MONETARY POLICY
REVIEW
APRIL 2021
APRIL 2021
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APRIL 2021
i
Preface
The primary mandate of the South African Reserve Bank (SARB) is to achieve and maintain price stability in the interest of
balanced and sustainable economic growth. In addition, the SARB has a complementary mandate to oversee and maintain
financial stability.
Price stability helps to protect the purchasing power and living standards of all South Africans. It provides a favourable
environment for investment and job creation, and supports international competitiveness. The goal of price stability is
quantified through an inflation target, which is set in consultation with government. The target is a range of 3–6%, which has
been in place since 2000.
The SARB has full operational independence. Monetary policy decisions are made by the SARB’s Monetary Policy Committee
(MPC), which is chaired by the Governor and includes the Deputy Governors and other senior officials of the SARB.
The inflation-targeting framework is flexible, meaning that policymakers will seek to look through temporary shocks, thereby
avoiding excessive volatility in interest rates and economic output. The MPC takes a forward-looking approach to account for
the time lags between policy adjustments and economic effects. MPC decisions are communicated at a press conference at
the end of each meeting, accompanied by a comprehensive statement.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening the public’s understanding of
the objectives and conduct of monetary policy. The MPR covers domestic and international developments that affect the
monetary policy stance.
In normal circumstances, the MPR is presented by senior officials of the SARB in major centres across South Africa. However,
due to COVID-19, this MPR will be launched virtually.
Questions about the publication may be directed to Marlene Hugo at
APRIL 2021
Contents
Recovery progressing, but slow and uneven

Boxes

Statements issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee

APRIL 2021
Recovery progressing,
but slow and uneven
Executive summary and
overview of the policy stance
In parallel with global developments, the past six months have
seen South Africa’s economy continue its recovery from last
year’s 7% contraction in output caused by the spread of the
COVID-19 virus. The Monetary Policy Committee (MPC) cut
the repurchase (repo) rate by 2.75 percentage points between
March and July 2020 in direct response to the pandemic, and
has since left the repo rate steady at 3.5%, helping to support
the recovery. Inflation remains well-contained, and is expected
to gradually rise towards the midpoint of the 3–6% target band,
reaching 4.5% by 2023. Keeping inflation low into the recovery
will help contain interest rates. Recovery to the 2019 level of
output is only expected in 2023, reflecting sustained headwinds
to economic activity, including high long-term investment costs
and electricity supply constraints.
The global economy continues to recover from the COVID-19induced recession in 2020 despite repeated waves of the virus.
Economic activity indicators for many major economies have
climbed back to near pre-COVID-19 levels, reflecting optimism
brought about by the launch of vaccination programmes and
the magnitude of fiscal and monetary support.1 The scale and
duration of the global recession turned out better than was
initially feared, with gross domestic product (GDP) contracting
by an estimated 3.3% in 2020 (compared to the initial
(June 2020)) forecast of a 4.9% contraction by the International
Monetary Fund (IMF)).2 In April 2021, the IMF revised its forecast
of global growth for 2021 to 6%, up from 5.5% in January.
The second wave of the pandemic was strong but had minimal
direct impacts on the global economy. Countries addressed
second waves by implementing better-targeted and less
economically-damaging lockdowns, unlike the tight restrictions
implemented during the first wave. In tandem, businesses have,
where possible, adapted or shifted to less contact-intensive
ways of working, further insulating production activity and many
jobs from restrictions on mobility and contact.

The US passed a US$900 billion stimulus package in December
2020 and a US$1.9 trillion package in February 2021. This was over
and above the US$2.4 trillion CARES Act of March 2020, bringing
the total fiscal intervention to over 25% of GDP. Japan announced an
additional ¥73.6 trillion (US$708 billion) support package in December
2020, split between pure fiscal support and equity injections, loans
and guarantees, taking its pure fiscal interventions to about 16% of
GDP. See IMF, Fiscal Monitor, Washington DC: IMF, April 2021.

International Monetary Fund (IMF), World Economic Outlook,
April 2021.
Percentage change
Global growth*
Source: IMF
-6
-4
-2

Jan 2021
Apr 2021

* Dotted lines indicate forecasts
Percentage change over four quarters

Targeted inflation forecast*

* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%.
Sources: Stats SA and SARB
3–6% inflation target range

Midpoint

China

SSA

G3 and the UK

SA trading partners (weighted average)
Percentage change
Trading-partner real GDP growth*


Source: SARB
* Dotted lines indicate forecasts

APRIL 2021
A moderate rise in inflation should accompany the global
recovery, accelerated by supply constraints in some instances
and stronger demand, but also tempered by well-anchored
inflation expectations. Inflation in the Group of Three (G3) –
the United States (US), Japan and the eurozone – averaged
0.7% in 2020, rising to about 1.7% in both 2021 and 2022.3
Inflation in the US may peak higher in the near term, at 2.4%,
before slowing into 2022.4 Emerging market inflation is also
rising, and is projected to average 3.5% in 2021. Recovery
has also improved the risk appetite of investors, supporting
renewed capital flows to emerging markets in the second half
of 2020. As seen in March, however, the threat of higher US
interest rates can and will prompt bouts of risk aversion and
generate volatility in capital flows.
On balance, stronger global outcomes will continue to
support faster recovery in the domestic economy. The easing
of lockdown restrictions, record-low interest rates and the
ongoing rally in commodities supported growth in the second
half of 2020 and into 2021, with the South African Reserve
Bank’s (SARB) forecasts for South Africa’s GDP in 2021
boosted by about half a percentage point as a result of global
developments.
Following the wild gyrations in quarterly output in 2020
(Q2: -51.7%; Q3: 67.3%; Q4: 6.3%), the South African economy
is expected to grow by 3.8% in 2021 before easing to growth
rates of 2.4% and 2.5% in 2022 and 2023 respectively.
The future evolution of the COVID-19 pandemic, potential
further lockdowns and delays in vaccination roll-out to the
public make these projections more uncertain than usual.
Although the growth rates projected across the forecast
horizon are higher than what South Africa has achieved in the
recent past, the level of output is not expected to reach the 2019
level until the first quarter of 2023. As a result, the recovery will
be wing-shaped, with a sharp yet incomplete initial bounceback followed by a gradual rise towards the pre-COVID-19 level.
This reflects both immediate headwinds to growth and preexisting constraints.
Unlike most previous recessions, the recovery from pandemic
conditions is uneven across sectors, raising the spectre of
a K-shaped recovery. The primary sector has already
recovered to pre-COVID-19 levels as of the fourth quarter,
with agriculture outperforming the 2019 benchmark, strongly
supported by favourable rainfall conditions that led to record
maize harvests. Mining is also almost back to pre-crisis
levels, buoyed by robust foreign demand and record-high
commodity prices.

Based on the IMF’s World Economic Outlook, April 2021.
SARB’s March 2021 MPC assumptions for weighted G3 inflation
are 0.8% in 2020, and 1.6% in both 2021 and 2022.

Federal Open Market Committee, 17 March 2021.
federalreserve.gov/monetarypolicy/fomcprojtabl20210317.htm
Percentage change over four quarters

Real GDP growth*
* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%.
This chart shows seasonally-adjusted data, as used in the QPM.
Sources: Stats SA and SARB


R trillions (2010 constant prices)
GDP levels


2010 2012 2014 2016
2020 2022
Seasonally adjusted and annualised
Sources: Stats SA and SARB
2007Q2:
2.606
2020Q2:
2.610
Jan 2020
Mar 2021
2019Q4:
3.144
2023Q1:
3.156
Per cent
Output: 2020Q4 deviation from 2019 level


Agriculture
Mining
Manufacturing
Electricity
Trade
Transport
Finance
Community and
social services
Construction
GDP
Sources: Stats SA and SARB

APRIL 2021
The secondary sector, however, is still to fully recover, with
construction furthest behind. Recovery in the manufacturing
sector has been tempered by idiosyncratic setbacks in the
petroleum subsector and weak demand for non-durable
goods, among other factors.5 The tertiary sector also remained
below the 2019 average as at December 2020, with the drag
coming mostly from finance, transport and trade, the latter two
sectors strongly influenced by tourism.
Turning to the demand side of the economy, the second
half of 2020 saw household consumption rebound strongly,
supported by cheaper credit and pent-up demand caused by
the lockdowns. Consumption of durable goods was especially
robust, while that of semi-durables remained substantially
below its 2019 average.
Household spending has, more broadly, been undermined by
widespread job losses, despite support from increased social
transfers.6 According to Statistics South Africa’s (Stats SA)
Quarterly Labour Force Survey (QLFS), of the roughly 2.2 million
jobs lost in the second quarter of 2020 due to the pandemic,
about 900 000 were recovered by the fourth quarter, implying
net job losses of nearly 1.4 million by the fourth quarter of 2020.
Job losses were skewed towards less-skilled workers, while
higher-skilled workers or those who could easily work from
home were relatively more protected. Most sectors mitigated
job-shedding by reducing salaries and eliminating bonuses,
but even here, the less-skilled workers were disproportionately
affected, with 1 in 5 experiencing earnings cuts, compared to
1 in 10 for graduates (QLFS).
An important feature of the economy’s performance in recent
years has been the decline in the rate of gross fixed capital
formation, which further contracted in 2020 alongside imports.
With sharply higher commodity prices, modest oil prices
and much lower imports of capital and consumption goods,
South Africa’s trade balance swung into surplus, creating an
overall surplus on the current account. The current account
is expected to narrow during 2021 as imports recover, before
turning into a deficit in 2022, even with robust export prices.
The rise in corporate saving associated with falling investment,
and the better-than-expected tax revenue growth from the
strong terms of trade, provided more financing for the larger
fiscal deficit.7 In turn, the better-than-expected fiscal deficit and
slower projected climb in public debt has helped, alongside
more buoyant projections for global growth, to ease South
Africa’s risk premium. Nonetheless, the potential is high for
reversals to this improvement, as the fiscal position remains
sensitive to changes in the nominal wage bill and other factors.

Two refineries experienced major accidents that disrupted
production for extended periods of time.

By the end of 2020Q4, consumption remained 2% below
the 2019 average.

Financing of the fiscal deficit at the expense of private investment
(crowding out) implies low future growth, especially given the
very low fiscal spending multipliers.
Index: 100 = 2019 average
Household consumption
Sources: Stats SA and SARB

Services
Durable goods
Non-durable goods
Semi-durable goods
Q4

Q1
Q2
Q3
Q4

Million people

Labour market
Source: Stats SA
Total labour force
Employed
Unemployed

Index: 2010 = 100

Commodity prices*

Source: SARB

* Dotted lines indicate forecasts

Incl. gold

Excl. gold

APRIL 2021
Risk can also arise from renewed global volatility, as seen
in market reactions to potentially higher real interest rates in
the US. A permanent rise in G3 real interest rates, all else
being equal, places capital inflows at risk by lessening
the attractiveness of alternative fixed-income investment
destinations. A resumption of risk-on sentiment and
implementation of the 2021 Budget should, other things being
equal, support further improvements in the risk premium.
A broadly more supportive global environment also helped
to sustain a recovery in the exchange rate of the rand,
contributing, alongside deflating imported goods prices, to
less inflation in the domestic economy. Inflation remained
well-contained in 2020 and into 2021, with headline averaging
3.3% for the year and both January and February monthly
outcomes coming out slightly below forecasts. Headline
inflation further benefitted from subdued services inflation and
fuel price deflation during the course of 2020, while upside
pressures came primarily from food and non-alcoholic
beverages (NAB).
Recent escalations in food and fuel inflation, together with base
effects, will add to near-term inflation, with headline breaching
the 4.5% midpoint in the second quarter of 2021 before easing
somewhat into 2022.
As with headline, core inflation averaged 3.3% in 2020, kept
low by continued weak housing price inflation and subdued
labour market pressures.8 Core inflation is projected to rise to
4.3% by the end of the forecast horizon (2023), with the pace of
the reversion tempered by the gradual closure of the negative
output gap, better-anchored inflation expectations and a less
depreciated real exchange rate.
Looking back, the 2014–16 period saw inflation hovering
around the 6% upper end of the target range, presenting
ongoing risks of abruptly higher interest rates and
undermining the credibility of policy. Since 2017, the SARB
has been communicating a preference for inflation to be
around the 4.5% midpoint, creating a focal point and helping
to better anchor inflation expectations. While differences in
the speed of convergence of expectations between business,
analysts and trade unions remain, the overall effect has been
positive, with an easing of inflation in response to better
communication.9

The imputations methodology used by Stats SA during the lockdown,
using headline (lower than core) to impute for non-collected prices,
contributed to the lower core trajectory in the middle months of 2020.

See, for instance, A Coco and N Viegi, ‘The monetary policy of the
South African Reserve Bank: stance, communication and credibility’,
South African Reserve Bank Working Paper Series No. WP/20/06,
Pretoria: South African Reserve Bank, June 2020.
co.za/content/dam/sarb/publications/working-papers/2020/10024/
WP-2006.pdf; M Reid and P Siklos, ‘Building credibility and influencing
expectations: the evolution of central bank communication’, South African
Reserve Bank Working Paper Series No. WP/20/08, Pretoria: South
African Reserve Bank, July 2020.
dam/sarb/publications/working-papers/2020/10144/WP-2008.pdf

Trade balance

Current account balance
Forecast
Percentage of GDP

Trade and current account balance
Source: SARB
-15
-10
-5

Percentage change over four quarters
Core inflation components*
Sources: Stats SA and SARB

Core
Services
Core goods
Midpoint of inflation
target range

* Dotted lines indicate forecasts
Per cent
Two-years-ahead inflation expectations
Sources: BER and SARB

Total
Analysts
Business
Trade unions
Q1
Q2
Q3
Q4

Q1
Q1
Q2
Q3
Q4


APRIL 2021
Despite this overall and longer-term improvement in the
inflation profile, the inflation outlook remains subject to risk.
Successive MPC meetings have noted how upside and
downside risks tend to cancel each other out, leaving the
risk assessment in balance. Headline inflation is expected to
gradually return to about 4.5% by 2023, but this depends
on an unusually wide range of factors. Food price inflation is
expected to remain elevated, pulled up by rapidly rising global
food prices, but favourable domestic market conditions
should provide some moderation. Wage inflation, both
public and private, is forecast to remain dampened by the
prolonged effects of employment loss and public sector wage
moderation. Lower services price inflation in particular
remains an important downside risk. Permanent losses in
supply capacity from firm closures and job losses, higher
import prices, sovereign risk and currency depreciation are
further risks to the inflation trajectory.10
Administered prices, particularly for water and electricity,
will keep overall inflation higher than otherwise, and also
present upside risks to the forecast. The administered prices
consumer price index (CPI) is projected at 8% in 2021, 5.9%
in 2022 and 5.7% in 2023, significantly above the 4.5%
midpoint. Worse still, the 2021 increase is significantly above
the upper limit of the 3–6% target band. Electricity prices are
expected to increase by 13% in 2021 and by 10% in both
2022 and 2023 (see Box 8).
Although South Africa’s inflation rate fell to one of its lowest
rates on record in 2020 (3.3%), we remain a high-inflation
economy relative to the rest of the emerging market and
developing economies.11 The 3.3% out-turn compares poorly,
placing South Africa 88th out of 154 countries. As headline
inflation returns to 4.5%, the gap relative to the group median
is set to rise, increasing South Africa-specific risk perception
and leading to generally higher interest rate levels.
10 These risks, should they materialise, could drive headline above the 4.5%
target midpoint and possibly dislodge inflation expectations away from
the midpoint.
11 South Africa’s relatively high inflation may be explained by, among
other things, administered price inflation, sustained above-inflation
government sector wage growth, and the high cost of doing business.
See BusinessTech, ‘The surprising reasons why South Africa’s
inflation has been higher than in other economies’,
8 February 2020.
business/371174/the-surprising-reasons-why-south-africasinflation-has-been-higher-than-in-other-economies/
Number of countries
Ranking of South Africa’s inflation
performance among emerging market
and developing economies
Sources: IMF and SARB

Below 25th percentile
Above 75th percentile
South Africa’s ranking

x
Between 25th and 50th percentile
Between 50th and 75th percentile
x
x
x
x
x
x

x

x x
x
x
x
x
x
x
x
x x x x
x
x x x

Percentage change over four quarters
Inflation*
Sources: Stats SA and SARB

Administered
Headline

* Dotted lines indicate forecasts
Midpoint
3–6% inflation target range

APRIL 2021
Overview of the policy stance
The MPC left the repo rate unchanged at 3.5% in its last
three meetings, monitoring the recovery, risks, and how the
economy absorbs the frontloaded repo rate cuts implemented
earlier in the timeline of the pandemic. Borrowing costs are at
their lowest level in five decades, and the economy continues
to recover, albeit unevenly across sectors.
Economic data for the second half of 2020 show how
policy support fed through into activity levels. Total credit to
households surpassed the 2019 level by December 2020,
driven by secured credit (mainly property and vehicles).12
A record number of mortgage advances was granted between
July and December 2020. Similarly, total credit extension to
corporates recovered to the 2019 level by October 2020.13
After surging in March 2020, new loans and advances to
corporates declined and remain depressed, suggesting that
corporates frontloaded their borrowing early in the pandemic
and are now waiting out the generally high uncertainty before
taking up new loans.14
Perhaps the biggest beneficiary of the ultra-low short-term rates
has been the public sector, which shifted most of its funding
to the shorter end of the yield curve.15 This has reduced overall
public sector funding costs as well as the effective interest
rate on government debt to about 6%, in sharp contrast to
borrowing costs of around 9% at longer maturities.
At the time of the November 2020 MPC meeting, highfrequency data pointed to positive economic momentum, and
the forecast of annual GDP growth for 2020 was revised higher
to -8.0% from the -8.2% expected at the September meeting.
The 2021 and 2022 growth forecasts were, however, revised
down on sharply lower investment. Core inflation was revised
lower for 2020 and 2021 at this meeting as services price
inflation weakened, but there was little change in the longerterm forecast. The output gap was forecast to narrow to -6.3%
in 2020 (from -6.5% in September) but to widen slightly in the
outer period. Labour market price pressures were expected to
remain subdued in light of the announced government wage
freeze and with the real unit labour cost (ULC) gap in deflationary
territory. Inflation expectations were around the 4.5% midpoint
and were expected to moderate further to 4.2% by 2022, while
the exchange rate gap was slightly less depreciated.
12 Unsecured household credit, however, has been on a declining trend
since June 2020.
13 Total credit extension to corporations includes ‘investment and bills’,
a component that is perhaps driven more by revaluations than
by new credit extension.
14 This could also reflect reduced demand for working capital in light of
the continued depressed activity levels in some sectors, for example
in tourism and construction.
15 Treasury bill issuances increased by 109% between February
and October 2020 (and by 62.1% year on year in February 2021),
while bonds issued only increased by 55.8% over the same
period (and by 32.8% year on year).

