South African Reserve Bank Governor Tito Mboweni says that most South Africans don’t remember interest rates being as low as they are at present.
But, he told members of the Cape Town Club on Tuesday night — ahead of Wednesday’s national Budget to be presented to Parliament by Finance Minister Trevor Manuel, that interest rates had been lowered “most definitely because inflation has come down”.
“The decision on interest rates [by the Monetary Policy Committee] has been a function … of the view of the bank going forward [which was] that inflation would come down.”
Gladly this view had been correct and South African had stayed in the target range of between 3 and 6%.
The spin-offs had been that year-on-year retail trade had grown by 4,3% between 2003 and 2004. Insolvencies had declined by 47%, while motorcar sales had jumped 23%.
“There is a party out there. People are buying out there,” he said.
Even electricity consumption had gone up in South Africa.
Other good news was that South Africa had “managed to get out of the box” of two to three percent growth and 4% had been recorded last year — after a first quarter growth of 5,7%.
Noting that CPIX was at about 4,3% and the repo rate at 7,5%, he said the difference between the two was three or four percent. Asking himself the rhetorical question whether this was too high, he said in a developing country “it is not”.
High interest rates in the 1980s and 1990s were, however, not sustainable.
In fact, they were “killing the South African economy,” he said.
South African did not want an overvalued exchange rate, nor did it want to see an undervalued exchange rate, but attention had to be given to the matter of cutting the fat in the economy for the country to be competitive, he said.
He pointed in particular to the problem of executive pay in South Africa which he described as having “gone completely bonkers”. This was closely linked to the expectation that the rand’s exchange rate was a “staircase of depreciation”.
This had led to the syndrome of building golf courses and spending money on trout fishing farms.
“We must cut the fat. We must look at the issue of executive pay very, very closely for our country to succeed.” He said it was hard to find executives who were earning less than four million rands a year.
Mboweni, who is a former Labour Minister in the African National Congress government, said that he had moved to remove dealers in the South African Reserve Bank’s dealing room who viewed the currency as a weakening one.
He said the role of the bank “has always been to cream off any excess dollar or foreign exchange” in the market. He referred to a “less than 30-year-old” chief foreign currency dealer who had done the country proud.
In December, for example, when the market was regarded as being “thin” with many of the dealers on holiday, there was the realisation that every dollar the bank bought or sold “might influence the exchange rate”.
When the market was short, the bank had put dollars in the market, when there was an excess, the bank took dollars out.
He said the country wanted a competitively valued exchange rate which was good for imports as well as exports “so that our manufacturing sector does not die”.
He acknowledged that “a brave face” had been presented in relation to the country’s large forward book that existed seven or eight years ago.
He said that in about 1998 “things were not okay”.
There had been a net open foreign currency position of “minus $23-billion”.
This was, he noted, “basically an overdraft in dollars that the country had that was being managed by the central bank”.
This had developed in part because South African corporates and the parastatals could not borrow directly from international capital markets and the central bank became the central mechanism for borrowing.
“The bank went to borrow on a bilateral basis with a number of banks,” he said.
The situation had turned around, however. From a position “that is called bankruptcy,” the country moved out of overdraft and “we now have reserves of our own to the tune of $15-billion”.
“It is a very good thing for the country,” he said.
He said that he expected a deficit before borrowing in Wednesday’s Budget of between 2,5% and 2,7%.
Mboweni also said the finance minister had a “lot of room to manoeuvre” in terms of revenue intake.
He said this was “first as a result of VAT [value added tax] intake” which itself was a result of the increase in consumer spending and also from increased company taxation.
“I think it is possible that the deficit before borrowing is going to be in the region of 2,5% to 2,7% of GDP,” said the governor.
Mboweni predicted that Wednesday’s Budget would be “a good budget,” but expressed optimism that Manuel would not be nasty to those who took part in those sins that one’s parents warned one against — tobacco and alcohol.
He told guests at the Cape Town Club on Tuesday night that he had, nevertheless, gone out to buy two boxes of cigars ahead of today’s Budget.
“In anticipation of what he [Manuel] might likely do. I went to Green Market Square and bought myself two boxes of cigars,” said the governor. – I-Net Bridge