in international oil prices, through their impact on domestic fuel costs, are likely to be a source of upward pressure on inflation and it is conceivable that the rate of increase in CPIX could temporarily breach the upper level of the target range towards the end of 2004 and the early part of 2005,” he said.
He added that forward-looking monetary policy remains focused on the expected trend of inflation and that policy decisions will be guided by the mandate to maintain CPIX inflation within the target range.
Mboweni said that preliminary information for April and May 2004 indicates a possibly slightly weaker trade balance in the second quarter of 2004.
However, in the second quarter of 2004 the proceeds from the country’s global bond issue of $1-billion has supported investment flows into South Africa.
In the first half of 2004, the SARB continued its accumulation of foreign-exchange reserves and the strengthening of its international liquidity position. But the potential impact of these transactions on domestic money-market liquidity was sterilised by means of open-market operations.
The exchange rate of the rand against a basket of currencies strengthened by 16% in the year ending December 2003 and, on balance, appreciated by a further 8,2% in the six months to the end of June 2004.
“This appreciation occurred despite the setback to international prices of commodity exports in the second quarter of 2004 in response to indications that steps would be taken to cool down buoyant economic growth in China,” Mboweni said.
He added: “While these movements of the exchange rate of the rand reduced the international competitiveness of South African producers, it resulted in a decline in the year-on-year change of imported goods over the past 14 months, notwithstanding a significant increase in the international price of crude oil over this period. Goods price inflation therefore moderated further both at the production and consumer level.
“By May 2004, CPIX inflation had been maintained within the 3% to 6% target range for nine months in succession and the year-on-year rate of increase amounted to 4,4% in each of the three months to May.”
Twelve-month growth in M3 remained brisk though it decelerated from 12,6% in April 2004 to 11,9% in May. Credit extended by banks by means of mortgages, instalment sale and leasing advances to the domestic private sector recorded strong growth in 2004 under conditions of lower interest rates, rapidly increasing domestic expenditure and rising house prices.
Growth in total loans and 12-month growth in M3 remained brisk though it decelerated from 12,6% in April 2004 to 11,9% in May. Credit extended by banks by means of mortgages, instalment sale and leasing advances to the domestic private sector recorded strong growth in 2004 under conditions of lower interest rates, rapidly increasing domestic expenditure and rising house prices.
Growth in total loans and advances to the private sector nevertheless decelerated from 10% in April 2004 to 9,1% in May owing to a decline in overdrafts.
According to Mboweni, yields on long-term South African government bonds increased sharply from 8,7% on January 17 2004 to 10,6% on June 15 in response to the weaker exchange value of the rand and inflation concerns arising from strong real economic activity and the higher price of oil.
Subsequently, bond yields fell back by about 50 basis points as the recovery in the external value of the rand scaled down inflation concerns.
“On balance, the trend in domestic yields closely followed that of United States government bond yields from the beginning of March 2004.”
In the share market, prices on the JSE Securities Exchange fell back by 9,7% from a recent peak in March 2004, in contrast to the bull rally in the preceding 10 months.
The real estate market remained buoyant and house prices continued to increase at a brisk pace, recording nominal year-on-year rates of increase of about 24% in the first half of 2004.
“However, month-on-month rates of increase in nominal house prices indicate that the prolonged boom in this sector could be losing some momentum in 2004,” Mboweni cautioned.
He said the authorities continued to pursue a cautiously expansionary fiscal policy, recording a public-sector borrowing requirement of 3,2% of gross domestic product in fiscal 2003/04 — higher than before, but nevertheless in accordance with widely accepted principles of fiscal prudence. It is envisaged that this ratio will decline to 2,7% in fiscal 2006/07.
“Rising capital expenditure by the public sector not only contributes to a more efficient functioning economy but public works programmes also enhance skills and create employment,” Mboweni pointed out.
“From this brief description of recent economic developments, it can be concluded that domestic growth prospects seem positive,” he added. — I-Net Bridge