Actual number, thousands
Mortgage advances granted

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: SARB
Volumes and yields of government bonds
and Treasury bills (March 2021)*
R millions
Black bars are inflation-linked bonds
Source: SARB
* Weighted average yield: 6.3%
91-day
182-day
273-day
364-day
R186
I2029
R2030
R213
R2032
I2033
R2035
R2037
I2038
R2040
R2044
I2046
R2048
I2050


Per cent
Repo rate

Source: SARB


APRIL 2021
With benign food and oil prices, the Quarterly Projection Model
(QPM) saw medium-term inflation gradually returning to the
4.5% midpoint by 2023. The environment favoured low and
stable prices, with the rand appreciating by 6.9% between the
September and November meetings. The implied path for the
policy rate generated by the QPM suggested no further repo
rate cuts for 2020, but indicated an increase of 25 basis points
in each of the third and fourth quarters of 2021, signalling future
rates normalisation.
With the economy projected to continue on a steady recovery
path, and the risks to the inflation outlook balanced, the MPC
decided to keep the repo rate unchanged at 3.5% in November.
The decision was not unanimous; three members voted
to hold the repo rate steady while two members favoured a
25 basis points cut.
The period running up to the January 2021 meeting of
the MPC exhibited signs of a stronger global recovery,
particularly in the US, and despite a sharp rise in new virus
cases in many advanced economies. The large fiscal stimulus
packages approved in the US and Japan during December
2020 supported the continued shift of sentiment toward riskon. Global policy rates remained accommodative, pushing
increased capital flows to emerging markets, but these were
modulated by risk aversion in regard to low-growth and highly
indebted economies.
The January 2021 MPC meeting followed the release of thirdquarter GDP data, which showed the economy had grown
much faster than anticipated. Fourth-quarter activity was,
however, tempered by a resurgence in the virus, which forced
South Africa into an adjusted lockdown Level 3 – a significantly
less stringent version compared to the original Level 3.
The peak of this second wave coincided with a period of
low economic/production activity (the December/January
holidays), and the lockdowns were carefully targeted (unlike
during the first wave), reducing their broader economic effects.
The January forecast saw GDP growth revised up to -7.1%
(from -8%) for 2020 and to 3.6% (from 3.5%) for 2021. Potential
growth was also revised slightly higher. The output gap
narrowed marginally. The neutral real interest rate was adjusted
a bit lower, by 0.1 percentage points, to 2.0% in 2020 and 2.1%
in 2021, in line with a somewhat stronger exchange rate path
and a modest improvement in the risk premium.
Core inflation came out at 3.3% in 2020, with the medium-term
forecast (4.3% by 2023) remaining unchanged relative to the
November MPC meeting. Services inflation was expected to
detract from core in 2021, largely due to lower health insurance
and housing inflation, before inflating slightly faster in 2022.
The labour market remained soft, with the real ULC forecast
remaining very low. Inflation expectations remained contained
around the 4.5% midpoint.

NRIR Nov 2020

NRIR Mar 2021

Real repo rate Mar 2021
Per cent

Neutral real interest rate changes

Source: SARB
Rand per US dollar
Jan

Apr
Jul
Oct
Jan
Mar
Exchange rate of the rand
Source: Bloomberg


Percentage points

Contributions to headline deviation from midpoint

Electricity (3.8%)

Fuel (4.6%)

Food and NAB (17.2%)

Core CPI (74.4%)

Headline inflation (100%)*
Sources: Stats SA and SARB
* Percentage change over four quarters
Forecast

APRIL 2021
Headline inflation was projected to rise gradually from 3.3%
in 2020 to reach 4.6% in 2023, 0.1 percentage points above
the November profile, with 2021 higher on food and the 2022
increase due to revisions to food, core and, to a lesser extent,
fuel price inflation.
As in November, the QPM’s Taylor rule advised two 25 basis
points hikes in the near term, the first in the second quarter of
2021 and the second in the third quarter of 2021, and a total
hike of 275 basis points over the three-year forecast horizon.
This normalisation of rates implied a gradual reversal of the
wide real repo rate gap achieved in the depths of the crisis.
The MPC decided to keep rates on hold at 3.5% at the January
meeting. It noted that monetary policy settings remained
strongly accommodative, with a sustained real repo rate level
well below the level of the neutral real rate. This time, too, the
decision was not unanimous, with two members preferring a
25 basis points cut. The MPC highlighted food, electricity and
other administered prices, as well as possible exchange rate
pressures emanating from fiscal risks, as perils to inflation, but
also alluded to the absence of demand pressures at the time.
The March MPC meeting was preceded by the release of the
2020 fourth-quarter GDP data. This showed that the economy
grew by 6.3%, quarter-on-quarter, seasonally adjusted and
annualised, well above the SARB’s forecast of 5.3% and the
Reuters median of 4.9%. Inflation for 2021 was revised higher
to 4.3% (from 4.0% at the January meeting), driven mainly by
fuel inflation as global oil prices recovered strongly. Greater
stability in oil prices in the outer years of the forecast, implied
that petrol price inflation eases in 2022. Rising electricity and
food prices also add to headline CPI in 2021 relative to earlier
forecasts.
The profile for core inflation mimics the January MPC profile,
except in 2021, where core is revised lower by 0.1 percentage
points to 3.3%, largely on (temporarily) lower insurance inflation.
Core settles at 4.3% by the end of the forecast horizon. The
drivers of core inflation virtually trace the path projected in
the January MPC meeting, except for the output gap, which
‘closes’ by the fourth quarter of 2023.16
Given the steady recovery in the economy, the QPM’s Taylor
rule indicated two rate hikes for 2021: the first hike was seen
in the second quarter (same as in January), while the second
hike is now only projected in the fourth quarter (previously the
third quarter). This is due to the slightly lower inflation in 2022,
mostly from petrol prices easing, relative to the January MPC
projections. As inflation rises to the midpoint of the target band,
the repo rate is expected to rise to close the negative real repo
rate gap.17
16 The output gap is forecast to reach -0.1% of potential GDP by
the fourth quarter of 2023.
17 The real repo rate gap, a measure of the degree of monetary
policy accommodation, is the difference between the real repo
rate and the neutral real interest rate, where the real repo rate
denotes the nominal repo rate adjusted for inflation. A real repo
rate below the neutral real interest rate indicates that monetary
policy is accommodative or expansionary, and the opposite is
true when the real repo is above the neutral real interest rate.
Percentage change over four quarters
Average inflation (3–5 quarters ahead)
Sources: Stats SA and SARB

Nov 2020
Jan 2021
Mar 2021


Forecast
Per cent

Neutral interest rate and real repo rate*
-2

Source: SARB
* Dotted lines indicate forecasts

Neutral interest rate

Real repo rate
Percentage change from quarter to quarter
Real GDP growth*
-60
-40
-20

Seasonally adjusted and annualised
Sources: Stats SA and SARB
* Dotted line indicates forecast

APRIL 2021
With inflation risks balanced and the recovery fairly robust, the
March MPC meeting unanimously decided to keep the repo
rate unchanged at 3.5%. As in the January meeting, the MPC
alluded to the exceptionally accommodative monetary policy
settings and that demand pressures remain well-contained.
The MPC, however, noted with concern that there was a rise in
supply-side risks to the inflation outlook, particularly from
administered prices.
In conclusion, the worst of the COVID-19-induced economic
effects continue to fade, with the recovery strengthening,
albeit unevenly across sectors. Exceptionally accommodative
monetary policy settings continue to support the recovery,
and inflation is projected to rise to the midpoint of the target
range gradually over the forecast horizon. This modest inflation
trajectory underpins the MPC’s decisions to keep the repo rate
unchanged at 3.5% over the course of the review period.
The past year demonstrated the value of having a low and stable
inflation rate and policy credibility. In the wake of repo rate cuts
of half a percentage point between July 2019 and January 2020,
the MPC rapidly cut the repo rate by a further 2.75 percentage
points between March and July in direct response to the
pandemic. This unprecedented easing of policy sharply reduced
the real cost of servicing debt for households and corporates,
and supported real purchasing power even as economic activity
was drastically curtailed. In the context of the pandemic shock,
the very low real interest rates will only gradually seep into
future credit demand, consumption and investment planning as
uncertainty slowly fades, incrementally pushing up output. This
implies that the benefits of the stimulus, moderated by broader
economic conditions and circumstances, should gradually
strengthen the recovery through this year and the next.
Like many other central banks, both in advanced and in
emerging economies, early and aggressive rate cuts provided
extensive support before shifting to a ‘wait and see’ approach,
monitoring how reduced rates affected the economy. With
inflationary pressures remaining well-contained, rates have
been kept low for longer in South Africa, in stark contrast to
recent developments in some peer economies.
The MPC highlighted that the economic recovery can be
enhanced by; further de-risking the economy by stabilising
public debt, providing sufficient energy for growth, reducing
the impact of administered prices on overall inflation, and
keeping inflation low into the recovery. A lower-inflation
domestic economy will go far in protecting the competitiveness
of producers in a world of diminished inflation, and raises
the prospect of borrowing costs for households and firms
permanently anchored at or near the current historically
lower levels.


200 Basis points
Emerging market policy rates
Mexico
South Africa
Brazil
Colombia
Peru
Russia
Czech Rep.
Poland
Chile
India
Turkey
Indonesia
Malaysia
Thailand
China
Taiwan

Changes from end Jan 2020 to end Oct 2020

Changes since end Oct 2020
Sources: Haver and SARB
+875
Per cent
Evolution of repo rate forecasts*
Source: SARB
* Dotted lines indicate forecasts

Actual

Nov 2020

Jan 2021

Mar 2021

APRIL 2021
Box 1 Has the transmission of monetary policy
been effective?

The incomplete pass-through for mortgage rates and
credit cards could reflect a host of possible explanations,
including unmodelled risk premiums, changes in the
composition of loans and high bank concentration.

Updated from L Soobyah and D Steenkamp, ‘Term premium and
rate expectation estimates from the South African yield curve’,
South African Reserve Bank Working Paper Series No. WP/20/03,
Pretoria: South African Reserve Bank, June 2020.

working-papers/2020/9998/WP-2003.pdf
The primary mechanism through which monetary policy affects the
real economy is the cost of bank funding and therefore the cost
and availability of credit. The South African Reserve Bank’s (SARB)
repurchase (repo) rate serves as an anchor for the rate at which
banks borrow from one another since banks can choose to borrow
funds overnight at a margin over the repo rate. Other factors also
influence the rates at which banks extend credit, including economic
uncertainty and sovereign risk, regulatory settings affecting required
holdings of liquidity, as well as the degree of competition among
banks that influences interest margins.
An assessment of the pass-through from the repo rate to bank lending
rates over the 2008–20 period shows close to full transmission
to lending rates for most categories of bank credit.1 This implies
that the ‘effective’ policy stance (in the sense of what consumers
actually experience) has been consistent with the policy stance of the
Monetary Policy Committee.
Focusing the assessment to policy easing during the COVID-19
pandemic, evidence suggests that repo rate cuts have transmitted
effectively to bank lending rates, with, for instance, the flexible
residential mortgage rate declining by about 2.8 percentage points.
However, there have been offsetting increases in risk and liquidity
premiums that have somewhat weakened the transmission of policy
to the real economy relative to the pre-COVID-19 period. This effect
can best be seen in the sustained steepness in the yield curve,
despite the aggressive policy easing. Long bond rates have remained
high, partly because of an increase in sovereign risk reflected in
the term premium. The 10-year government bond yield was about
100 basis points higher in February 2021 compared to January
2020, notwithstanding the record-low short-term rates.2
Pass-through from the repo rate to ...
Source: M Greenwood-Nimmo, D Steenkamp

Rate cut

Rate hike
Corporate
credit cards
Corporate
flexible
mortgages
Household
credit cards
Household
overdrafts
Household
flexible
mortgages
and R van Jaarsveld (2021, forthcoming)
-1

10-year government bond yield decomposition
-100
-50

Source: SARB

Term premium

Expectations

Yield
* 1 Jan 2020 versus 25 Feb 2021
Basis points change*

APRIL 2021
Box 2 Lower inflation: the role of target clarity
and favourable circumstances

Over the 2010–17 period, the inflation rate was above the
5.5% mark more than 53% of the time and above the 5.75%
mark 42% of the time.

Monetary policy is said to be credible when the central
bank’s actions are consistent with reaching its stated goals,
and economic agents believe that the central bank will act
in a way that ensures the realisation of those goals.

E Schaling and M Hoeberichts, ‘Why speed doesn’t kill:
learning to believe in disinflation’, De Economist 158(1),
Amsterdam: De Nederlandsche Bank, March 2020. https://
link.springer.com/article/10.1007/s10645-010-9136-3

The sacrifice ratio measures the amount of output
(GDP) forgone to lower the inflation rate by 1.0%.
South Africa’s inflation rate has moderated in recent years, in line with
the Monetary Policy Committee’s (MPC) articulation of a clear preference
for the midpoint of the target range. Whereas headline inflation before
the announcement averaged 5.4% (over the 2010–17 period) and
was often very close to the top of the band, it has fallen to an average
of 4.0% since the beginning of 2018.1 This period of disinflation is
particularly remarkable as it coincided with rand weakness, almost
always a harbinger of higher inflation. Lower crude oil prices helped
neutralise the inflationary impact of a weaker rand, but the experience
also demonstrates how communications can help anchor inflation
expectations and achieve big gains for the economy. In the absence
of disinflation through the past year, interest rates could have averaged
more than 2.5 percentage points higher than the 3.5% level set by the
MPC, working against the economic recovery.
While there is broad agreement that low inflation is beneficial for an
economy, aligning inflation to levels in competitor countries is often
resisted, as the costs associated with lowering inflation are seen to be
high. The literature, however, tells us that monetary policy credibility
determines how fast expectations adjust.2 High-credibility regimes
get faster adjustment with minimal output losses, and vice versa.
Thus, rapid disinflation is optimal if the new target can be effectively
and credibly communicated. Also, the more forward-looking inflation
expectations are, the smaller the cost of bringing inflation down to the
preferred target. Gradual disinflation can build credibility over time, but it
raises the overall economic costs.3
Using the South African Reserve Bank’s Quarterly Projection Model,
simulations indicated that, under a 100% monetary policy credibility
scenario, it would take about one year to lower the inflation target by
1.5 percentage points (from 6.0% to 4.5%), and the output gap would
close in three years, with a sacrifice ratio4 of 0.8 percentage points of
gross domestic product (GDP). In a 50% credibility scenario, the output
gap would take about six years to close, and the sacrifice ratio would rise
to 1.2 percentage points of GDP. In a 0% monetary policy credibility
scenario, it would take about eight years to close the output gap, with
a 2.1 sacrifice ratio.
Percentage of potential GDP
Output gap scenarios

100% credibility

50% credibility

0% credibility

Actual change

in output gap

Source: SARB

Actual outcomes offer a sharp contrast to the simulations.
While inflation came down to the 4.5% midpoint of the target
range, there is little evidence of a cyclical output forgone over the
2017–19 disinflation period when measuring the output foregone
by the change in the output gap.

APRIL 2021
The global economy:
a divergent recovery
The global economy is on a recovery path. Expansionary
global fiscal and monetary conditions as well as vaccination
campaigns should continue to support the recovery. Individual
economies are, however, progressing at divergent speeds.
Beyond the short-term outlook, the COVID-19 pandemic is
likely to leave permanent scars on the world economy, including
high fiscal deficits, elevated debt and weak investment.
Certain sectors, such as travel and tourism, will take years to
recover. Global inflation is expected to remain subdued against
a backdrop of well-anchored inflation expectations and muted
underlying inflationary pressures.
The path to recovery
The global economy is on a recovery path after weathering
the pandemic-induced recession better than expected.
At the height of the COVID-19 crisis, consensus expectations
were for the world economy to contract by around 4.7% in
2020. More recent global growth estimates, however, project a
decline of around 3.8% in 2020, mainly due to a firm recovery
across most regions of the world in the second half of the
year.18 As the recovery takes shape, considerable volatility will
mark the global economic trajectory, and the long-term effects
of the pandemic on the world economy will come into sharper
focus. At a global level, inflation is likely to remain muted,
but, in the near and medium term, supply disruptions and
other factors will generate significant divergences in relative
prices, in particular between global food, commodities and
services prices.
Advanced economies
The rebound across the advanced economies has been strong,
underpinned by exceptionally large government stimuli – fiscal
and monetary. Growth, however, has diverged across countries.
According to the IMF (2021), the US economy contracted by
3.5% in 2020, compared to the initial expectation for an 8%
contraction, while Japanese GDP contracted by 4.8% in 2020,
less severe than the 5.8% initial expectation. These betterthan-expected growth outcomes were mainly due to activity
normalising faster than expected, additional government fiscal
support measures in late 2020 and early 2021, expectations
of earlier vaccine availability, and the continued exceptionally
accommodative monetary policies of the major global
central banks.
The second wave of COVID-19 infections slowed the recovery
across some regions, in particular the eurozone, which
tightened mobility restrictions in a targeted manner. Despite
the US also experiencing a strong second wave of infections
18 The IMF’s April 2021 World Economic Outlook has global GDP
contracting by 3.3% in 2020.


Percentage change
Jan

Apr
Jul
Oct
Jan
Evolution of the 2020 global growth forecast
Source: Consensus Economics


Percentage change
Jan

Jul
Jan
Jul
Jan
Source: Bloomberg


Euro area

Japan

US

Dot =
actual
outcomes
Evolution of and actual 2020 real GDP growth

APRIL 2021
at the same time, stronger growth reflected continued fiscal
support and less stringent lockdowns relative to the eurozone.19
Some European countries – such as Spain (-11%), Italy (-8.9%)
and France (-8.2%) – experienced steep contractions in 2020,
and eurozone economic activity is now only expected to return
to 2019 levels by 2022.20
Emerging markets
While the advanced economies have fared better than
expected, the economic hit to the emerging markets was
more severe than initially thought. This was mainly reflected
by overwhelmed health-care systems, greater dependency
on sectors such as tourism that were severely affected by the
pandemic, as well as the fiscal support gap. The fiscal response
in most emerging markets was much more constrained, as
many of these countries entered the pandemic with little fiscal
space. Whereas the fiscal stimulus of the advanced economies
averaged about 16% of GDP, emerging markets could only
afford an average of about 4%. And despite the relatively weak
fiscal stimulus, most emerging markets are now facing high
debt burdens due to loss of revenue and, in a lot of cases,
unfavourable debt dynamics, many which existed prior to
the pandemic.
Emerging market central banks generally responded to the
pandemic with large interest rate cuts, new lending facilities
and bond purchase programmes to prevent financial market
dysfunctions caused by flight-to-safety disinvestments by
global and sometimes domestic investors. The governance,
size and duration of these bond purchase programmes
have, however, been less transparent than in the advanced
economies, and the effects on markets less certain.21
Emerging market recoveries have also been divergent. China
is the only major (emerging) economy to record positive
GDP growth (2.3%) in 2020, following effective containment
measures, a robust public investment response as well as
ample central bank liquidity provisions. Excluding China,
emerging market output in 2020 is estimated to have contracted
by nearly 6%, with sharp contractions recorded in Argentina
(10%), Mexico (8%), India (8%) and Brazil (4.1%).
Taiwan and Vietnam performed particularly well in 2020,
growing by 3.1% and 2.9% respectively, owing partly to
their proximity to China but also to early containment of
the pandemic and less need for heavier restrictions. Major
exporters in the region, such as Malaysia and Thailand,
saw their exports rebound quickly as goods consumption
recovered faster than services in the advanced economies.
19 The philosophies were also different, with the US resisting a tightening
of mobility restrictions, but also seeing the largest share of COVID-19
infections and deaths among the advanced economies.
20 International Monetary Fund, World Economic Outlook,
Washington DC: International Monetary Fund, April 2021.
21 World Bank, Global Economic Prospects, Washington DC:
World Bank, January 2021.
-15
-10
-5

Percentage change
Real GDP growth estimate (2020)
Sources: IMF and SARB
Advanced economies
Emerging markets
Argentina
Mexico
India
South Africa
EMs excl. China
Brazil
Russia
Indonesia
EMs
Turkey
China
Spain
UK
Italy
Greece
France
Euro area
Japan
AEs
US
New Zealand

Percentage of GDP
Emerging market fiscal response (2020)
Source: IMF
Mexico
Egypt
Turkey
Pakistan
Saudi Arabia
UAE
Tunisia
Philippines
India
Argentina
EM average
Colombia
Russia
Indonesia
China
South Africa
Peru
Poland
Chile
Thailand
Brazil
AE average

