Rather than worry about how to get growth going, people should be worrying how to make the most of a South African economy that is “pumping”, South African Reserve Bank (SARB) Governor Tito Mboweni said on Monday.
He was speaking at a media conference following the fourth business round table with the government, organised by The Economist magazine.
The round table addressed issues of faster growth, attracting foreign direct investment and black economic empowerment.
“One of the questions you have asked me to address is whether a strong rand will impede growth. It is difficult to isolate the exchange-rate movements from other policy initiatives. What I do know is that the South African economy is growing very strongly, it is pumping, as the macro-economic reforms flow into micro-economic reforms,” Mboweni said.
“The current real interest rates are not prohibitive and most companies and households have healthy balance sheets,” he said.
South Africa’s real prime rate is of the order of 6%, which is considerably higher than many other emerging market economies and most developed economies.
He also said the link between M3 money-supply growth and consumer inflation is not statistically significant.
The United States Federal Reserve will no longer publish the M3 money-supply aggregate from March next year.
“As one of my central bank peers said, ‘It is not that we have abandoned money-supply aggregates; rather, they have abandoned us,'” he said.
South Africa pursued a monetary policy strategy that included setting some pre-announced M3 money-supply targets from 1986 to 1989 and M3 guidelines from 1990, until formal inflation targeting was introduced in 2000.
Stable rand
The SARB prefers a stable and competitive exchange rate, Mboweni said.
He suspects that the rand will be stronger and more stable going forward, as structural issues such as the closing of the net open forward position and building foreign reserves have been addressed. This has resulted in credit-ratings upgrades.
“The rand’s volatility has dropped from 30% in mid-2003 to only 10% last month, while on a trade-weighted basis, which is a far better way at looking at the rand than just against the US dollar, the rand has only lost 6% since the beginning of the year,” Mboweni said.
He reiterated that the SARB does not have an exchange-rate target, only an inflation target, and he said the biggest risk going forward is oil prices, not the rand.
“People talk about ‘hot money’, but we have not been able to quantify it, and the International Monetary Fund — in a paper entitled The Composition of Capital Flows: Is South Africa Different? — came to the conclusion that we are different, as we attract three times more portfolio flows for the size of our economy and those flows are more stable than other emerging markets,” he said.
“So, there may be some deterioration in the current account, but this is more than covered by capital inflows. In addition, these inflows are increasingly of the foreign direct investment kind, with the Barclays deal merely the first of many,” Mboweni said.
A rand near R6 per dollar will put a strain on the mining sector, but miners have to deal with reality, he said.
“I do not see politicians standing up and saying I want a collapsed currency, as they know that will result in higher inflation, which will hurt the poor more than the rich.
“Miners must learn to deal with reality and I am confident that Chinese demand will lead to strong commodity prices. It is the function of central banks to provide financial stability, which is supportive of growth and job creation,” Mboweni said.
Regional policies
The SARB considers regional economies when the monetary policy committee (MPC) meets to discuss monetary policy, but formal representation of other central banks on the MPC is a political decision, Mboweni said.
“The governors of other regional central banks send us information two days before the MPC meets, so we do consider the impact of our decisions on other economies, but actual representation of other central banks on the MPC is a political decision,” Mboweni said.
Lesotho, Namibia and Swaziland are members of the Common Monetary Area, where the local currencies are fixed against the rand.
Mboweni noted that the rand is increasingly being used as a currency in other countries north of South Africa, which augurs well for regional integration.
“The central bank governors of the African Union have a target of achieving monetary union by 2025. This target has the tacit approval of most governments, but in order to achieve that union, we must agree on convergence criteria, such as fiscal deficits to GDP ratios and low inflation rates,” Mboweni said.
Inflation outlook
South Africa’s inflation outlook has deteriorated moderately, with CPIX now seen at the upper end of the 3% to 6% range in the first quarter of 2006, Mboweni continued.
Nonetheless, inflation should remain within target range over the forecast period. This is, among others, dependent on the future path of oil prices, and developments in the exchange rate of the rand and food prices, he added.
“Inflation expectations, as can be expected, have deteriorated moderately, but on the whole still point to CPIX remaining within target over the next three years. The bank [SARB] needs to guard against inflation expectations worsening further and becoming entrenched,” Mboweni said.
Economic growth, he added, should remain robust, despite the fact that oil prices will most likely have a dampening effect on growth. The manufacturing sector appears to have weathered a relatively strong rand quite well, while global economic conditions are such that export growth should be maintained at a healthy pace.
“Both consumer and business confidence should remain high, with the factors supporting consumer confidence in 2005 still effective in 2006 — healthy disposable income, structural changes in the economy, and still low nominal interest rates.
“Money supply and credit extension should witness a mild moderation, alongside growth in the housing market. We have noted signs of cooling off already. Expectations of interest-rate increases are likely to dampen credit demand [mortgage financing] somewhat.
“However, certain country-specific factors are likely to support still high and positive rates of growth, namely, the participation of non-resident buyers in the local market, the emergence of a new middle class, strong consumer demand, and a general catching-up in the local housing market with international developments,” Mboweni stated.
“The balance of payments may witness a mild deterioration; however, capital inflows, both portfolio and foreign direct investment, should be sufficient to finance this.
“The bank will continue to build its foreign-exchange reserves, and purchase foreign currency at opportune times in a manner that does not destabilise the financial markets,” he added. — I-Net Bridge