This week South Africa discovered that its trade deficit was overstated by R24-billion and that the official inflation figure is closer to 7,7% and not 10,3%. This is a difference of 27% and 24% respectively.
In the global world in which we now live, macroeconomic figures matter — a great deal. International investors use them to compare how one country is faring compared with another and allocate investments accordingly.
Fiscal and monetary policies are also dictated by these figures, which include trade numbers, employment, economic growth, inflation and interest rates. South Africa seems to be getting some of the key figures wrong.
Then, when the mistakes are picked up by economists, they tend to be ignored or berated, not celebrated.
The new inflation figure is not so much a mistake as bad timing. According to Statistics SA the inflation basket should be re-weighted every five years. But because of delays the new basket was released a year late, which has resulted in the inflation figure being overstated by more than 2%.
Statistics SA appears to be confusing the issue by comparing the new inflation figure of 7,7% for the first 11 months last year with the old consumer price index (CPI) figure of 8,6%. This makes the debacle look more benign, but the reality is that official inflation figures are being compared regardless of how they are calculated.
The official inflation rate is the rate at which wage and rental negotiations as well as government budget increases are based and, most importantly, the figure the Reserve Bank uses to determine the interest rates.
When comparing the CPIX figures of 10,3% (the old inflation rate that was used for inflation targeting purposes) with the new inflation number, which is expected to be between 7,5% and 8% for the full year, the inflation figure has been overstated by between 2,3% to 2,8% basis points or 24% on an absolute basis. This has had enormous knock-on effects for the economy.
Increases in labour costs last year ran at 10,6%, that is 3% above the new inflation figure. According to Vivienne Taberer, portfolio manager at Investec Asset Management, one of the reasons South Africa struggles to lower its inflation rate in line with developed economies is that we tends to be backward-looking when it comes to wage negotiations.
Rather than looking at future inflation expectations we negotiate on last year’s figure. If one is coming out of a period of high inflation, wage increases will often be higher than the actual inflation figure.
This time the effect has been exaÂcerbated by the fact that inflation was overstated in the first place. When salary negotiations were under way towards the end of 2008, labour would have used inflation figures of 12% to 13% whereas the real inflation rate was running below 10%.
Government employees, for example, have inflation linked salary increases. In the medium-term budget government made R59-billion in inflation adjustments for salaries, social grants, increased fuel costs, medicine, food and textbooks. With inflation overstated by 24%, this will cost taxpayers R13-billion in over-adjustments.
This significant increase in real wages will have a secondary-round effect on inflation and prevent inflation from remaining within target range once the impact of lower oil and food prices has worked through the system.
Moreover, if the new inflation figures had been released a year ago, the Reserve Bank would have based interest rate decisions on inflation figures about 2,5% lower. This means that South Africa’s interest rate bill has been 24% more expensive than it could have been. If interest rates were 2% lower on a total mortgage book of R887-billion, South African borrowers would have saved R17-billion last year.
The mistake in trade figures, according to the South African Revenue Service (Sars), arose when temporary gold imports sent into South Africa for refining purposes were included in trade statistics in July because of a large increase in these types of imports.
In a statement Sars explained that ”temporarily imported” gold, brought into the country for refining, was included in report statistics. But it was not included in export statistics on leaving the country — this is data that the Reserve Bank compiles.
Suddenly South Africa became an importer of one of its most abundant precious metals, making its trade deficit balloon.
Sars and the Reserve Bank, however, moved swiftly to address the problem after it was reported by Business Day on Monday, releasing revised trade stats on Wednesday. The revised trade deficit for 2008 decreased from R88,05-billlion to R64,5-billion because of the ”downward revision” of gold imports by R23,5-billion.
Sars spokesperson Adrian Lackay said it ”disputes the assertion that we knew about the problem for months and did not act to correct it. This is simply not true — as our actions this past week indicate.”
Furthermore, he said that after wide consultation with independent economists, private market analysts and macroeconomic experts from national treasury, it was deemed very unlikely that one issue impacted on the currency and the market.
”The period in question is characterised by high international market volatility, currency volatility and, by its nature, trade data also tends to be volatile and in flux,” he said. ”Sars has stated its position in this matter publicly and seeks to own up to its responsibilities. Still, we do not believe there is a need for market alarm.”
But such anomalies have created a great deal of concern for private sectors economists before.
In 2005 T-Sec economist Mike Schussler presented the South African Employment Report compiled for the United Association of South Africa labour union (Uasa). It indicated that official statistics had underestimated the growth of formal economy jobs and as a result GDP growth.
Last year Investec alerted the market to a two-year delay in the re-weighting and rebasing of the inflation basket. The findings echoed a similar problem in 2003, when John Stopford, joint head of fixed income at Investec Asset Management, discovered that CPIX had been overstated by 1,9%.
While economists acknowledge that statistics of any kind are never 100% accurate anomalies like these need to be communicated to the public and addressed swiftly.
Kevin Lings, chief economist at Stanlib, says that while the faulty trade data was unlikely to have affected monetary policy, it no doubt affected the market’s perception of the country’s economic health in the current financial crisis.
Lings says many countries experience anomalies in their statistical and trade data, the difference is ”the extent to which [other countries] clarify and communicate any anomalies”.