APRIL 2021
Unlike emerging Asia, countries across Latin America were
less successful in weathering the COVID-19 wave, with GDP
for the region projected to have contracted by 7%.
Like Latin America, sub-Saharan Africa (SSA) economies
were heavily impacted by the pandemic, with GDP estimated
to have fallen by 1.9% in 2020 (the contraction is only 0.4%
if Nigeria and South Africa are excluded). The most severe
impacts of the pandemic were felt in the tourism-dependent
and oil-exporting economies. Mauritius’ GDP, for instance, is
expected to have contracted by 15.8% in 2020, and Nigeria’s
by 1.8%. However, the oil price has been recovering in line with
the global economy, which should lift growth for oil exporters
in the region.
Inflation
After declining sharply at the height of the pandemic, global
inflation has been increasing modestly, reflecting the recovery
in the world economy. Inflation in the G3 – being the US, Japan
and the eurozone – averaged 0.7% in 2020, well below the 2%
target. However, expectations are for inflation to pick up in the
advanced economies, albeit at different speeds. According
to the IMF (2021), inflation is expected to rise firmly to about
2.3% in 2021 in the US and at around 1.4% and 0.1% in the
eurozone and Japan respectively.22 Emerging market inflation
has started to increase, and is projected to average 3.5% in
2021, which is lower than the historical average for the group.
Monetary policy remains expansionary and supportive of
the global recovery. Policy rates across the major advanced
economies should remain accommodative, against a
backdrop of well-anchored inflation expectations and muted
inflationary pressures. Emerging market central banks should
also maintain their monetary support where possible, while
being more limited in countries experiencing rising inflation.
As of December 2020, some emerging market central banks
have continued with asset purchases, while many others have
paused as inflation expectations have increased.23 Indeed,
monetary tightening has begun in some major emerging
markets, including Brazil, Russia and Turkey.
22 The sharp pickup in the US economy is raising fears that inflationary
pressures could start to increase and spill over to the rest of the world.
However, against a backdrop of elevated US unemployment (at least
relative to the pre-COVID-19 level) and the negative output gap,
underlying inflation pressures remain modest.
23 According to the World Bank, as of mid-December 2020, 18 emerging
market central banks announced or implemented asset purchase
programmes (World Bank, Global Economic Prospects, Washington DC:
World Bank, January 2021).
Index: 2019 = 100

Sub-Saharan African real growth divergence
Source: IMF

Pre-crisis

Pre-crisis

Latest (Apr 2021)

Latest (Apr 2021)

Emerging markets
Sub-Saharan Africa
Forecast
Percentage change over four quarters
Inflation in advanced economies
and emerging markets*
Sources: Bloomberg and SARB

Advanced economies**

Emerging markets***


* Dotted lines indicate forecasts
** Includes unweighted average of 15 advanced economies
*** Includes unweighted average of 21 emerging markets
Per cent

Policy rates*
Sources: Haver and SARB

Advanced economies
Emerging markets
* Sample includes 16 advanced economies
and 26 emerging markets

APRIL 2021
Global recovery
The IMF projects the global economy to expand by 6% in 2021
and by 4.4% in 2022. This represents a 0.5, and respectively,
0.2 percentage points upward revision to growth relative to
the January forecasts. While these are large adjustments, they
will still leave output levels below the pre-pandemic trend. The
global recovery is highly dependent on the success of vaccine
roll-outs. Uncertainties exist around the ramp-up of production
and distribution, and the willingness of the population
to get vaccinated.24 Challenges in vaccine roll-outs, including
inequitable access (particularly by the developing economies),
could delay the containment of the virus and slow the
recovery process.
The ongoing debate about the expected shape of the global
recovery – L, U, V or W – has been supplemented by the
K-shaped recovery. In the K shape, economic conditions
are expected to rebound sharply for certain sectors (such
as technology firms), while those affected directly by the
pandemic (such as small businesses, transportation, tourism
and commercial real estate) may take years to recover. Despite
the reopening of economies, the recovery in travel and tourism
has been slow, and will remain dependent on the successful
roll-out of vaccinations.
While the global recovery is expected to gradually improve as
uncertainty recedes, there are concerns that the pandemic
may leave lasting scars on the global economy, particularly in
the form of diminished potential growth.25 Of particular concern
is the impact the pandemic has already had through lower
investment, erosion of human capital because of extended
periods of unemployment, and loss of schooling, especially
in emerging markets.26 According to the World Bank, the
pandemic could knock 0.6 percentage points off emerging
market potential growth over the next decade.
Another concern for the global outlook is the sharp increase
in debt in response to the pandemic. The global governmentdebt-to-GDP ratio reached a new record high of 82.3% in
2020, driven by the substantial fiscal support provided by
the advanced economies (US$11.8 trillion), which pushed
average debt-to-GDP to 130%. In emerging markets, the ratio
rose to 63%, with major increases seen in Brazil, China, India
and South Africa.
24 The World Economic Forum surveyed 18 526 participants across
15 nations and found that 73% of the participants indicated
a willingness to get a COVID-19 vaccine if available.
25 World Bank, Global Economic Prospects, Washington DC:
World Bank, January 2021.
26 A Dieppe, Global productivity: trends, drivers and policies, 2020.
Index: 2019 = 100

Global real GDP levels
Sources: IMF and SARB

Pre-pandemic trend

Post-pandemic trend
Service sector share of GDP, per cent
Service sector impacted by COVID-19
Sources: Bloomberg and World Bank
Lebanon
US
UK
Japan
2020 growth estimate
-30
-20
-10

South Africa
Equador
Angola
Ethopia
China
India
Bangladesh
Per cent
2000–09
2010–19
2020–29
Global potential growth estimates
Source: World Bank


Pre-COVID-19

APRIL 2021
Global debt could rise further, exacerbating debt vulnerabilities
and leading to debt distress, as already seen in countries such
as Chad and Zambia. Countries with weak fiscal positions
and/or elevated debt levels will struggle to provide additional
stimulus in the event of renewed outbreaks or to finance
their deficits in the event of a strong risk-off event. However,
it appears that most countries with a structural deficit saw
a current account improvement in 2020, largely on higher
commodity prices and weak import demand, but this is
unlikely to last long as the pandemic eases and economic
activity levels reach previous highs.27
Conclusion
A recovery in the global economy is underway, though the pace
of recovery is divergent across countries. The strength of the
recovery will in large part depend on monetary policy settings
by the major global central banks remaining accommodative
for longer, and the success of vaccine roll-outs. Risks to the
recovery include large fiscal deficits, elevated debt ratios,
a mutated virus resistant to the existing vaccines and
heightened uncertainty. These risks, should they materialise,
could prolong the return to pre-pandemic output levels.
27 The likes of Chile, Indonesia and Peru should see a narrower
shortfall in 2020, while Brazil, India, Mexico and South Africa
have probably posted their first surplus in years.
Percentage of GDP

Government debt
Source: IIF

Advanced economies

Emerging markets

APRIL 2021
Box 3 Vaccination roll-out and global growth

Herd immunity is the protection from an infectious disease that
happens when a population becomes immune to the disease, either
through vaccination or through a previous infection with the disease.

The World Bank’s global growth scenarios for 2021 present
forecasts ranging from a worst-case scenario of -1% to
a best-case scenario of 5% for global growth this year,
depending on the proportion of populations vaccinated
in the major advanced and emerging economies.

Within a year of the outbreak of the pandemic, 12 vaccines had
received emergency use approval, with around 89 others at an
advanced stage of development – an extraordinary achievement.
See C Zimmer, J Corum and S-L Wee, Coronavirus vaccine
tracker. The New York Times,
interactive/2020/science/coronavirus-vaccine-tracker.html

The authors of an article published in The Lancet medical
journal estimate that rich nations, representing 16% of the global
population, had already secured 70% of vaccine doses as of
February 2021. See O J Wouters, K C Shadlen, M SalcherKonrad, A J Pollard, H J Larson, Y Teerawattananon and M Jit,
‘Challenges in ensuring global access to COVID-19 vaccines:
production, affordability, allocation and deployment’, The
Lancet 397(10278), 2021, p 1028.
action/showPdf?pii=S0140-6736%2821%2900306-8

C Çakmakli, S Demiralp, S Kalemli-Özcan, S Yesiltas and
M A Yildirim, ‘The economic case for global vaccinations:
an epidemiological model with international production
networks’, National Bureau of Economic Research
Working Paper Series No. 28395, Cambridge: National
Bureau of Economic Research, January 2021.
To date, the World Health Organisation estimates that COVID-19 has
infected 13% of the world’s population, while 0.11% has succumbed
to the virus. The global population, therefore, remains well below the
threshold for natural herd immunity1, which is estimated to be in the
region of 60–90%, highlighting the key role of vaccination in reaching
herd immunity at a much-reduced human and economic cost. Other
than the containment of the outbreaks of the virus, governments’ main
focus is to reach vaccine-assisted herd immunity, as it appears to be
the safest path to return to full economic activity.2 This box assesses
the state of vaccination roll-outs and the implications for the global
growth outlook.3
COVID-19 is unique in that it is perhaps the first disease ever that
requires concurrent worldwide vaccination, putting immense pressure
on vaccine production and distribution systems. As of early 2021,
vaccines were in short supply, with many already reserved for the
advanced economies4, which could see the poorer countries falling
behind in vaccine access and distribution.
The pace of vaccination differs vastly across countries, but generally
the start has been slow. The difficulty in accessing and distributing
vaccines could delay the achievement of herd immunity and thereby
slow the global economic recovery. The stockpiling of vaccines by
richer countries could also leave the COVID-19 Vaccine Global Access
(COVAX) initiative (on which low-income countries rely) at risk of
vaccine shortages. In turn, uneven access to vaccines could prolong
the pandemic and raise the risk of further vaccine-resistant mutations
of the virus.
A recent study has found that a delay in bringing the pandemic under
control in the developing countries could wipe around US$9.2 trillion
off world output in 2021, largely through the trade channel, with the
advanced economies bearing the brunt of these losses.5 This potentially
has far-reaching implications for the developing economies through,
Vaccination growth scenarios


Source: World Bank
Global
EMDE
AEs
Per cent
* Major advanced and
emerging economics
Baseline
Severe (10% vaccinated*)
Confirmed COVID-19 vaccine doses purchased*
Source: Duke Global Health Institute
Number of doses, millions
* Updated on 26 Mar 2021

High-
income
Upper-
middle
income
Lower-
middle
income
Low
income
Global
entity/
COVAX

Russia
France
Germany
Norway
Italy
UK
Switzerland
Denmark
Turkey
Morocco
Serbia
Bahrain
US
Chile
Israel
Population fully vaccinated against
COVID-19* by 31 March 2021
Source: Our World in Data
Herd immunity
threshold

Percentage of population
* Share of population that have
received all doses prescribed
by the vaccination protocol

APRIL 2021
for instance, loss of export markets, reduced growth and slippage on
the sustainable development goals, as well as the direct and indirect
human costs of the pandemic. The pandemic is likely to have had
severe negative effects on human capital accumulation in developed
and developing countries, given the difficulty in achieving widespread
online learning.
The major advanced economies such as the United Kingdom and the
United States are expected to reach herd immunity by the first half of
2021.6 While inoculations in the advanced countries started in earnest
around the last week of 2020, most middle-income countries are only
starting their roll-out in the first half of 2021 – and the last to achieve
widespread coverage could be Africa, by mid-2023 or early 2024.7
The pace of vaccination is currently less than optimal, and the
inequities are substantial. Narrowing the gap in rolling out vaccines
between nations should therefore be a policy priority. The pace is,
however, expected to accelerate in the coming quarters, as (i) the initial
logistical challenges at production and/or distribution level should be
overcome through learning by doing, (ii) supply should increase as
more vaccines are approved, and (iii) the need for stockpiling by the
advanced economies is likely to decline, and some of these excess
supplies could be released into the market.
Progress on vaccination and the recovery of the global economy should
spur South Africa’s economic recovery through the trade channel.
However, the slow pace of vaccination in sub-Saharan Africa could
slow recovery in the region – a major trading partner for South Africa.

Deutsche Bank, Focus Germany: outlook 2021 – contingent on
the COVID cycle, 6 December 2020.

Editorial, ‘Africa’s recovery from COVID-19 will be slow’,
The Economist, 6 February 2021.
Per cent
Forecast of vaccines

2020Q4
2021Q1
2021Q2
2021Q3
Source: Deutsche Bank
Herd immunity
threshold

Australia

Canada

EU

Japan

UK

US

When will Africa be fully vaccinated?

Source: The Economist
Cumulative percentage of fully vaccinated countries
Egypt,
Morocco,
Western
Sahara,
Ethiopia,
Kenya,
Gabon,
Equitorial
Guinea
South Africa
Mid-2022
Late 2022

Early 2023
onwards
Number of countries

APRIL 2021
Box 4 The ‘wall of liquidity’ and its potential
implications

OECD, ‘The increase in bank deposits during the COVID-19 crisis:
possible drivers and implications’, OECD Economic
Outlook 2020(2), December 2020.

C Nourse, J Tasker and M Garofalo, ‘How has COVID affected
household savings?’, Bank Overground, Bank of England,
25 November 2020.
overground/2020/how-has-covid-affected-household-savings;
and J MacGee, T M Pugh and K See, ‘The heterogeneous effects
of COVID-19 on Canadian household consumption, debt and
savings’, Bank of Canada Staff Working Paper No. 2020–51,
Ottawa: Bank of Canada, 27 November 2020.
bankofcanada.ca/wp-content/uploads/2020/11/swp2020-51.pdf

See, for instance, A Haldane, ‘Inflation: a tiger by the tail?’.
Speech by Andy Haldane, Chief Economist and member of the
Monetary Policy Committee, Bank of England, 26 February 2021.

andy-haldane-recorded-mini-speech-on-inflation-outlook
Aggressive policy responses to the COVID-19 pandemic as well as
higher household and corporate savings rates have seen global monetary
aggregates accelerating sharply. The South African Reserve Bank (SARB)
estimates show that a United States (US) dollar-denominated combined
M2 money supply aggregate for 17 of the world’s largest economies rose
by 19.3% year on year in January 2021, the highest reading since 2008.
This stands in contrast to the 2008–09 global financial crisis which saw
a sharp slowdown in monetary aggregates.
The bulk of this surge in M2 reflects increases in private sector bank
deposits.1 Government cash transfers to households and businesses
(combined with a deferral of tax liabilities) occurred early in the pandemic,
at a time when lockdowns limited the ability to spend or invest.
With cash flowing in and taxes deferred, especially in the advanced
economies, and as precautionary savings and liquidity preferences
increased, households’ savings rates surged. As economies reopened,
savings rates started to normalise, although the second wave of the
pandemic and its accompanying lockdowns has delayed that process.
As the COVID-19 pandemic is better controlled and economic activity
normalises, consumption and investment out of the accumulated
stock of savings could result in a stronger economic recovery and
higher inflation. However, the unwinding of these large deposits
could take time. Presently, in many large economies, consumer
surveys indicate heightened concern about job losses and wariness
of concluding big-ticket purchases. Furthermore, the surge in savings
is not evenly distributed, with higher-income households, who have a
lower propensity to consume, saving much more than lower-income
households.2 Equally, the distribution of companies’ cash buffers may
be concentrated in particular sectors, meaning that high corporate
deposits may not be a good indicator of a broad-based rebound in
investment once normalcy returns.
The risk of sharply higher inflation also appears to be muted.3 As seen
in the rebound from the bursting of the dot-com bubble of the early
2000s, not all episodes of money supply acceleration result in inflation.
More broadly, in large economies where the pickup in money supply was
particularly strong in recent quarters (Canada, Japan and the US), the
correlation between monetary growth and inflation has proven weaker in
-10
-5

Percentage change over 12 months

Sources: Haver and SARB
* Advanced economies include Australia, Canada, the eurozone,
Japan, South Korea, the UK and the US. Data for Australia are
M3 as authorities do not calculate M2.
** Emerging markets include Argentina, Brazil, China, India,
Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.


Advanced economies*

Emerging markets**

Total
Aggregate M2 money supply
Percentage of disposable income

Sources: Bloomberg, Haver and SARB
* Net of capital depreciation
** US data for 2021Q1 are for Jan 2021 only


France

Germany*

UK

US**

Household savings in selected advanced economies

APRIL 2021
recent decades.4 Factors such as the credibility of the central bank, the
anchoring of inflation expectations and wage determination based on
productivity growth, among other things, may limit inflation risks.
Encouragingly, the rise in deposits has allowed both low-cost credit
creation where needed and some paring down of debt levels. Growth
in loans and advances has remained moderate, and there are signs
in some countries that households are using the ‘wall of liquidity’ to
reduce liabilities. Equally, there is no sign that lending standards have
been relaxed. Surveys suggest that banks have generally tightened
criteria since the start of the pandemic. Such developments, among
others, suggest a lower risk of aggressive general increases in overall
inflation, although some countries are experiencing rising asset prices.
These will be closely watched for implications for financial stability.

Y Wen and M A Arias, ‘What does money velocity tell
us about low inflation in the US?’, St Louis Fed on the
Economy blog, 1 September 2014.
org/on-the-economy/2014/september/what-doesmoney-velocity-tell-us-about-low-inflation-in-the-us

APRIL 2021
Financial market developments:
riding the (choppy) recovery wave
Risk appetite improved in the second half of 2020, following a
period of acute market stress during the onset of the COVID-19
pandemic. Markets benefitted from a range of developments,
including the development of effective COVID-19 vaccines,
large-scale macroeconomic stimulus measures, the US
election outcome and the finalisation of the Brexit deal. In
this risk-on environment, South African assets also registered
gains, despite additional lockdown restrictions and further
credit-rating downgrades. Global and domestic conditions
turned quite sharply during the first quarter of 2021, however,
as US Treasury yields rose, pulling capital into the US and out
of other markets, including South Africa.
Despite the COVID-19 crisis, many asset classes recorded
positive returns for 2020 as a whole. For instance, after declining
by as much as 30%, mirroring the declines of the 2008/09
global financial crisis, both emerging and developed market
equity indices secured gains in excess of 10% for the year.
Similarly, the total return indices for emerging and developed
market bonds were 5.9% and 5.3% respectively. Capital flows
recovered strongly, with the Institute of International Finance
(IIF) recording 12 consecutive months of net inflows into
emerging market equities and debt (as of March 2021). While
the sudden stop in March 2020 saw outflows of US$90 billion
from emerging markets, the subsequent inflows have totalled
more than US$480 billion, with the bulk flowing into China.
Volatility also subsided, with the Volatility Index (VIX) declining
from a record high of 82 index points in March 2020 to end
the year at 22 index points. Lower equity market volatility
coincided with a rally in US stocks, which extended their gains
to historic levels in February 2021, largely bolstered by the
technology sector. The technology-heavy Nasdaq Composite
Index’s market capitalisation increased to over 60% of the S&P
500, a record high.
The US dollar weakened during the course of 2020, and traded
in a fairly sideways manner into 2021. Dollar weakness did not
initially serve as a windfall for emerging market currencies,
given concerns over their economies and fiscal positions.
Most emerging market currencies managed to recover some
ground by year-end, but typically did not regain pre-COVID-19
valuations, with the JPMorgan Emerging Market Foreign
Exchange Index (JPMorgan EM FX Index), for instance, ending
the year 5.6% lower.
The first quarter of 2021 saw a significant increase in volatility,
however, particularly for US Treasury notes, amid higher
economic growth and inflation expectations. The yield on the
10-year Treasury note surpassed 1.5% for the first time since
March 2020 in February, and the Merrill Lynch Option Volatility

Index: 1 Jan 2020 = 100
Jan

Apr
Jul
Oct
Jan
Mar
Total bond returns: EMs versus AEs
Sources: Bloomberg and SARB

EM bonds

AE bonds

-75
-50
-25

US$ billions

EM portfolio flows

Debt

Equity

Total flows
Source: IIF

Index
Jan

Apr
Jul
Oct
Jan
Mar
VIX and MOVE volatility indices
Sources: Bloomberg and SARB

VIX

MOVE

APRIL 2021
Estimate (MOVE) Index, a gauge for Treasury market volatility,
rose to nearly one-year highs. The increase in yields coincided
with gains across commodity markets and other barometers
of demand. Volatility in US bond markets also fed through to
stock markets, with the Nasdaq declining by around 10% from
its February peak. European government bond yields also
rose, as expectations of a rate cut eased.
In these circumstances, the JPMorgan EM FX Index reversed
its 2021 gains, while emerging market bond yields rose over
5%, according to the JPMorgan Government Bond Index
(JPMorgan GBI) for local currency. Higher developed market
bond yields appear to have eroded the premium that emerging
market assets offer investors relative to safe havens.
Domestic financial market
developments
Global gains in the second half of 2020 also benefitted South
African markets, despite domestic macroeconomic challenges.
This progress stalled, however, with the March 2021 sell-off.
In November 2020, South Africa’s sovereign credit rating was
further downgraded by both Fitch Ratings Inc. (Fitch) and
Moody’s Investors Service (Moody’s), with both agencies also
maintaining a negative outlook. Although these developments
were not fully anticipated, the market reaction at the time was
fairly muted. It may be the case that investors had already
taken into account South Africa’s earlier exclusion from the
World Government Bond Index (WGBI) and the worsening of
its sovereign credit rating to sub-investment grade.
Non-resident investors returned to the domestic bond market
towards the end of 202028, although they remained net sellers
of bonds and equities for the period starting March 2020. Yields
at the longer end of the domestic bond curve have declined
since the previous Monetary Policy Review (MPR), given
expectations of reduced supply (and possibly following the
strong sell-off in longer-dated bonds previously). At the same
time, government significantly increased its shorter-dated debt
issuance in the 2020/21 fiscal year, taking advantage of both
investor demand and lower funding costs. For the current fiscal
year, government anticipates a faster pace of deficit reduction
relative to the October estimates and, relatedly, a reduction in
net issuance.
28 According to National Treasury, foreign holdings of domestic
bonds increased to 30.3% in February 2021, having risen
gradually from a multi-year low of 29% in October 2020.
Ratio
Nasdaq market capitalisation/S&P 500
market capitalisation
Sources: Bloomberg and SARB

Jan

Apr
Oct
Jul
Jan
Apr
Oct
Jul
Jan
Per cent

Selected yields and interest rates
Source: Bloomberg

10-year US bond yield

Effective Fed funds rate

5-year US break-even
US dollar and emerging market FX indices
Index
Index
Source: Bloomberg

Jan

Apr
Oct
Jul
Jan
Apr
Oct
Jul
Jan

Bloomberg US$ Index

JPMorgan EM Currency

Index (rhs, inverted)

APRIL 2021
While the initial bond market reaction to the Budget announced
on 24 February 2021 was positive, this was tempered by global
developments. The spread between long- and shorter-dated
bond yields has remained wide, as has the gap between South
Africa’s local currency domestic bond yields and emerging
market averages.29 Indeed, this gap has widened notably since
2019, when South Africa’s fiscal deterioration intensified, as
shown, for instance, by the JPMorgan GBI.
Separately, the JSE Limited (JSE) All-Share Index (Alsi)
ended 2020 in positive territory, and extended its advance to
reach a peak in February 2021. Gains were led primarily by
mining sector stocks on the back of strong commodity price
increases. Conversely, the property, retail and banking sectors
continued to underperform, as a generally weak economic
climate weighed on the earnings outlook. The returns of the
JSE Alsi remained positive on a year-to-date basis.
As mentioned in the previous MPR, the SARB implemented
various measures to provide liquidity to the money market
from the onset of the pandemic.30 While the take-up of crisis
facilities was significant in March 2020, usage declined over
time amid enough cash in the system. This was evidenced
by commercial banks’ negotiable certificate of deposit (NCD)
bid-offer spreads, which returned to pre-crisis levels as early
as May. The 3-month Johannesburg Interbank Average Rate
(Jibar) dipped below the official policy rate between midAugust and late December, when sufficient liquidity generally
drove short-term interest rates lower, but has since traded at
a positive spread. By contrast, implied rates were temporarily
higher in the foreign exchange (FX) forward market, where
there have been shortages of liquidity (discussed in Box 5).
29 Historically low short-term rates should, through the term structure
of interest rates, lower longer-dated rates. However, this channel
is likely intermediated by the term premium, on account of
elevated fiscal risks and the resultant sovereign downgrades.
30 The SARB’s measures included offering daily Intraday Overnight
Supplementary Repurchase Operations (IOSROs) and term repurchase
facilities, an adjustment to the interest rates on standing facilities (SFs),
deviation from the targeted R56 billion weekly money market shortage,
and secondary market government bond purchases to alleviate
the observed dysfunction in that market. Liquidity operations were
gradually unwound as conditions started to normalise. Specifically,
the SF interest rates were adjusted to their standard levels in midAugust 2020: the SF repo/lending rate was adjusted to the repo rate
plus 100 basis points, and the SF reverse repo/deposit rate was
adjusted to the repo rate less 100 basis points. The three-month term
repo facility and the IOSROs were discontinued in December 2020
and February 2021 respectively, and the main Wednesday repurchase
auction amount reverted to R56 billion in February 2021.
Basis points

South African yield spreads to 30-year
domestic bond
Sources: Bloomberg and SARB

2-year

5-year

10-year
Per cent
JPMorgan GBI (local currency) bond indices
Source: Bloomberg

GBI-EM yield
GBI-SA yield

JSE All-Share Index

Industrials

Resources

Banks

Retailers

Property
Cumulative percentage return since 1 Jan 2020
Equity performance
-60
-40
-20

Jan

Apr
Jul
Oct
Jan
Mar
Sources: Bloomberg and SARB

APRIL 2021
In tandem with its emerging market peers, the rand recouped
most of its 2020 losses, particularly in the final quarter, after
depreciating to a record low of R19.30 against the US dollar
in April 2020. While the rand has weakened against the dollar
since the start of this year, it has nonetheless been one of the
best-performing emerging market currencies over the past six
months, reflecting its high beta status.
Generally, emerging market assets have benefitted from the
easy financing conditions worldwide at a time when emerging
market current account deficits have narrowed and inflation
is below longer-term averages. Despite this, the potential
remains for sharp swings in market sentiment given the
possibility of a declining degree of government and central
bank support, which keeps concerns of ‘tantrum’ episodes
intact. New virus strains, an uneven global economic recovery
and precarious fiscal positions also warrant caution on the
outlook for riskier assets.
Per cent
Jan

Apr
Jul
Oct
Jan
Mar
3-month Jibar and repo rate
Source: Bloomberg

3-month Jibar

Repo rate


Per cent
Jan

Apr
Jul
Oct
Jan
Mar
Rand against the US dollar, monthly performance
Source: Bloomberg


APRIL 2021
Box 5 The problem of high foreign exchange-implied
interest rates
There are a number of different markets where financial institutions can
source the rand. One of these is the foreign exchange (FX) swap market,
where borrowers can swap FX (i.e. the United States (US) dollar) for the
local currency. Under normal conditions, the borrowing rates in this
market would track the repurchase rate, which is the benchmark for
short-term rand borrowing. Over the past six months, however, the
short-term FX-implied rates have been volatile and sometimes very
elevated – at one point briefly exceeding 12%.
This behaviour is unusual, both from a historical perspective and
relative to South Africa’s peer countries. While a range of explanations
has been offered, there are two that appear especially important.
-
First, markets have been abundantly supplied with the US dollar,
and market players have been reluctant to absorb more. Dollars
have been plentiful due to the Federal Reserve’s swap lines,
quantitative easing and other interventions, in contrast with the
early-2020s period where dollars were scarce. Given the current
account surplus in South Africa, local demand for dollars has also
been unusually subdued. Furthermore, segmentation between
markets has prevented unusually high rates in the forward market
from being arbitraged away, despite abundant supplies of rand
liquidity in the money market. For instance, internal bank limits on
foreign currency positions have made it difficult for FX desks to
source rands from cash-flush money market desks.
-
Second, an already-strained FX forward market was then
overwhelmed by the South African Reserve Bank’s (SARB) use of
FX swaps to sterilise loans from international financial institutions.
These funds were transferred directly to the SARB in foreign
currency, which the SARB swapped into rands using the forward
market. Those rands, in turn, were deposited into National
Treasury’s tax and loan accounts with banks, while dollars became
part of South Africa’s FX reserves. These arrangements left the
overall rand liquidity in the system unchanged, but, as noted
above, this liquidity did not flow smoothly from the cash market
into the forward market.

1-week FX-implied rate

Repo rate
Per cent
FX-implied rate

Feb
Apr
Jun
Aug
Oct
Dec
Feb
Apr
Source: SARB

Brazil

Chile

Colombia

Hungary

Mexico

Poland

South Africa


Per cent
Spread of FX-implied rates over policy rates
-3
-2
-1

A M J J A S O N D J F M A M J J A S O N D J F M

Sources: Bloomberg and Haver

To address these distortions, the SARB has injected rand liquidity
into the forward market, focusing on month-end periods when
distortions have been largest. These injections were ramped up in
December 2020 and January 2021, after smaller interventions in
September and November 2020.1
From late February 2021, the FX-implied rates have moderated, but
the SARB will continue to monitor this market closely and will respond
as appropriate to curb extreme movements in FX-implied rates.
Such interventions might also require additional tools, and the SARB
continues to study options for mitigating extreme movements in FXimplied rates, although no further instruments have been adopted at
this stage.

Injecting further rand liquidity into the market, however, reduces the
money market shortage, which is the basis for monetary policy
transmission. Nonetheless, short-term liquidity injections are viable,
especially around the end of the month, when they are offset by a
higher demand for notes and coin (which expands the shortage).
The SARB has also matured some of its swaps, returning rand
liquidity to the forward market.

APRIL 2021
Growing the market and attracting more (green) foreign funding
depends as much on the financial sector regulatory framework
as on South Africa’s broader policy environment. The best macro
policy option to attract funding is maintaining macroeconomic
stability (low and stable inflation) and using the fiscal space well.
Policy should enable accurate pricing of negative climate-change
externalities to better align with investment incentives. Micro policy
reforms, which aim to improve the ease of doing business for
both local and international investors and try to open up sectors
dominated by public companies to competition, provide new green
investment opportunities. Missing out on the global green-funding
boom and transitioning too slowly will leave South Africa overtaken
by other countries and unable to generate the jobs of the future or of
the past.7

See, for instance, C Arndt, C Loewald and K Makrelov, ‘Climate
change and its implications for central banks in emerging and
developing economies’, South African Reserve Bank Working
Paper Series No. WP/20/04, Pretoria: South African Reserve
Bank, June 2020.
publications/working-papers/2020/10001/WP-2004.pdf
Box 6 Green funding opportunities

A Turner, ‘The costs of tackling climate change keep on
falling’. Financial Times, 11 December 2020.
ft.com/content/33bb3714-93cf-4af5-9897-e5bf3b013cb7

Organisation for Economic Co-operation and Development,
Mobilising bond markets for a low-carbon transition, Paris:
Organisation for Economic Co-operation and Development, 2017.

B Nauman, ‘Analysts expect as much as $500bn of green
bonds in bumper 2021’. Financial Times, 4 January 2021.

0f3260b73d62

Goldman Sachs, ‘ESG is no longer optional, but approaches differ
across asset managers’, Goldman Sachs Equity Research, 2021.

M Carney, ‘Resolving the climate paradox’, during an
Arthur Burns memorial lecture at the Bank of England,
London: Bank of England, 22 September 2016.

The Climate Policy Initiative estimates that South Africa
faces R2 trillion of transition risks in net present value
terms over the period 2013 to 2035, mainly associated
with carbon-intensive industries such as coal.
With the adaptation and mitigation costs of greening economies
falling but still high, efficient and transparent financial markets will play
an important role in ensuring that the use of greener technologies
is funded as cheaply as possible. The calculation of climate-related
risks and changing regulatory environments provide support for the
development of new financial instruments and markets.
Over the next three years, transition costs are estimated at roughly 1.5%
of global gross domestic product.1 The annual issuance of green bonds
may reach US$620–720 billion, and outstanding securities issuances
could reach US$4.7–5.6 trillion by 2035.2 The global issuance of green
debt is expected to reach US$500 billion in 2021.3
The demand for green financial instruments is also reflected in the
strong growth of environmental, social and governance (ESG) equity
and fixed-income instruments, which attracted record inflows in
Europe and the United States (US) in 2020, outperforming non-ESG
funds.4 Green bonds dominate the sustainable debt market. Global
policy efforts – such as the European Union’s adoption of the Green
Taxonomy Regulation in 2020 and introduction of the Sustainable
Finance Disclosure Regulation in 2021, as well as the climate policy
agenda of the new Biden administration in the US – provide further
support.
Market development will require a variety of interventions, including
support for the development of green-bond indices, the standardisation
and harmonisation of principles for green-bond listing across
jurisdictions, and ways to reduce transaction and funding costs.5
These financial instruments can help tap funding for South Africa’s
own green transition and large infrastructure needs, especially given its
limited fiscal space and low domestic savings.6 Rising global demand
for green investments and the well-developed local capital market
can support local issuance of green funding instruments. Domestic
institutions such as the Development Bank of Southern Africa are
taking advantage of these opportunities, but the local market for green
funding remains small.
US$ billions
Issuance of green bonds

Sources: IIF and SARB

Offshore centres

Emerging markets

Mature markets

APRIL 2021
The real economy: uneven
recovery across sectors
COVID-19 is the worst shock to the South African economy since
the Great Depression of the 1930s, with the economy contracting
by 7% in 2020 and unemployment rising to record highs. The
economy has recovered faster than expected, though the
recovery is uneven across sectors and remains fragile. Elevated
terms of trade have supported macro balances, with the current
account surplus at its highest level in 32 years and tax revenue
overperforming relative to previous projections. The broad
distribution of vaccines should accelerate the normalisation of
economic activity. However, structural constraints – including
insufficient energy supply, the regulatory burden and skills
constraints – will impede a faster recovery over the medium
term, while the fiscal outlook remains sensitive to the nominal
wage bill trajectory and other risks.
How the COVID-19 shock
hit the economy
The COVID-19 shock that hit the economy late in the first quarter
of 2020 was severe and instant as the country immediately
went into a hard lockdown. The lockdown, initially expected
to be short-lived, has persisted for the rest of 2020 and into
2021, with varying degrees of stringency. The initial lockdown
was the most stringent, and its effect on the economy was
sharp: economic activity stalled, and GDP contracted by an
annualised 51.7% on a seasonally adjusted quarter-on-quarter
basis during the second quarter of 2020.
The impact of the COVID-19 pandemic was broad-based,
although the sectors that were unable to operate remotely
experienced the steepest losses during the second quarter of
2020. This was especially true for activity in the primary and
secondary sectors, such as mining (72%) and manufacturing
(74.9%), but also for the tertiary sector, including transport
(69.4%) and trade (67.6%). Usually, contractions in the tertiary
sector during recessions are less extreme than in the primary
and secondary sectors. However, the COVID-19 recession is
atypical: it differs from other recessions both in terms of its
origins (policy directive) and in terms of its nature (a halt in
activity for most of the economy).
The partial reopening of the economy during the third quarter
of 2020 caused a large improvement in GDP, with the economy
expanding by 67.3% on an annualised basis. The economic
rebound continued through the fourth quarter, though at a much
slower pace, as economic activity continued to normalise, but
also due to the resurgence of the pandemic late in the fourth
quarter. Despite these improvements, the contraction in the
second quarter had been so deep that by the end of the fourth
quarter GDP remained 4.2% smaller than it was in the previous
year. For the year as a whole, output contracted by 7%, making
2020 the worst year for growth since 1920.
Percentage change
Real GDP growth
Sources: Stats SA and SARB

-15
-10
-5

1912 1924
Index
Lockdown stringency index
Sources: Oxford COVID-19 Government Response Tracker and SARB

South Africa

Global average
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Minimum
Maximum

APRIL 2021
The sharp negative effects of the pandemic on the economy
also reflected in the labour market, where the already elevated
rate of joblessness was exacerbated. According to the QLFS,
more than 2.2 million people lost their jobs during the second
quarter of 2020. In an effort to minimise job-shedding and to
reduce job match destruction, most economic sectors, except
for the government sector and utilities, implemented salary
and bonus cuts during the height of the pandemic. The QLFS
notes, however, that workers with less than a matric education
not only experienced more job losses; they were also twice
as likely to experience earnings cuts as those with graduate
qualifications.
Since many individuals were unable to search for jobs during
the most stringent episodes of the lockdown, the labour force
participation rate declined sharply, artificially lowering the
official unemployment rate from 30.1% in the first quarter of
2020 to 23.3% in the second quarter. The labour force has not
fully recovered yet, with about 1.2 million people still not back
in the labour market by the fourth quarter.
The second wave of the COVID-19 pandemic, which began
late in the fourth quarter of 2020, straddled into 2021, with
more lockdown measures implemented under the riskadjusted Level 3 ‘lite’ until the end of February. The measures –
which included the closure of land borders, the reintroduction
of curfews, and a ban on the consumption of alcohol – once
again pushed South Africa’s lockdown stringency higher
relative to the global average. Still, these measures were
significantly less severe than the measures implemented
during the first wave of the pandemic, with less than 2.8% of
the economy affected during the November 2020–March 2021
lockdown compared to 42% during the March–October 2020
lockdown. The lockdowns were also carefully targeted during
the second wave, which helped to minimise economic effects.
This suggests that the economy may now have adapted to
‘operating’ with the COVID-19 virus.
The recovery
The economy entered the recovery phase during the second
half of 2020, after a difficult first half. The recovery has, however,
been relatively slow and uneven across sectors. The primary
sector appears to have been the least affected, with overall
growth in 2020 at -5.3%. The agricultural sector, which grew
at 13.1% in 2020, benefitted from bumper crops and the eased
lockdown regulations for the sector. Recovery in the mining
sector continues to benefit from high commodity prices and a
favourable exchange rate. The rest of the economy, however,
has seen a more muted recovery, with all but two sectors
(agriculture as well as government and personal services) still
below the 2019 output level. The construction sector is furthest
behind, followed by transport. The pivot towards remote
working could further affect the recovery of the construction
Portion of total output affected by the lockdown
Lockdown sectoral impact

Wave 1: Mar–Oct 2020
Wave 2: Nov 2020–Feb 2021
Sources: Oxford University, Stats SA and SARB
Government and personal services
Finance
Transport
Construction
Trade
Mining
Manufacturing
Electricity
Agriculture
Trade
Transport

Agriculture

Mining

Manufacturing

Construction

Finance

Trade

Government and personal services

Transport

Electricity
Index: 2019 average = 100
Output (distance from 2019 levels)

Q1
Q2
Q2
Q3
Q4
Q4
Q1
Q3
Sources: Stats SA and SARB

2019 average

APRIL 2021
sector, while the transport and tourism sectors remain
subdued as individuals travel less, with international travellers
particularly wary of the 501.V2 variant of the virus.31
As the economic recovery progressed, so, to some extent,
has the labour market, with 3.8 million individuals returning to
the labour market by the fourth quarter. Of these, only about
900 000, or 24%, managed to find employment, leaving
about 1.4 million jobs still missing relative to the first quarter
of 2020. The unemployment rate is now at 32.5%, its highest
level since the QLFS began in 2008.32 The broader definition
of unemployment, which is less distorted by volatility in the
labour force participation rate, has shown signs of moderation,
although at 42.6% remains extremely elevated.
The largest driver of growth in the second half of 2020 was
household consumption, which benefitted from a favourable
credit environment. Households entered the crisis after a long
period of deleveraging, with debt as a share of disposable
income at just 71.5% in mid-2017, which created space for
households to take in new credit. With interest rates at their
lowest in five decades, the easing of lockdowns saw a strong
rebound in household consumption, including of mortgages,
durable goods and vehicles.33 Mortgage applications and
approvals rose strongly, and significantly outpaced those in
2019. Mortgage debt increased in real terms by 0.4% during
2020, despite a substantial slowdown in mortgages during the
closure of the deeds office at the height of the first wave of the
pandemic. Anecdotal evidence suggests that the consumption
recovery has been uneven along the income spectrum, with
higher-income consumers more able to take advantage of the
low interest rates.
Credit extension to the corporate sector followed a different
pattern to that for the household sector. Corporates frontloaded
their credit needs early on, with credit surging by 5.4% month
on month during March 2020, in the lead-up to the lockdown.
Corporates then abruptly slowed their uptake of credit,
hesitant to take on new debt while facing high uncertainty.34
By December 2020, total loans and advances to corporates
fell 2.4% shy of their December 2019 level, although total
credit to corporates, which includes investment and bills, had
recovered to pre-pandemic levels.
31 The implementation of government’s infrastructure investment
programme should, on the margin, help lift recovery in the
construction sector.
32 Stats SA has been collecting household labour market data since
1993 with the annual October Household Survey. This survey
was replaced in 2000 with the semi-annual Labour Force Survey,
which was used until 2007. According to this survey, the previous
peak in unemployment was during February 2003, at 30.8%.
33 Debt-service costs as a ratio of disposable income fell to
just 7.7% in 2020Q4, the lowest rate since 2006.
34 Unlike households, corporates entered the COVID-19 pandemic
relatively more leveraged, at least relative to the global financial crisis
in 2008, with corporate debt reaching almost 40% of GDP by 2019.
See the BIS’s online statistics on the credit to the non-financial sector.

Per cent
Unemployment rates
Source: Stats SA

Unemployment rate (official)

Unemployment rate (expanded)
Percentage of GDP
Credit to the non-financial private sector
Source: BIS

Households

Non-financial corporations

APRIL 2021
The growth outlook
With a relatively strong recovery that has surprised on the
upside in both the third and the fourth quarters of 2020, the
SARB expects GDP growth to average 3.8% in 2021 before
moderating to 2.4% and 2.5% in 2022 and 2023 respectively.
Near-term GDP growth (2021Q1) is projected at -0.2%,
quarter-on-quarter, seasonally adjusted and annualised,
weighed down by the second wave of the COVID-19
pandemic and the lockdowns that were implemented, as
well as load-shedding.
Historically speaking, growth during 2021 will be at its highest
rate since 2007 and much higher than the 2015–19 average
of 0.8%. However, the outperformance during 2021 is largely
a statistical artefact. The big increase in 2021 is from a very low
starting point, so the base effect is larger than usual.35 Indeed,
the output level is only expected to reach pre-COVID-19 levels
during 2023.
The low interest rates and the vaccine distribution should
support the recovery over the forecast horizon. The large
interest rate cuts implemented last year are still filtering
through the economy, with their peak effects expected in 2021.
While measuring the precise impact of policy rate cuts on
growth is difficult, and the current times are by no means
‘normal’, with higher-than-usual uncertainty, these effects
should be expected to carry through, as the pickup in
mortgage applications suggests. The cuts will linger in the
system for some time, boosting growth in the outer period.
Vaccinations should help curb future waves of the pandemic,
lower uncertainty and reduce disruptions to economic activity
over the medium term. The vaccine roll-out has been slow
so far, with complications arising from the efficacy of certain
vaccines against the dominant 501.V2 strain of the virus as well
as vaccine shortages. The SARB assumes that about 10% of
the population will be vaccinated by the end of the second
quarter of 2021, slowly rising to 67% by the middle of 2022.
A more rapid roll-out would quicken the return to ‘normalcy’,
particularly for sectors such as travel and tourism. Bringing
tourism and transport back to full activity levels would raise
the economy’s potential growth (a reversal of the adverse
supply shock to these sectors). However, until herd immunity
is reached, future waves of the virus will continue to affect the
economy, although the impacts are likely to become smaller
with each wave as the economy adjusts to its new way of
operating and as an increasingly large share of the population
develops natural immunity from exposure to the virus.
Potential growth is an important concept in macroeconomic
policy as it defines the economy’s growth ‘speed limit’,
meaning the maximum sustainable output that an economy
35 Because the contraction in GDP during 2020 was so large, any return
to more ‘normal’ levels of activity will look significantly larger when
analysed on a year-on-year basis.
Percentage change
Real GDP growth
Sources: Stats SA and SARB


Forecasts
Per cent
Impact of interest rate cuts on credit extension
Source: SARB


Repo rate

Short-term credit

Long-term credit

Total credit
Number, rolling seven-day average
Daily COVID-19 vaccine doses administered
Source: Our World in Data
Feb 2021
Mar 2021


APRIL 2021
is capable of producing under full employment conditions with
inflation stable.36 Potential growth is an unobservable variable
which must be estimated from observable data. Realised
growth minus potential growth equals the output gap, another
unobservable, and one component of the monetary policy
rules used by central banks.
The COVID-19 shock affected the domestic economy’s
potential GDP level as the lockdowns (temporarily) withdrew
capital and labour from economic activity – a supply-side
shock. Firm closures and unemployment reduced incomes
for workers, reducing demand for goods and services.37 In
addition, the high uncertainty, mobility restrictions and health
concerns made consumers circumspect about spending,
further constraining demand. In the absence of reliable data as
to which of the two is dominant, the QPM treated the pandemic
as a roughly equal split between demand and supply shocks,
meaning that half of the low growth in 2020 is attributed to
the closure of businesses while the other half is attributed to
reduced demand.
In the face of exceptionally high uncertainty about the evolution
of the pandemic, the SARB’s forecasting team made more
revisions than usual to potential GDP growth, as it had to rely
on high-frequency data to gauge the underlying state of the
economy.38 The most recent revision was made during the
January 2021 MPC meeting, following the release of GDP
data for the third quarter of 2020. Potential GDP growth is now
expected to recover from -2.5% in 2020 to 1.6% in 2021 before
moderating to just 0.9% for both 2022 and 2023. Revisions to
potential growth meant revisions to the output gap too, which
is now expected to close over time, from -5.9% of potential
GDP in 2020 to just -0.5% in 2023.39
One of the reasons why potential GDP does not rise faster
is the persistence of electricity shortages. Despite very low
economic activity, load-shedding during 2020 was the worst
annual performance on record, and this trend is likely to
continue through 2021. The total energy availability factor in
South Africa is around 60%, and is expected to remain near
these levels over the next five years, placing a cap on the pace
of economic growth.40
36 T Powell, L Sheiner and D Wessel, ‘What is potential GDP, and why
is it so controversial right now?’ The Brookings Institution – The Hutchins
Center Explains Series, 22 February 2021.
edu/blog/up-front/2021/02/22/what-is-potential-gdpand-why-is-it-so-controversial-right-now/
37 This could potentially lead to a further supply contraction.
38 Revisions to potential growth usually follow data releases by Stats SA,
which give an indication of how the economic shock is progressing.
39 The output gap is projected at -0.1% in 2023Q4.
40 The Council for Scientific and Industrial Research (CSIR) argues
that the minimum requirement to assure reliability for South
Africa is 72%. J G Wright and J R Calitz, ‘Setting up for the
2020s: addressing South Africa’s electricity crisis and getting
ready for the next decade’, CSIR presentation, 2020. https://
researchspace.csir.co.za/dspace/handle/10204/11282
Per cent

Evolution of potential GDP growth*
Source: SARB


Jan 2020

Mar 2020

Apr 2020

Sep 2020

Jan 2021
* No revisions to potential
output in Apr, Jul and
Sep 2020 and Mar 2021

R billions (constant 2010 prices)
Real GDP and the output gap
Sources: Stats SA and SARB

Potential GDP

Actual GDP

Output gap

Cumulative GWh shed
Jan
Apr
Jul
Oct
Dec
Load-shedding
Sources: EskomSePush (app), Eskom Twitter account and SARB


APRIL 2021
Another reason for low potential growth is weak investment,
which currently stands at 15% of GDP, much lower than its
long-run average of 22% and significantly below the emerging
market average. Gross fixed capital formation by the public
sector was already weak before the pandemic. Private sector
business enterprises were hit hard during the pandemic, and
investment recovery is expected to be slow as firms remain
constrained by low business confidence, persistent electricity
shortages and high long-term borrowing costs.
Percentage of GDP

Investment*

Source: IMF
* Dotted lines indicate forecasts
Emerging markets
South Africa
Box 7 What can total factor productivity tell us about
South Africa’s weak growth?1

This box builds on J Pain, M Rapapali and D Steenkamp,
‘Industry TFP estimates for South Africa’, South African Reserve
Bank Occasional Bulletin of Economic Notes No. OBEN/20/02,
Pretoria: South African Reserve Bank, November 2020. https://
www.resbank.co.za/en/home/publications/publication-detailpages/occasional-bulletin-of-economic-notes/2020/1001212

The full sample period is 2000Q1–2019Q4 to
exclude the COVID-19 shock in 2020.
Total factor productivity (TFP) growth is a measure of the efficiency
with which inputs into production (e.g. labour and capital) are used to
produce economic output. It is defined as the growth in output that
cannot be explained by the accumulation of inputs. An industry-level
production function helps to identify poorly-performing sectors and
suggests where reforms could have a more meaningful impact.
TFP growth is estimated from a Cobb–Douglas production function
with two factors of production: labour and capital. The results show
that TFP growth has slowed since the global financial crisis (GFC),
growing at -0.36% for the period 2009Q1–2019Q4, down from 2.8%
during 2000Q1–2007Q42 and significantly below the long-run average
of 1.4%.
While TFP growth was positive for all industries (except agriculture
and mining) during the period 2000Q1–2007Q4 (a pre-GFC period),
it declined for all sectors except agriculture, finance and community
services after the GFC. These trends hold true for the different postGFC sample periods, except the sub-period 2011Q1–2015Q4, where
the manufacturing, wholesale trade and construction sectors show
relatively better growth performance.
The electricity and mining sectors experienced the largest slowdown in
productivity growth after the GFC, while manufacturing and wholesale
trade experienced the smallest. Much of the fall in productivity is
explained by weaker output. Electricity production grew by -0.15% per
annum during the post-GFC period, compared to 3.3% pre-GFC.

Average (1961–19)

Total factor productivity
Percentage change over four quarters
TFP growth


Source: SARB

2000Q1–2007Q4

2009Q1–2019Q4
TFP growth (average, per cent)
Benchmark TFP growth estimates
-6
-4
-2

Source: SARB
Total economy
Agriculture
Mining
Manufacturing
Electricity
Construction
Wholesale
Transport
Finance
Community services

APRIL 2021
Macroeconomic balances
The current account
South Africa enjoyed one of the largest current account
surpluses during 2020, with its ratio to GDP swinging from a
2.9% deficit in the second quarter of 2020 to a 5.9% surplus
during the third quarter, a 32-year high. Within the South
African context, current account surpluses do not occur often:
the current account has been in deficit nearly two-thirds of the
time since 1960 and 86% of the time since 1994. The 2020
surplus is, however, expected to be temporary, and should
narrow from its average of 2.2% in 2020 to 1.3% in 2021,
before reverting to a deficit, averaging 0.8% and 1.3% in 2022
and 2023 respectively. The current account benefitted from
the exceptionally favourable terms of trade in 2020, supported
by strong commodity exports and subdued imports.
The current account deficit should be smaller than historical
averages as the trade balance is expected to remain in surplus
throughout the forecast horizon, counteracting the downward
pressure from the services, income and transfers balance.
The terms of trade are strongly influenced by the prices for
Platinum Group Metals (PGMs), which have increased fivefold
since 2018. When these commodities are excluded, South
Africa’s commodity price basket is much more moderate,
increasing by only 8%. Palladium and rhodium prices are
expected to fall over the forecast horizon as the market
shortage in these metals begins to narrow. Nonetheless, they
are expected to remain above their long-run averages as
demand for catalytic converters remains buoyant on climate
imperatives. These strong commodity prices have helped to
push exports to 30% of GDP, a 12-year high.
Manufacturing TFP growth has also been adversely affected by low
investment, in particular the decline in the acquisition of machinery and
equipment responsible for innovation (according to the World Bank),
and weak competition.3, 4
The broader contribution of TFP to economic growth underscores the
criticality of innovation, investment, and efficiency gains. From 2009
onwards, the contribution of TFP to output growth ranged between
20% and 50%. The decline in TFP growth across most industries
raises concerns over the capacity of the economy to grow more
rapidly on a sustainable basis, particularly as the country emerges
from the COVID-19 pandemic. Structural reforms, particularly those
aimed at raising the efficiency of the infrastructure sectors, as well
as the strengthening of skills, domestic competition and the use of
technology in production, should support higher TFP growth.

World Bank, South Africa economic update: innovation for
productivity and inclusiveness, Washington DC: World Bank, 2017.

V Thakoor, ‘Market power, growth and inclusion: the South
African experience’, International Monetary Fund Working
Paper Series No. WP/20/206, Washington DC: International
Monetary Fund, September 2020.
Publications/WP/Issues/2020/09/25/Market-Power-Growthand-Inclusion-The-South-African-Experience-49761

2011Q1–2015Q4

2016Q1–2019Q4
TFP growth (average, per cent)
TFP growth estimates for split post-GFC periods


Total economy
Agriculture
Mining
Manufacturing
Electricity
Construction
Wholesale
Transport
Finance
Community services
Source: SARB
Percentage of GDP

Current account balance
Source: SARB
Trade balance
Net factor payments
Current account balance

Forecast
-15
-10
-5

APRIL 2021
The recovery in oil demand (and prices) should moderate South
Africa’s terms of trade, despite the large price gains by the
PGMs. During April 2020, the price of Brent crude oil collapsed
to just US$23 per barrel as global activity came to a standstill.
These low oil prices, together with a weak domestic demand
for fuel, halved oil imports from 7% of GDP in 2019 to just 3.5%
in 2020, boosting the trade balance. In line with the recovery in
the global economy, oil prices have now risen to pre-pandemic
levels, dampening the terms of trade and pushing oil imports
back towards their long-run average.
The services, income and transfers account will likely widen
over the forecast horizon after narrowing slightly to -3.6% of
GDP during 2020, compared to its 2010–19 average of -3.8%,
primarily on reduced distribution of profits abroad.41 With
uncertainty about the course of the pandemic receding and the
economic recovery gaining steam, firms have since resumed
the distribution of profits abroad. At the same time, the balance
on the interest account widened to -1.7% of GDP versus the
long-run average of -1.3%, and is expected to continue widening
in line with rising interest payments to non-resident debt
holders. The services account had a wider-than-usual balance
during 2020 at -0.8% compared to the 2010–19 average of
-0.3% as spending by foreigners on travelling collapsed and
is only expected to improve when international travel recovers.
Finally, the transfers balance remained close to its long-run
average of just under 1% of GDP. The recent collapse in imports
will likely see a moderation in Southern African Customs
Union (SACU) payments over the forecast horizon to about
0.4% of GDP.
The fiscal account
The fiscal situation in South Africa remains precarious as debt
levels have remained stubbornly elevated for an extended
period of time. The 2021 Budget expects gross national
debt to stabilise at 88.9% of GDP in 2025/26 compared to
95.3% of GDP projected in the 2020 Medium Term Budget
Policy Statement (MTBPS). Debt-service costs remain elevated
and are estimated to absorb 22% of revenue by 2023/24.
The better-than-expected debt profile follows from a fasterthan-expected narrowing in the main budget deficit, which
is projected to reduce to 12.3% of GDP in the current fiscal
year from the 14.3% 2020 MTBPS forecast, before narrowing
further to 6.5% of GDP in 2023/24.
Tax revenue is projected to overshoot by about R100 billion
in the current fiscal year relative to the 2020 MTBPS. The
stronger-than-expected revenue is on account of corporate
income tax (CIT) payments as well as the better-than-expected
rebound in value-added tax (VAT) and customs revenues as
domestic consumption recovered. Provisional CIT payments
41 The ratio of dividends paid (abroad) to GDP halved to just 1.2%
compared to the post-global financial crisis average of 2.5%.
Index: 2010 = 100

Commodity prices

Source: SARB
Total
Total (excl. PGMs)

* Dotted lines indicate forecasts

Percentage of GDP
External trade
Sources: Stats SA and SARB

Imports

Exports
Percentage of GDP

Gross loan debt*
Source: National Treasury

2020 Budget

2020 MTBPS

2021 Budget

* Dotted lines indicate projections


APRIL 2021
from mining surged, buoyed by high commodity prices and
a favourable exchange rate. Sectors that service the mining
sector (e.g. machinery and equipment, motor vehicles, energy
and services) should benefit from the high commodity prices
through their economic linkages with the mining sector.
The 2021 Budget commits to reining in spending, reducing
it by R264.9 billion in the medium term. Fiscal spending,
however, remains sensitive to such eventualities as further
support to state-owned enterprises (SOEs), the still-to-befinalised public sector wage dispute, and the evolution of the
COVID-19 pandemic, all of which remain uncertain.
Conclusion
After enduring the largest contraction in annual GDP in a
century in 2020, the South African economy is on a recovery
path, with GDP growth in the third and fourth quarters
surprising on the upside. Growth in the first quarter of 2021
is, however, projected to disappoint. Although the economy
has recovered faster than expected thus far, the labour market
remains subdued. The terms of trade are expected to continue
supporting the trade balance and tax revenue performance,
though not enough to maintain a current account surplus
beyond 2021. While the growth outlook is positive, risks include
electricity supply constraints, more waves of the COVID-19
pandemic and higher long-term borrowing costs.


R billions
Broad-based tax gains in 2020/21
PIT
CIT
VAT
Dividends tax
Fuel levy
Customs duties
Ad valorem
Other
Source: National Treasury

2020 MTBPS

2021 Budget
duties
Specific excise

APRIL 2021
Price developments: supplyside pressures the main
risk to the outlook
Headline inflation averaged 3.3% in 2020 – a record annual
low for targeted CPI. Despite this low average, inflation was
relatively volatile, driven by lockdown-related imputations,
municipal adjustments for electricity, declining rental prices,
and petrol and food prices. From July onward, inflation hovered
at around 3%. Core inflation decelerated in 2020, with both
core goods and services now considerably below the midpoint
of the target range. This weakness should continue in 2021,
as big-ticket items – such as medical insurance and housing
– are subdued, and most items are expected to recover only
gradually in line with the general economy. The major sources
of upward pressure to headline are food, fuel and electricity.
Inflation remained well-contained in 2020, staying closer to the
lower limit of the target range since March. Inflation breached
the lower limit of the target range for two consecutive months
in 2020 – May and June – partly on account of methodological
innovations by Stats SA to impute for goods whose sales were
banned during the lockdown. Inflation also dipped below 3%
in February 2021. However, prices of the volatile components
have begun edging up since the latter part of 2020.
Food and NAB inflation accelerated in the latter part of 2020,
from 3.9% in September to 6% in December, and should
remain above the target midpoint in 2021, partly driven by
global supply-side factors. Food inflation should moderate on
a good domestic harvest and improvement in regional food
harvests, which should soften external demand.
Fuel inflation has been climbing on higher global oil demand as
economies recover. Domestic fuel price inflation is expected
to rise from -3.4% in 2021Q1 to 29.5% in 2021Q2 on higher
global oil prices and base effects from last year, contributing
1.5 percentage points to headline inflation. The July increase
in electricity price inflation is projected at 13%, up from 6.2%,
with further double-digit increases projected in the outer
forecast period.
The QPM currently has core inflation remaining below the
midpoint throughout the forecast horizon – averaging 4.3% in
2023 on lower wage pressures, less exchange rate pressure,
and a faster deceleration in inflation expectations than
previously expected. However, rising food, fuel and electricity
prices have headline inflation settling at the midpoint of the
target range by 2023.
Percentage change over 12 months

Headline and core inflation
Sources: Stats SA and SARB

Headline inflation

Core inflation

3–6% inflation target range
Midpoint
Percentage points
Contributions to headline inflation


* Includes direct import price pressures and forecast interventions.
Sources: Stats SA and SARB
Electricity
Inflation expectations
Unit labour cost
Other*
Food
Petrol
Demand pressure
Real exchange rate
Headline inflation (percentage change over four quarters)
-3
-2
-1

Percentage change over four quarters
Rental per value band
Source: TPN Credit Bureau

National

< R3 000

R3 000–R7 000

R7 000–R12 000

> R12 000

APRIL 2021
Core inflation
Housing dynamics are important in understanding services
inflation. This item weighs over 32% in services (23% in core),
and has driven the most recent deceleration in services
inflation. The rental market remains lacklustre.42 The supply of
rental space has been exceeding demand since 2019, and the
gap has widened recently as lower interest rates have driven
some tenants into purchasing property, given the reduced gap
between rentals and mortgage repayments. For other tenants,
reduced earnings or employment losses have resulted in early
cancellations of rental agreements, driving vacancy rates up
to 13% by the start of 2021 from 7.5% at the start of 2020.
With a glut of rental housing and declining affordability, rental
escalations are expected to remain muted. In light of the above,
housing inflation is projected to decline from 1.3% in the fourth
quarter of 2020 to 1.1% in the first quarter of 2021 before rising
to 1.7% in the fourth quarter of 2021. This is in line with the
expected slow improvement in employment and salaries, and
the general economic climate.
Insurance accounts for nearly a fifth of services in the CPI.
Medical insurance, the largest insurance item, recorded
inflation of 4.7% in February 2021, down from 9.5% last year.43
Discovery’s July 2021 increase is still to come; the exact
hike will be announced in May but it is expected to be at or
below 5.9%. Should Discovery hike by 5.9%, this would add
0.6 percentage points to medical insurance inflation, and the
average for 2021 would be 5%. Going into 2022, medical
inflation could be higher on increased utilisation, as people
take up previously postponed elective procedures. In addition,
the Council for Medical Schemes has added the COVID-19
vaccine to the Prescribed Minimum Benefits list, which means
that medical aids will have to pay for it, adding pressure to
medical insurance costs. Services inflation should average
3.3% in 2021, 4.2% in 2022 and 4.3% in 2023.
Core goods inflation averaged 2.1% in 2020, below the five-year
average of 3.3%. Lower core goods inflation is partly the result
of lockdown-related imputations, which primarily affected five
months of CPI data releases (April to August 2020) and about
42 Owners’ equivalent rent, the imputed value of owner-occupied
housing, is proxied by rental inflation for comparable dwellings.
43 Similarly to medical insurance, medical goods and services have
moderated, likely because of lower utilisation.

Scale
Supply and demand of rental space*
Source: TPN Credit Bureau

*
No survey results for 2017Q1
** Letting agents score the rental market 100 if 'strong',
50 if 'average' and 0 if 'weak'. The average can be
somewhere between 0 and 100.
Supply**
Demand**
Actual
Sep 2020
Mar 2021
Percentage change over four quarters

Core goods inflation*

* Dotted lines indicate forecasts
Sources: Stats SA and SARB

Services inflation
Percentage change over 12 months
Sources: Stats SA and SARB

Housing impact
Medical insurance impact
Services
Services (excl. housing)
Services (excl. medical insurance)

APRIL 2021
25% of the core goods basket.44 Even after these imputations,
vehicle inflation remains muted, despite rand depreciation and
accelerating manufacturing prices. The near-term outlook was
for vehicle inflation to rise from 3.5% in the first half of 2020
to 5.4% in the second half of 2020, but it only rose to 4.2%,
reflecting weak local demand. Core goods inflation is expected
to rise to 3.4% in 2021, mainly on base effects, then to 3.8% in
2022 and 4.3% in 2023.45
A set of core CPI items remain above the midpoint of the inflation
target range: water, medical insurance and education. Water
inflation alone, currently at 10.1% (for July 2020 to June 2021),
adds 0.08 percentage points to upward core pressure. Medical
insurance inflation is much lower but still above the target
midpoint, adding 0.02 percentage points. Lastly, the education
inflation gap is currently at 1.9% (March 2020 to February 2021),
adding 0.06 percentage points, but this item should also be
lower this year.
Food and NAB inflation
Following a prolonged period of food inflation being below
the target midpoint (December 2017 to September 2020), it
quickly accelerated in October 2020, and is now closer to the
upper limit of the target range. The increase from 4% in the
third quarter of 2020 to 5.7% in the fourth quarter was the
result of a broad-based rise in food and NAB prices. Global
food prices also accelerated in 2020, with the La Niña weather
event and food stockpiling placing pressure on markets. The
United Nations (UN) Food and Agriculture Organization (FAO)
food price index recorded inflation of 24.6% in March 2021, the
highest in almost 11 years. Domestically, food prices tend to
record higher month-on-month changes towards the festive
season (October to January): an average of 0.7% versus 0.3%
during the other months of the year. Although the relationship
between local and global food inflation is weak on average,
there are times when they correlate strongly – which has been
the case during COVID-19.
44 While imputations have continued, the basket of goods covered by
the imputations has progressively shrunk as lockdown restrictions
eased, hence the emphasis on the first five months of the lockdown.
45 Durable goods inflation has already recovered to pre-lockdown levels,
supported by easier funding conditions.
-4
-2

Deviation from midpoint, percentage points
CPI items with above-midpoint inflation
Sources: Stats SA and SARB

Core CPI

Water supply

Education (incl. boarding fees)

Medical insurance

Actual

Sep 2019

Mar 2020

Sep 2020

Mar 2021
Percentage change over four quarters

Food and non-alcoholic beverages inflation*

* Dotted lines indicate forecasts
Sources: Stats SA and SARB

New vehicles CPI

Nominal effective exchange rate* (rhs)
Percentage change over 12 months

New vehicle CPI versus NEER
Sources: Stats SA and SARB


Lockdown
imputations
* 12-month moving average

APRIL 2021
Domestic grain prices have been on an upward trajectory in
recent months. The spot price for white maize was R3 600 in
October, the highest since December 2016 and closer to import
parity prices, while yellow maize was R3 479, the highest since
July 2016. South Africa, a net exporter of maize, recorded a
bumper crop of 15.4 million tonnes during the 2019/20 season,
37% higher than in the 2018/19 season. Ordinarily, a bumper
crop season translates into lower domestic grain prices, but
this was not the case in 2019/20.
Firstly, global grain prices increased amid tight supply
conditions and strong global demand. Secondly, demand was
stronger for South African maize in Southern Africa and the Far
East region (Asia), pushing up domestic prices closer to the
higher international prices. As a result, agricultural trade exports
reached the second-highest level on record: US$10.2 billion in
2020, 3% higher than in 2019. Meanwhile, imports fell by 8%
between 2019 and 2020 due to higher spot prices for wheat,
rice and palm oil.46
Going forward, bread and cereals inflation is expected to
remain elevated, at least in the first quarter of 2021, before
moderating gradually. This outlook is shaped by expectations
of a large summer grain harvest in the 2020/21 season and
a good harvest across the Southern Africa region, softening
external demand pressures.47
With respect to meat, the recent price increases have
been broad-based and mainly driven by domestic factors.
Slaughtering activity in the beef market was weaker towards
the end of 2020 due, in part, to good rains and cheaper
cattle feed costs, pushing meat prices higher. Poultry prices
increased between March and July, coinciding with the higher
poultry import tariffs which increased from 37% to 62%. Meat
inflation is expected to moderate from current levels, supported
by already-improving slaughtering activity and the base effect
from poultry inflation.
46 The wheat import tariff was increased temporarily in September 2020,
from R517 to R832 per tonne, in response to international prices
falling below local prices, but has since been deactivated.
47 Although South Africa and the Southern Africa region received
above-average rainfall in the 2020/21 agricultural season, this
is not expected to negatively affect crop yields. See W Sihlobo,
‘Reflections on South Africa’s agriculture and food price inflation
path in 2021’, Agriculture Economics Today, 4 March 2021.

africas-agriculture-and-food-price-inflation-path-in-2021/
-6
-4
-2

Percentage change over four quarters
Bread and cereals inflation*
Sources: Stats SA and SARB

Actual

Sep 2019

Mar 2020

Sep 2020

Mar 2021
* Dotted lines indicate forecasts
-2

Percentage change over four quarters
Meat inflation*
Sources: Stats SA and SARB

Actual

Sep 2019

Mar 2020

Sep 2020

Mar 2021
* Dotted lines indicate forecasts

APRIL 2021
Lastly, oils and fats have also contributed to the recent
increases in food inflation. The spot price for sunflower seed
was R9 272 per tonne in January 2021, almost double the price
in 2019. Anecdotal reports suggest that farmers substituted
some sunflower seed hectares for maize because of the
favourable maize prices, but some normalisation should occur
as maize prices moderate.
Overall, food inflation is expected to remain above the midpoint
of the target range in the first quarter of 2021 at 5.4%,
averaging 5.2% in 2021, 4.4% in 2022 and 4.5% in 2023. Risks
to the outlook include input cost pressures (such as electricity)
as well as transportation costs (such as fuel).
Administered price inflation
Administered prices are prices determined or influenced by
government or a government agency, without any reference
to market forces (Stats SA). They include education, fuel and
electricity prices.48 Except for fuel, which is generally volatile,
administered prices have tended to rise at rates significantly
above the midpoint of the target range. Recently, the Minister
of Higher Education proposed that tuition fee increases
be capped at 4.7% and boarding fee increases at 6.7%.
Several universities have announced increases in line with this
proposal; some even lower. Primary and secondary schools
will also, on average, implement smaller increases.49 In the
October 2020 MPR, a 6.4% fee increase was projected for
48 Presently, Stats SA does not distinguish between public and
private education, and treats both as administered prices.
49 School Governing Body associations have advised that member
schools should consider either a 0% or a minimal fee increase
for 2021, and inflation-linked increases in the medium term.
Consumer food price inflation (March 2021 forecasts)
Percentage change over four quarters; September 2020 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2010–20*
2020*
2021*
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB

Percentage change over 12 months
Education inflation
Sources: Stats SA and SARB
Pre-primary and
primary (0.76%)
Secondary

Tertiary
(0.99%)
Total education


Average (2016–2020)

Mar 2021

Mar 2022

Mar 2023

APRIL 2021
March 2021. This has been subsequently lowered to 4% in
2021, 5% in 2022 and 5.5% in 2023.50
Oil prices have continued to rally, following a low of US$36 per
barrel in October 2020 amid renewed lockdowns.51 Brent crude
oil averaged US$65 per barrel in March 2021, slightly higher
than the US$62 per barrel average in February. The relatively
benign economic impacts of the second COVID-19 wave, the
global vaccine roll-out, additional supply reductions, optimism
around the latest US fiscal stimulus package as well as the
recent inventory drawdowns are supportive of a higher price.52
Over the longer term, oil prices should remain below the 2019
average of US$64, averaging US$62 in 2021 and US$60 in
both 2022 and 2023.
The sharp increase in oil prices has driven domestic
petrol prices higher, from R14.86 per litre in October 2020
(for Gauteng) to R17.32 per litre in April 2021, despite a
simultaneous appreciation of the rand during this period.
Fuel inflation is expected to reach 2.2% in March 2021
from -9.2% in October 2020. The fuel tax increase of 27c
announced in the national Budget was slightly lower than the
31c expected by the SARB, and has therefore not affected
the inflation outlook. The higher oil prices as well as the
large base effect from last year mean that fuel prices will lift
headline inflation this year, temporarily driving headline above
the 4.5% target midpoint in the second quarter of 2021.
Fuel prices are expected to average 12.7% in 2021, 3% in 2022
and 2.3% in 2023.
Electricity inflation is another source of inflation risk. The
electricity price increase is projected at 13% in July 2021 and
10% in both July 2022 and July 2023. The risks to the electricity
inflation outlook are mixed.
50 Education fees are surveyed in March, so annual averages are different.
Annual inflation is 4.4% in 2021, 4.8% in 2022 and 5.4% in 2023.
51 While oil reached its lowest price of US$23 per barrel in April 2020, at
the height of the global lockdown, US$36 per barrel of Brent crude is
the lowest price during the period from October 2020 to March 2021.
52 Saudi Arabia reduced its outbut by 1 million barrels per day
between February and April 2021.
US$ per barrel

Evolution of oil price forecasts
Source: SARB
MPC meeting dates

Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Apr
May
Jul
Sep
Nov

Jan
Mar
May
Jul
Sep
Nov
Rand

Unleaded petrol price in Gauteng
Sources: Bloomberg and Central Energy Fund

95 unleaded petrol (per litre)

Exchange rate (per US$)

APRIL 2021
Box 8 Electricity price inflation scenarios

This includes the allowable revenues determined during the three
previous RCA processes, and NERSA’s decision to include the
R69 billion bailout from National Treasury as ‘revenue’ for Eskom.

The annual averages differ because electricity is surveyed
in July, not at the start, of each year.

Stats SA surveys municipalities in its CPI methodology. Bulk
purchases constitute the majority of municipality costs, while
salaries and other operational costs make up the rest.

Eskom should make concurrent RCA applications, which happen
each year, and a new MYPD should be put in place. In forecasting
electricity price inflation, we assume that the municipal bulk
purchase price is the same as that for direct users, and that all
other costs remain constant. Also, we assume that sales revenues
grow at the same rate as the average of the past five years.
After increasing by 6.2% in 2020, electricity price inflation is set to return
to double-digit levels this year. Usually, electricity prices are adjusted with
multi-year price determination (MYPD)- and Regulatory Clearing Account
(RCA)-approved revenues, but in 2020 Eskom successfully disputed
some of the previous decisions of the National Energy Regulator of South
Africa (NERSA) in court. The High Court rulings in favour of Eskom as
well as the most recent RCAs and supplementary revenue application,
concluded in 2020 and 2021, leave a sum of R96.7 billion in additional
revenue due to Eskom, to be recovered through electricity tariff hikes.1
While the amount at stake is now known, there is still uncertainty as to
how quickly this sum will be recouped.
Forecasts of electricity price inflation in 2020 settled on 10% increases
for July of both 2021 and 2022, equating to average electricity inflation
of 8.8% and 10% for each of these forecast years, respectively.2
It now appears that the revenue increase for 2021/22 will be capped
at R21.5 billion, which raises the tariff hike by 10.1 percentage points,
amounting to a 15.1% hike in tariffs for direct users. Electricity price
inflation of 14.6% for the period July 2021 to June 2022 is now
expected, up from the 13% anticipated during the March 2021 MPC
meeting.3 The expectation for July 2022 remains unchanged at 10%.
The cumulative tariff increase will be R92.3 billion in 2022/23 and
2023/24. Together with the R21.5 billion allowed in 2021/22, this is
R17 billion above the sum allowed by the courts and recently approved
RCAs. The risks to the current forecast are mixed because outcomes
could still surprise either way, depending on how quickly NERSA allows
Eskom to recover the revenues owed, or depending on Eskom’s new
applications.4 If NERSA were to continue capping increases at around
R20 billion, then electricity price inflation would amount to 5.2% and
3.9% in each of the outer financial years. In fact, in such a scenario,
it would take NERSA just short of five years, including the current
financial year, to recover all the proposed amounts (compared to the
less than three years in the current forecast). Should NERSA choose
to recover these amounts in exactly three years, inflation in the outer
forecast years would amount to 10.7% and 3.9% respectively.
Municipal cost structure for electricity provision (2021/22)
Expenses
Weight
Increase
Guideline to
municipalities
76.0%
17.8%
13.5*
Repairs and maintenance....

* Percentage points
Source: NERSA

Actual

Sep 2020

Mar 2021
Percentage change over 12 months
Electricity prices*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts
R20 billion cap, 5-year liquidation
Electricity price inflation rates in brackets
R billions
Electricity tariff hike scenarios


Source: SARB
R96.7 billion
(4%)
(11%)
3-year
liquidation


APRIL 2021
The main sources of inflationary pressures in the economy can
be decomposed into public and private CPI components.53
The CPI items affected by the public sector – which include
electricity, water and fuel taxes – had an average inflation of
4.9% in 2020, while private sector inflation averaged 2.8%. The
2020 out-turn for headline, 3.3%, could therefore have been
lower had it not been for higher public CPI. Although public CPI
recently decelerated to about the midpoint, the gap between
public and private CPI remains wide.
Medium-term inflation outlook
The QPM considers four key drivers of the medium-term
inflation outlook, namely ULCs, the exchange rate, inflation
expectations and the output gap. Over the medium term,
these drivers are integral to closing the gap between observed
inflation and the midpoint of the target range.
53 Public sector CPI includes the usual administered prices (such
as education and electricity), but adds other items that are
heavily affected by government (such as alcoholic beverages
and tobacco). It also considers fuel taxes instead of fuel prices,
making the index less volatile than the administered prices.
Private sector CPI is headline CPI less public sector CPI.
Percentage change over 12 months

Public versus private inflation
Sources: Stats SA and SARB

Public sector CPI

Private sector CPI
3–6% inflation target range
Midpoint
Headline inflation (March 2021 forecasts)
Percentage change over four quarters; September 2020 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2010–20*
2020*
2021*
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4

Annual average percentage change
**
CPI excluding food, NAB, fuel and electricity
***
Combines actual rentals and owners’ equivalent rent
Sources: Stats SA and SARB

APRIL 2021
The QPM uses the real ULC gap to measure the inflationary
pressures from the labour market. This measure gauges
the inflationary impact of real wage increases in excess of
productivity growth. Since the October 2020 MPR, the nearterm forecast for the real ULC gap has declined, as real
wages were lower than expected and productivity increased
in line with the upward surprise in GDP growth of 2020Q3.
The inflation forecast assumes an ongoing public sector wage
freeze. On average, this subtracts 0.5 percentage points per
year from total (aggregate) nominal wage inflation until 2022.
Meanwhile, private sector wage adjustments are expected to
rebound only gradually as corporate cash flows recover from
the pandemic effects.
Nominal wage growth is now forecast at 0% (previously -1.4%)
in 2020, 3.8% (previously 3.4%) in 2021, 5.1% (previously
5.5%) in 2022, and 6% in 2023. These subdued employee
compensation numbers are consistent with other market
indicators. For example, the average wage settlement outcome
from the Andrew Levy survey in 2020Q4 was 6.3%. Similarly,
the 2021Q1 Bureau for Economic Research (BER) survey of
salary increase expectations for 2021 and 2022 indicated
4.3% and 4.7% respectively.
The exchange rate gap is defined by deviations of the real
exchange rate from the level consistent with fundamentals (the
real exchange rate equilibrium). The real exchange rate gap has
improved throughout the forecast horizon, reflecting a more
appreciated nominal effective exchange rate (NEER) as well
as depreciation in the real exchange rate equilibrium, which is
driven by local fiscal risks. The balance is a less undervalued
exchange rate, applying less pressure to inflation and thereby
supporting a lower pass-through.
Inflation expectations are a crucial driver of longer-term
inflation.54 Since 2017, inflation expectations have moderated
closer to the midpoint of the target range. This is in line with the
explicit guidance from the MPC on where it prefers inflation to
be. Specifically, the two-years-ahead expectations reached the
midpoint of the target range a quarter earlier than anticipated,
at the time of the September 2020 MPC meeting. They are
projected to remain close to the 4.5% midpoint throughout the
forecast period. However, the challenge will be the inflationary
pressures emanating from non-core items (electricity, food and
petrol inflation), which could possibly trigger expectations of
higher inflation.55
54 In the QPM, inflation expectations are treated as a blend of backward-
and forward-looking elements, with the backward-looking portion
derived from the BER’s two-years-ahead survey results and the forwardlooking component based on the model’s own inflation forecasts.
55 The second-round effects from these items are rather muted. SARB
studies find that a 1% shock to food, fuel and electricity drives ULCs
up by 0.4% a year after the shock and raises core inflation by 0.2%.
-4
-2

Percentage points

2022 2023

Contributions to the unit labour cost gap

Productivity

Real wage gap

Real ULC gap

Source: SARB
Per cent

Source: Andrew Levy
Andrew Levy survey: average level
of wage settlements

Sep 2020

Mar 2021
* Values < 0 imply undervaluations


Per cent
Real effective exchange rate gap forecasts*
Source: SARB

APRIL 2021
The output gap captures the extent of demand pressures on
inflation. The wider the output gap, the weaker the demand
pressures, and hence the more it exerts downward pressure
on inflation. The COVID-19 shock has led to a significant
widening of the output gap, from -1.5% of potential growth in
2020Q1 to -12.3% in 2020Q2, but this narrowed to -4.2% in
2020Q4. The implied peak impact of the 2020Q2 output gap,
expected five quarters after the shock (i.e. in 2021Q3), should
be a 1.9 percentage points drop in inflation, other things being
equal. However, this will likely be tempered by limited space
for additional economic slack to impact inflation, varying
degrees of demand slack across sectors, and supply-side
inflationary pressures. The forecast anticipates the output gap
to ‘close’ by the end of the forecast period, which should assist
with a rise in inflation towards the midpoint of the target range.
Conclusion
Headline inflation was close to the bottom of the target range
in 2020, mostly on core inflation weakness and fuel deflation.
A rise in volatile CPI components leads headline inflation to
temporarily breach the target midpoint in the second quarter of
2021. Over the medium term, core inflation should rise from the
current lows, assisted by ULC gap pressures and a narrowing
output gap, and headline is projected to settle at the 4.5%
midpoint in 2023.
Implied rand/US$

2022 2023

Nominal exchange rate*

Actual

Sep 2020

Mar 2021

Source: SARB
* Doted lines indicate forecasts


Per cent

Inflation expectations
Sources: BER and SARB

Midpoint

Current year

One year ahead

Two years ahead

Five years ahead
3–6% inflation target range

APRIL 2021

SARB

Market analysts
Deviation from actual, percentage points
SARB versus market analysts inflation forecasts

Jan
Mar
Nov
May
Jul
Sep
Jan
Sources: Bloomberg and SARB

Root mean square errors
Sample: January 2008 to July 2020
1 month
ahead
2 months
ahead
3 months
ahead
4 months
ahead
6 months
ahead
12 months
ahead

Source: B Botha, R Burger, K Kotzé, N Rankin and D Steenkamp, ‘Big Data forecasting of South African inflation’, South African Reserve Bank Working
Paper Series, forthcoming.
Box 9 The SARB’s Disaggregated Inflation Model
versus Big Data models

The DIM is a seasonal model, weighing up CPI component
forecasts. Big Data models use penalised likelihood functions
and Bayesian techniques to exclude the CPI items without
significant predictive power for headline inflation.

A four-digit classification considers bread and cereals
instead of brown bread, which is an eight-digit
classification. The Big Data models in our suite use
data at four-, five- and eight-digit classifications.
Near-term inflation forecasts are an important input into the South
African Reserve Bank’s (SARB) monetary policy framework. The
SARB’s forecasting team employs the Disaggregated Inflation Model
(DIM) to generate near-term forecasts, which provide the onequarter-ahead starting-point projection. The Quarterly Projection
Model (QPM) utilises this forecast as input to generate the mediumterm inflation projection. These inflation forecasts, together with the
output gap forecasts, feed into the QPM’s Taylor rule, determining
the model-implied path of interest rates to meet the SARB’s preferred
4.5% inflation target, the midpoint of the 3—6% target range, over
the forecast horizon. To ensure credible and reliable forecasts, the
SARB is continually evaluating and improving its models for forecast
accuracy and bias.
As part of model development, assessments are conducted of the
relative performance of advanced forecasting methods, making use
of machine-learning techniques and Big Data to better understand
the drivers of inflation and, hopefully, improve inflation forecasts.
The table below compares the forecasting performance of the DIM
to the best-performing model among the suite of Big Data models
considered.1 This Big Data model includes 16 of the 46 consumer
price index (CPI) items currently included in the DIM, at a four-digit
level of disaggregation of headline inflation.2 Unlike the DIM, Big Data
models do not incorporate off-model information such as the tariff
adjustments approved by the National Energy Regulator of South
Africa (NERSA), the announced university fee increases and medical
scheme contribution hikes.
Comparing the root mean square error (RMSE), we find that the
SARB’s DIM with off-model information outperforms the Big Data
model. Basically, SARB staff ‘interventions’ to incorporate the latest
information and analysis improve the DIM forecasts significantly.
From April to August 2020, the period when most of the lockdownrelated CPI imputations were in place, the forecasting performance
of the DIM was relatively similar to the median forecasts of market
analysts, as surveyed by Bloomberg – both had an RMSE of 0.12.
These forecasts were also reasonably accurate from January 2020
until February 2021, with an RMSE of 0.14, the largest forecast error
occurring in October 2020 when food and non-alcoholic beverages
(NAB) inflation was underestimated. In terms of bias, the SARB errors
are fairly balanced. Inflation is overestimated 57% of the time and
underestimated 43% of the time.
In summary, the SARB’s DIM produces fairly accurate forecasts for
near-term inflation, which should provide confidence to the SARB
policymakers and other stakeholders.

Actual

SARB

Market analysts
Percentage change over 12 months
SARB versus market analysts inflation forecasts

Jan
Mar
Nov
May
Jul
Sep
Jan
Sources: Bloomberg and SARB

APRIL 2021
Conclusion
The COVID-19 pandemic, a global health crisis, morphed into
a massive economic shock. The economic effects have been
sharply differentiated across economies, in terms of both the
intensity of economic contraction and the unevenness of the
subsequent recovery.
After suffering a 7% contraction in GDP in 2020, the South
African economy is on a recovery path. The third- and fourthquarter GDP growth out-turns have been robust, with GDP
reaching about 96% of its 2019 level by the fourth quarter of
2020. The robustness of the recovery to date has surprised
both the SARB and the markets, though it remains uneven
across sectors.
The primary sector has led the recovery. Both agriculture
and mining performed exceptionally well, supported by good
rainfall in 2020 and, respectively, a rally in commodity prices.
The tourism and transport sectors, on the other hand, remain
further behind in their recovery.
The MPC responded to the COVID-19 shock by aggressively
lowering the repo rate, cutting it by a cumulative
2.75 percentage points between March and July 2020.
The resultant lower borrowing costs have supported credit
extension to both households and corporates, and have
spurred a recovery in consumption, with durable goods
showing a sharp recovery from the lows observed in
the second quarter of 2020. The low interest rates have
helped to ease debt repayment pressures, boosting the
real purchasing power of households and corporates.
Government has also benefitted from the low interest rates
through lower costs of borrowing.
The MPC held the repo rate unchanged at 3.5% in its
November 2020, January 2021 and March 2021 meetings, as
the recovery gained momentum. Growth is expected to reach
3.8% in 2021, while output is only expected to recover to the
2019 level in 2023. Inflation is expected to gradually rise to the
midpoint of the target range by 2023, in line with the recovery
in the economy. The return of inflation to target will require
rates normalisation to close the real interest rate gap.
The slow recovery to the 2019 level of output indicates
constraints in the economy that predate the COVID-19
pandemic. The constraints include inadequate electricity
supply, inefficiencies in key infrastructure sectors, skills
shortages, the regulatory burden faced by enterprises and
weak competition. These raise the cost of doing business or
the cost of restructuring in the face of major shocks to the
business environment, impacting on competitiveness. The
inadequate supply of electricity not only affects the level
of production now; it also serves as a disincentive to new
investment, affecting the country’s future growth.
Percentage points
Contributions to real GDP growth
-100
-50

Source: Stats SA
Residual items
Exports of goods and services
Imports of goods and services
Households
Gross fixed capital formation
General government
Change in inventories

APRIL 2021
The constrained fiscal space also serves as an obstacle to the
recovery, and to stronger growth more generally, through its
effects on long-term borrowing costs as well as confidence.
The fiscal trajectory articulated in the 2021 Budget commits to
arresting the fiscal deterioration, and policy space will increase
and risk decrease as Budget targets are met or exceeded.
In considering the shape of the economic recovery going
forward, the MPC has highlighted the importance of several
factors, in particular: further de-risking the economy by
stabilising public debt, providing sufficient energy for growth,
reducing the impact of administered prices on overall
inflation, and keeping inflation low into the recovery. A lowerinflation domestic economy will go far in protecting the
competitiveness of producers in a world of diminished inflation,
and raises the prospect of borrowing costs for households
and firms permanently anchored at or near the current
historically low levels.
Ease of doing business scores
Source: World Bank
Brazil

China

India
Russia
South Africa
Resolving
insolvency
Trading
across
borders
Getting credit
Reliability of supply
and transparency
of tariff index (0-8)
Starting a
business
Ease of doing business

APRIL 2021
Statement of the Monetary Policy Committee
19 November 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average of South Africa’s trading partners. For 2020, this is now at -3.9% (up from -4.2% in September),
and it has been revised down to 4.5% for 2021. Based on the October 2020 World Economic Outlook, the IMF expects global growth of 5.2% in 2021.

Compared to 3.9% and 2.6% respectively in September.

Measured by the Emerging Markets Bond Index (EMBI+) premium over emerging market averages and as an absolute value over time.
Since the September meeting of the Monetary Policy
Committee (MPC), it has become clear that COVID-19
infections will occur in waves of higher and lower intensity,
caused in large part by pandemic fatigue and lapses in
safety protocols. The virus is spreading rapidly in parts of
North America and Europe, and hotspots have emerged in
some parts of South Africa. While we have learnt how to
better manage the risks of transmission and the design of
lockdowns, these waves of infection will continue for some
time. Fresh spread of the virus and reimposed lockdowns will
extend the time needed for economies to get back to prepandemic activity levels. Despite the welcome development
in November of successful vaccine trials, global distribution
of vaccines is likely to be slow, resulting in a modest pace of
global economic growth into 2021.
As expected, the second-quarter gross domestic product
(GDP) outcomes for most economies were massively
negative. Third-quarter recoveries have generally been
robust, and economies will continue to recover in the
fourth quarter. The International Monetary Fund (IMF) now
expects global GDP to contract by 4.4% this year. Although
global GDP forecasts have improved from September, it is
probable that global growth will be revised somewhat in the
coming months.1
While financial asset prices have been volatile for much of the
year due to pandemic-related developments and geopolitical
events, recent weeks have seen markets strengthen. Capital
flows to emerging markets have generally picked up when
compared to the outflows experienced in March and April,
and global policy rates look set to remain accommodative.
Nonetheless, pronounced levels of risk aversion are likely
to persist through 2021, particularly where economies fail
to grow or where they run large external imbalances, fiscal
deficits and high debt levels.
Locally, the further easing of lockdown restrictions has
supported economic growth, with high-frequency indicators
continuing to show a pickup in economic activity during
August and September. The South African Reserve Bank’s
(SARB) forecast of third-quarter GDP growth has been
revised up to 50.3% quarter on quarter, seasonally adjusted
and annualised. The growth rate for the full year is now
expected to be -8.0% compared to the contraction of 8.2%
expected at the time of the September meeting.
South Africa’s terms of trade remain robust. Commodity
export prices are high, while oil prices remain generally low.
Getting back to pre-pandemic output levels will, however,
take time. Sharply lower investment this year by both the
public and the private sectors will weigh on growth prospects
in the coming years. GDP is now expected to grow by 3.5%
in 2021 and by 2.4% in 2022.2
Overall, the risks to the growth outlook are assessed to be
balanced, but this is tentative and open to adjustment, given
the wide range of shocks hitting the economy, uncertainties
around the effectiveness of policy, and the sensitivity of
sentiment to news flows. The somewhat stronger growth in
2020 and the small downward revision to growth in 2021
implies little change in the size of the output gap over the
forecast period compared to the September meeting.
The accommodative policies in many advanced economies
and the improved economic outlook have supported a
partial recovery in global financial markets. But this has
so far resulted in only a trickle of fresh capital flows to
emerging markets, and financing conditions remain
uncertain. South Africa’s high public financing needs
have been met instead by local private sector savings and
borrowing from international financial institutions. Yields
have eased in recent months due to higher purchases of
sovereign bonds by resident investors, including banks,
alongside the SARB’s liquidity management operations.
However, the yield curve remains exceptionally steep,
reflecting elevated levels of risk associated with high public
borrowing needs.3
Better global economic and financial conditions have
seen the rand appreciate by 6.9% since the September
meeting. The rand has, however, depreciated by 8.7%
against the United States (US) dollar since January, and
remains below its estimated long-run equilibrium value.
The implied starting point for the rand forecast is R16.50 to
the US dollar, compared with R16.90 at the time of the
previous meeting.
The SARB’s headline consumer price inflation forecast
averages 3.2% in 2020, is slightly lower than previously
forecast at 3.9% in 2021, and remains at 4.4% in 2022. The
forecast for core inflation is lower at 3.3% in 2020 and 3.4%
in 2021, and remains stable at 4.0% in 2022.

APRIL 2021
The overall risks to the inflation outlook appear to be
to the downside in the near term and balanced over the
medium term. Global producer price inflation and oil prices
remain low.4 Local food price inflation is expected to remain
contained. The MPC additionally notes the significant
but likely temporary reduction in medical insurance price
inflation for next year. Given the low pass-through, the risks
to inflation from currency depreciation are expected to stay
muted. However, additional exchange rate pressures could
result from heightened fiscal risks. While no demand-side
pressures are evident, electricity and other administered
prices remain a concern.
Importantly, the expectations of future inflation continued
to moderate this year, and have shifted slightly below the
midpoint of the target band for 2021. The market-based
expectations for short- and medium-term inflation have
eased slightly, while longer-term inflation expectations
remain higher.5
The MPC notes that the slow recovery will keep inflation
below the midpoint of the target range for this year and the
next. Unless the risks outlined earlier materialise, inflation
is expected to be well-contained over the medium term,
remaining below but close to the midpoint in 2021 and 2022.
Against this backdrop, the MPC has decided to keep rates
unchanged at 3.5% per annum. Two members preferred a
25 basis points cut, and three preferred to hold rates at the
current level.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates no further repurchase (repo) rate
cuts in the near term, and two increases of 25 basis points
in the third and fourth quarters of 2021.
Monetary policy has eased financial conditions, and has
improved the resilience of households and firms to the
economic implications of COVID-19. It continues to be
accommodative. The SARB has taken important steps
to ensure adequate liquidity in the domestic markets.
Regulatory capital relief has also been provided, sustaining
lending by financial institutions to households and firms.
Monetary policy cannot, however, improve the potential
growth rate of the economy or reduce fiscal risks on its
own. These should be addressed by implementing prudent
macroeconomic policies and structural reforms that lower
costs generally and increase investment opportunities,
potential growth and job creation. Consistently aligning
administered prices and productivity-adjusted wage
setting with projected inflation would generate important

Our assumptions are now for oil prices to average about US$40 per barrel in 2020, rising to US$45 per barrel in 2021 and US$50 per barrel in 2022.

The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.3 percentage points to 3.6% and to 4.2% (from 3.9% and
4.5%) for 2021. Five-years-ahead inflation expectations have eased from 4.7% to 4.5%. Household inflation expectations are down from 6.2% to 5.9%.
Market analysts (Reuters Econometer) expect inflation to remain unchanged at 3.3% for 2020, lower to 3.9% in 2021, and remain unchanged at 4.4% in
2022. Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked
bonds. These sit at 3.15% for the five-year break-even and at 4.91% on the 10-year break-even; the 15-year break-even inflation sits at 6.1%.
macroeconomic gains. Such steps would enhance the
effectiveness of monetary policy and its transmission to the
broader economy.
Economic and financial conditions are expected to remain
volatile for the foreseeable future. In this highly uncertain
environment, policy decisions will continue to be datadependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through any temporary
price shocks and will focus on second-round effects.
As usual, the repo rate projection from the QPM remains a
broad policy guide, changing from meeting to meeting in
response to new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (November 2020)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2021
Summary of assumptions: Monetary Policy Committee
meeting on 19 November 2020*
Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 61 and 62.

APRIL 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 19 November 2020*
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation
of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2021
Statement of the Monetary Policy Committee
21 January 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average of South Africa’s trading partners. For 2020, this is now at -3.6% (up from -3.9% in November),
and it has been revised up to 5.0% for 2021. Based on the October 2020 World Economic Outlook, the IMF expects global growth of 5.2% in 2021.

Compared to 3.5% and 2.4% respectively in November.

Measured by the Emerging Markets Bond Index (EMBI+) premium over emerging market averages and as an absolute value over time.

Our assumptions are now for oil prices to average about US$50 per barrel in 2021, rising to US$55 per barrel in 2022 and US$57 per barrel in 2023.
Since the November meeting of the Monetary Policy
Committee (MPC), a second wave of COVID-19 infections
has peaked in South Africa and in many other countries. It
is expected that these waves of infection will continue until
vaccine distribution is widespread and populations develop
sufficient immunity to curb virus transmission.
Although the virus will continue in new waves, the roll-out
of vaccines is expected to boost global growth prospects
generally. We have therefore revised global growth for 2021
higher.1 However, global distribution of vaccines is likely
to be slow, creating an uneven pace of global economic
recovery in 2021. The International Monetary Fund (IMF)
had forecast global gross domestic product (GDP) to have
contracted by 4.4% in 2020 and to expand by 5.2% in 2021;
their new forecasts will be released on 26 January 2021.
While financial asset prices were volatile for much of the
past year due to pandemic-related developments and
geopolitical events, recent months have seen markets
strengthen. Capital flows to emerging markets have generally
picked up when compared to the outflows experienced
in March and April last year. Although global policy rates
look set to remain accommodative, risk aversion is likely to
persist through 2021, particularly where economies fail to
take advantage of improved global prospects or run large
macroeconomic imbalances.
In the third quarter of 2020, the South African economy
grew by 66.1% quarter on quarter, seasonally adjusted
and annualised, compared to the South African Reserve
Bank’s (SARB) expected 50.3% growth. The growth rate for
the full year is now expected to be -7.1%, compared to the
contraction of 8.0% expected at the time of the November
meeting. However, our projection for the fourth quarter
of 2020 is expected to be lower than previously forecast.
And while the lockdown restrictions currently in place are
considerably less restrictive than in 2020, we expect growth
in the first quarter of 2021 to remain muted.
Despite very robust terms of trade and stronger exports,
getting back to pre-pandemic output levels will take time.
Sharply lower public and private investment last year and
continued weakness in 2021 will weigh on growth prospects.
GDP is now expected to grow by 3.6% in 2021 and by 2.4%
in 2022.2 GDP growth of 2.5% is expected in 2023.
Overall, the risks to the domestic growth outlook are
assessed to be balanced. Global growth, vaccine
distribution, a low cost of capital and high commodity
prices are supportive of growth. However, new waves of the
COVID-19 virus are likely to periodically weigh on economic
activity, both globally and locally. In addition, constraints
to the domestic supply of energy, weak investment and
uncertainty about the vaccine roll-out remain serious
downside risks to domestic growth.
The accommodative policies in many advanced economies
and the improved economic outlook continue to support the
recovery in global financial markets and some strengthening
in international capital flows. So far, this has resulted in a
trickle of fresh capital flows to South Africa. Financing
conditions remain uncertain, as reflected in the exceptionally
steep yield curve.3
These favourable global conditions have seen the rand
appreciate by 1.7% since the November meeting. However,
since January 2020, the rand has depreciated by 8.0%
against the United States (US) dollar, and remains below its
estimated long-run equilibrium value. The implied starting
point for the rand forecast is R15.70 to the US dollar,
compared with R16.50 at the time of the previous meeting.
Headline consumer price inflation averaged 3.3% in 2020,
in line with the SARB’s expectation, and is the lowest
rate since 2004. The SARB’s forecast for 2021 is slightly
higher at 4.0% (up from 3.9%), and is 4.5% (up from 4.4%)
for 2022. The forecast for 2023 is 4.6%. Core inflation also
averaged 3.3% in 2020. The forecasts for 2021 and 2022
are unchanged at 3.4% and 4.0% respectively. In 2023, core
inflation is expected to be 4.3%.
Despite an upward revision to potential growth, higher
growth in 2020 and in 2021 implies a small narrowing of
the output gap over the forecast period, compared to
the November meeting. Global producer price inflation,
food price inflation and oil prices have risen.4 The more
appreciated nominal exchange rate in recent months is,
however, expected to moderate some inflationary pressure.

APRIL 2021
The overall risks to the inflation outlook appear to be
balanced in the near and medium term. Local food price
inflation is higher but is expected to remain broadly
contained. The MPC additionally notes the significant
but likely temporary reduction in medical insurance price
inflation this year. Given the low pass-through, the risks to
inflation from currency depreciation are expected to stay
muted. However, additional exchange rate pressures could
result from fiscal risks. While no demand-side pressures are
evident, electricity and other administered prices remain
serious concerns.
The expectations of future inflation appear more stable
after sustained moderation last year, although those of
households continue to moderate from quite high levels.
The market-based expectations for short- and mediumterm inflation have eased slightly, while longer-term inflation
expectations remain higher.5
The MPC notes that the slow economic recovery will help
keep inflation below the midpoint of the target range for
this year and the next. Unless the risks outlined earlier
materialise, inflation is expected to be well-contained in
2021, before rising to around the midpoint in 2022 and 2023.
Against this backdrop, the MPC has decided to keep rates
unchanged at 3.5% per annum. Two members preferred a
25 basis points cut, and three preferred to hold rates at the
current level.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates two increases of 25 basis points in
the second and third quarters of 2021.
Monetary policy has eased financial conditions, and has
improved the resilience of households and firms to the
economic implications of COVID-19. It continues to be
accommodative. The steps taken by the SARB have ensured
adequate liquidity in the domestic markets. In addition, the
regulatory relief provided to banks has sustained lending to
households and firms.
While monetary policy will continue to support the economic
recovery, a faster growth rate depends on implementing
prudent macroeconomic policies and structural reforms.
Lower administered prices and productivity-adjusted
wage setting aligned to projected inflation would also
generate important macroeconomic gains. Such steps
would enhance the effectiveness of monetary policy and its
transmission to the broader economy.

The latest Bureau for Economic Research (BER) survey expectations for 2020 are 0.1 percentage points higher at 3.7%, unchanged in 2021 at 4.2%,
and 0.1 percentage points lower in 2022 at 4.5%. Household inflation expectations have eased further to 5.3% from 5.9%. Market analysts (Reuters
Econometer) expect inflation to remain unchanged at 3.3% for 2020, lower to 3.8% in 2021, and lower to 4.2% in 2022. Inflation is expected to be 4.5%
in 2023. Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked
bonds. These sit at 3.2% for the five-year break-even and at 5.0% on the 10-year break-even; the 15-year break-even inflation sits at 6.2%.
Economic and financial conditions are expected to remain
volatile for the foreseeable future. In this highly uncertain
environment, policy decisions will continue to be datadependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through any temporary
price shocks and will focus on second-round effects.
As usual, the repurchase (repo) rate projection from the
QPM remains a broad policy guide, changing from meeting
to meeting in response to new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (January 2021)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2021
Summary of assumptions: Monetary Policy Committee
meeting on 21 January 2021*
Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 61 and 62.

APRIL 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 21 January 2021*
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro
area, the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an
overvaluation of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2021
Statement of the Monetary Policy Committee
25 March 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average of South Africa’s trading partners. For 2020, this is now at -3.1% (up from -3.6% in January),
and for 2021, it has been revised up from 5.0% to 5.8%. The IMF’s global forecast for 2022 sits at 4.2%.

The current account is expected to be in a surplus of 1.3% of GDP in 2021, shifting to a deficit of 0.8% in 2022.
Since the January meeting of the Monetary Policy
Committee (MPC), a second wave of COVID-19 infections
has come and gone, with lockdown restrictions further
reduced. Until vaccination is widespread and populations
develop sufficient immunity to curb virus transmission,
it is expected that these waves of infection will continue.
As indicated by public health authorities, a third wave of
COVID-19 infections is probable in the coming months.
Despite further expected waves, the start of vaccinations
in many countries has lifted projections for global economic
growth and boosted confidence significantly.
The International Monetary Fund’s (IMF) January forecast
for growth in global gross domestic product (GDP) for 2021
has been revised up to 5.5%. The South African Reserve
Bank’s (SARB) forecast for global growth in 2021 is now
5.8%.1 For 2022, we expect global growth of about 3.7%.
Despite this more optimistic outlook, the distribution of
vaccines will be slow, contributing to an uneven pace of
global economic recovery this year and the next.
Financial markets have generally improved, in line with
stronger growth and expectations that the policy settings
in the advanced economies will remain accommodative.
Capital flows to emerging markets increased in December
and January. However, in recent weeks, renewed
uncertainty resulted in more volatility in flows and
currencies. This reflects considerable sensitivity to risk,
particularly where economies fail to take advantage of
improved global prospects or run large macroeconomic
imbalances. Even though global policy rates are likely to
remain accommodative, risk aversion will persist.
South Africa’s economy expanded by 6.3% on a quarterly,
annualised basis in the fourth quarter of 2020, but
contracted by 7.0% for the year as a whole. The SARB’s
forecast for GDP for the first quarter of 2021 stands at
-0.2%, down from 1.0% at the time of the January MPC
meeting. With stronger quarterly outcomes for the rest of
this year, the economy is expected to grow by about 3.8%
(up from 3.6%).
Getting back to pre-pandemic output levels will take time.
While the recent lockdown restrictions have proved less
constraining to economic activity, load-shedding has been
substantial, and consumption moderated after December.
Rising oil prices have increased the economy’s total import
bill, offsetting some income gains from stronger terms
of trade.
The sharply lower public and private investment last year
and continued weakness in 2021 will weigh on growth
prospects. GDP is expected to grow by 2.4% in 2022 and
by 2.5% in 2023, unchanged since the January meeting.
Overall, the risks to the domestic growth outlook are
assessed to be balanced. Global growth, progress in
vaccination, a low cost of capital and high commodity
prices are all supportive of growth. However, new waves of
the COVID-19 virus are likely to weigh on economic activity,
both globally and locally. In addition, the ongoing constraints
to the domestic supply of energy as well as uncertainty
about the vaccine roll-out continue to pose downside risks
to growth.
The large current account surplus at present reflects good
growth and higher prices for exports, moderate prices for
imported oil, and very weak demand for imported consumer
and investment goods. This surplus is expected to give way
to a modest current account deficit as the year progresses.2
Despite the recent volatility, on balance, the accommodative
policies in many advanced economies and the improved
economic outlook will support global financial markets
and strengthen international capital flows. This broad
improvement in the global environment resulted in net
capital inflows to South Africa in December and January,
before giving way to net outflows in recent weeks. Although
financing conditions have improved modestly and fiscal risk
has eased, the yield curve for rand-denominated assets
remains steep.
Despite these generally favourable global conditions and
considerable rand appreciation through the latter half of
2020 and into this year, the rand remains below its estimated
long-run equilibrium value. Since the January meeting, the
rand has appreciated by 1.3% on a trade-weighted basis.
The implied starting point for the rand forecast is R14.96 to
the United States (US) dollar, compared with R15.70 at the
time of the previous meeting.
Headline consumer price inflation averaged 3.3% in 2020.
The forecast for 2021 is higher at 4.3% (up from 4.0%),
and slightly lower for 2022 at 4.4% (down from 4.5%). The
forecast for 2023 is 4.5% (down from 4.6%).

APRIL 2021
Core inflation also averaged 3.3% in 2020. The core inflation
forecast for 2021 is slightly lower at 3.3% (down from 3.4%),
and unchanged for 2022 and 2023 at 4.0% and 4.3%
respectively.
Oil prices have been revised up sharply in the forecast,
resulting in higher petrol price inflation at 12.7% for 2021,
compared to 4.4% at the time of the January meeting.3
Electricity prices are significantly higher at 9.7% for 2021
(up from 8.1%).
Expectations of future inflation eased further in the first
quarter of this year. The inflation expectations of households
continue to moderate from quite high levels. The marketbased expectations for short-term inflation are lower, but
have increased for the medium- and longer-term horizons.4
The overall risks to the inflation outlook appear to be
balanced. The more appreciated nominal exchange rate
in recent months and the generally low pass-through
are expected to continue moderating some inflationary
pressure. The MPC additionally notes the significant, but
likely temporary, reduction in medical insurance price
inflation this year. While global food price inflation remains
high, local food price inflation is slightly lower than previously
expected, and should remain broadly contained due to
higher local crop production. Oil prices have increased
sharply this year, and are expected to remain at these levels
over the forecast horizon. Electricity and other administered
prices remain as upside risks to the inflation trajectory.
While no demand-side pressures are evident at present,
higher growth in 2021 and no change in the potential growth
rate implies a faster narrowing of the output gap over the
forecast period, compared to the January meeting.
Unless the risks outlined earlier materialise, inflation is
expected to be well-contained in 2021, before rising to
around the midpoint of the inflation target range in 2022
and 2023.
Against this backdrop, the MPC has decided to keep
rates unchanged at 3.5% per annum. The decision was
unanimous.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates an increase of 25 basis points in
each of the second and fourth quarters of 2021. Compared
to the previous meeting, the shift in the rate path from the
third to the fourth quarter is due to somewhat lower inflation
in 2022.

Our assumptions are now for oil prices to average about US$62 per barrel in 2021 (up from US$50) and about US$60 per barrel in both 2022 and
2023 (up from US$55 and US$57 respectively).

The latest (2021Q1) Bureau for Economic Research (BER) survey expectations have eased from 4.2% to 3.9% for 2021 and from 4.5% to 4.2% for 2022;
they are at 4.4% for 2023. Household inflation expectations have eased further to 5.0% from 5.3%. Market analysts (Reuters Econometer) expect inflation
to be higher at 4.1% (from 3.8%) in 2021, at 4.3% (from 4.2%) in 2022, and unchanged at 4.5% in 2023. Market-based rates are calculated from the
break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds. These now sit at 4.4% for the five-year breakeven and at 5.9% on the 10-year break-even; the 15-year break-even inflation sits at 6.8%.
Monetary policy continues to be accommodative, keeping
financial conditions supportive of credit demand as the
economy recovers from the pandemic and the associated
lockdowns. The SARB has ensured adequate liquidity in
the domestic markets, and will continue to closely monitor
the funding markets for stress. In addition, the regulatory
relief provided to banks continues to support lending to
households and firms.
Important macroeconomic gains would be realised by
achieving a stable public debt level, increasing the supply of
energy, moderating administered price inflation and keeping
inflation low into the recovery. Such steps would enhance
the effectiveness of monetary policy and its transmission to
the broader economy.
Economic and financial conditions are expected to
remain volatile for the foreseeable future. In this uncertain
environment, policy decisions will continue to be datadependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through any temporary
price shocks and will focus on second-round effects.
As usual, the repurchase (repo) rate projection from the
QPM remains a broad policy guide, changing from meeting
to meeting in response to new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (March 2021)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2021
Summary of assumptions: Monetary Policy Committee
meeting on 25 March 2021*
Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 61 and 62.

APRIL 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 25 March 2021*
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro
area, the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an
overvaluation of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2021
Foreign sector assumptions
1. Trading-partner gross domestic product (GDP) growth
is broadly determined using the Global Projection Model
(GPM), which is adjusted to aggregate the GDP growth
rates of South Africa’s major trading partners on a tradeweighted basis. Individual projections are done for the
six largest trading partners, namely the euro area, the
United States (US), the United Kingdom (UK), Japan,
China and India. Other countries considered, although
with small weights, are Brazil, Mexico and Russia.
The remaining trading partners are grouped into the
‘Rest of countries’ bloc. Since sub-Saharan Africa
(SSA) is also a major trading region for South Africa
(but does not have a bloc in the GPM), it is modelled
separately and then combined with the aggregate of
all the countries in the GPM to make up total tradingpartner growth.
2. As with GDP growth, the output gap is determined using
the GPM and is adjusted in a similar way. The output gap
is driven by a combination of country-specific domestic
factors, external factors, and financial-real linkages
(beyond interest rate and exchange rate effects).
Domestic factors include expectations of future demand
and medium-term interest rates. External factors include
exchange rate impacts on demand, direct spillovers
through trade with trading-partner countries, and
foreign demand.
3. The commodity price index is a weighted aggregate
price index of the major South African export
commodities.
4. The Brent crude oil price is expressed in US dollars
per barrel. The assumption incorporates supply and
demand dynamics as well as oil inventories (of all grades).
The assumption is also informed by projections from the
US Energy Information Administration, the Organization
of the Petroleum Exporting Countries (OPEC) and
Reuters.
5. World food prices is the composite food price index
of the United Nations (UN) Food and Agriculture
Organization (FAO) in US dollars. It is weighted using
average export shares, and represents the monthly
change in the international prices of a basket of five
food commodity price indices (cereals, vegetable oil,
dairy, meat and sugar). World food price prospects
incorporate selected global institution forecasts for
food prices and imbalances from the anticipated trend
in international food supplies relative to expected food
demand pressures.
6. International consumer prices are also broadly
determined using the GPM. The index is an aggregate
of the consumer price indices of the euro area, the
US and Japan, weighted by their relative trade shares.
Consumer prices are determined for each of these
economies by accounting for inflation expectations,
demand pressures, and pass-through from changes in
the relevant exchange rate. Other institutional forecasts
for international consumer prices are also considered.
7. International policy interest rates are again broadly
determined using the GPM. Interest rates are a weighted
average of the policy rates of the euro area, the US and
Japan. They are individually determined by a ‘Taylortype’ monetary policy rule. The communications of the
relevant central banks and other institutional forecasts
are also considered.

APRIL 2021
Domestic sector assumptions
1. The electricity price is an administered price measured
at the municipal level with a weight of 3.75% in the
headline consumer price index (CPI) basket. Electricity
price adjustments generally take place in the months of
July and August of each year, and the assumed pace of
increase over the forecast period reflects the multi-year
price determination agreement between Eskom and the
National Energy Regulator of South Africa (NERSA), with
a slight adjustment for measurement at the municipal
level.
2. Fuel taxes and levies are the total domestic taxes and
costs included in the price of fuel paid at the pump. They
include the Road Accident Fund (RAF) levy, the fuel levy,
retail and wholesale margins, the slate levy, and other
minor levies. The two major taxes, which are set by the
Minister of Finance in the annual national Budget, are the
RAF levy and the fuel levy. The income generated by the
RAF levy is utilised to compensate third-party victims of
motor vehicle accidents, while the fuel levy is used to
provide funding for road infrastructure.
3. Potential growth is derived from the South African
Reserve Bank’s (SARB) semi-structural potential output
model. The measurement accounts for the impact of the
financial cycle on real economic activity, and introduces
economic structure via the relationship between potential
output and capacity utilisation in the manufacturing
sector (SARB Working Paper Series No. WP/14/08).
4. The midpoint of the inflation target range is 4.5%.
The official inflation target range is 3–6%.
5. The neutral real interest rate (NRIR) is the interest rate
consistent with stable inflation and output in line with
the economy’s potential. This variable is the basis for
judging whether a given policy stance is expansionary,
contractionary or neutral.

APRIL 2021
Glossary
Advanced economies: Advanced economies are countries
with high gross domestic product (GDP) per capita,
diversified exports, and close integration into the global
financial system.
Balance of payments: This is a record of transactions
between the home country and the rest of the world over a
specific period of time. It includes the current and financial
accounts. See also ‘Current account’ below.
Brent crude: Brent crude is a light and sweet blend of oil
from five different fields in the North Sea. The price of Brent
crude is one of the benchmark oil prices in international
markets.
Budget deficit: A budget deficit indicates the extent to which
government expenditure exceeds government revenue.
Business and consumer confidence: These are economic
indicators that measure the level of optimism about the
economy and its prospects among business managers and
consumers.
Commodities: Commodities can refer to energy, agriculture,
metals and minerals. Major South African-produced
commodities include platinum and gold.
Consumer price index (CPI): The CPI provides an indication
of aggregate price changes in the domestic economy. The
index is calculated using a number of categories forming
a representative set of goods and services bought by
consumers.
Core inflation: Core generally refers to underlying inflation
excluding the volatile elements (e.g. food and energy prices).
The South African Reserve Bank’s (SARB) forecasts and
discussions refer to headline CPI excluding food, nonalcoholic beverages (NAB), fuel and electricity prices.
Crude oil price: This is the United States (US) dollar price
per barrel of unrefined oil. See also ‘Brent crude’ above.
Current account: The current account of the balance of
payments consists of net exports (exports less imports)
in the trade account as well as the services, income and
current transfers.
Emerging markets: Emerging markets are countries with
low to middle income per capita. They are advancing rapidly
and are integrating with global (product and capital) markets.
Exchange rate depreciation (appreciation): Exchange rate
depreciation (appreciation) refers to a decrease (increase) in
the value of a currency relative to another currency.
Exchange rate pass-through: This is the effect of exchange
rate changes on domestic inflation (i.e. the percentage
change in domestic CPI due to a change in the exchange
rate). Changes in the exchange rate affect import prices,
which in turn affect domestic consumer prices and inflation.
Forecast horizon: This is the future period over which the
SARB generates its forecasts, typically between two and
three years.
Gross domestic product (GDP): GDP is the total market
value of all the goods and services produced in a country.
It includes total consumption expenditure, capital formation,
government consumption expenditure, and the value of
exports less the value of imports.
Gross fixed capital formation (investment): The value of
acquisitions of capital goods (e.g. machinery, equipment
and buildings) by firms, adjusted for disposals, constitutes
gross fixed capital formation.
Headline consumer price index (CPI): Headline CPI refers
to CPI for all urban areas, as measured on a monthly basis
by Statistics South Africa (Stats SA). Headline CPI is a
measure of price levels in all urban areas. The 12-month
percentage change in headline CPI is referred to as ‘headline
CPI inflation’ and reflects changes in the cost of living. This
is the official inflation measure for South Africa.
Household consumption: This is the amount of money
spent by households on consumer goods and services.
Inflation (growth) outlook: This outlook refers to the evolution
of future inflation (growth) over the forecast horizon.
Inflation targeting: This is a monetary policy framework
used by central banks to steer actual inflation towards an
inflation-target level or range.
Monetary policy normalisation: This refers to the unwinding
of an unusually accommodative monetary policy. It could
also mean adjusting the economy’s policy rate towards its
neutral real policy rate.
Neutral real interest rate (NRIR): The NRIR is the level at
which the real interest rate will settle once the output gap is
closed and inflation is stable.
Nominal effective exchange rate (NEER): The NEER
is an index that expresses the value of a country’s
currency relative to a basket of other (trading-partner)
currencies. An increase (decrease) in the NEER indicates
a strengthening (weakening) of the domestic currency with
respect to the selected basket of currencies. The weighted
average exchange rate of the rand is calculated against
20 currencies. The weights of the five major currencies are
as follows: the euro (29.26%), the Chinese yuan (20.54%),
the US dollar (13.72%), the Japanese yen (6.03%), and the
British pound (5.82%). Index: 2010 = 100. See also ‘Real
effective exchange rate’ below.
Output gap/potential growth: Potential growth is the rate
of GDP growth that could theoretically be achieved if all
the productive assets in the economy were employed

APRIL 2021
in a stable inflation environment. The output gap is the
difference between actual growth and potential growth,
which accumulates over time. If the output gap is negative,
the economy is viewed to be underperforming, and demand
pressures on inflation are low. If the output gap is positive,
the economy is viewed to be overheating, and demand
pressures are inflationary.
Policy rate: A policy rate is the interest rate used by a central
bank to implement monetary policy.
Productivity: Productivity indicates the amount of goods
and services produced in relation to the resources utilised
in the form of labour and capital.
Real effective exchange rate (REER): The REER is the
NEER adjusted for inflation differentials between South Africa
and its main trading partners. See also ‘Nominal effective
exchange rate’ above.
Repurchase (repo) rate: This is the policy rate that is set
by the Monetary Policy Committee (MPC). It is the rate that
commercial banks pay to borrow money from the SARB.
Real repo rate: This is the nominal repo rate, as set by the
MPC, adjusted for expected inflation.
Terms of trade: This refers to the ratio of export prices to
import prices.
Unit labour cost (ULC): A ULC is the labour cost to produce
one ‘unit’ of output. This is calculated as the total wages
and salaries in the non-agricultural sector divided by the real
value added at basic prices in the non-agricultural sector of
the economy.

APRIL 2021
Abbreviations
AE
advanced economy
Alsi
All-Share Index
BER
Bureau for Economic Research
BIS
Bank for International Settlements
CARES Act
Coronavirus Aid, Relief and Economic Security Act
CIT
corporate income tax
COVAX
COVID-19 Vaccine Global Access
CPI
consumer price index
CSIR
Council for Scientific and Industrial Research
DIM
Disaggregated Inflation Model
ECB
European Central Bank
EM
emerging market
EMBI+
Emerging Market Bond Index Plus
EMDE
emerging market and developing economy
ESG
environmental, social and governance
EU
European Union
FAO
Food and Agriculture Organization
Fed
Federal Reserve
Fitch
Fitch Ratings Inc.
FX
foreign exchange
G3
Group of Three (United States, euro area, Japan)
GDP
gross domestic product
GFC
global financial crisis
GPM
Global Projection Model
Haver
Haver Analytics
IIF
Institute of International Finance
IMF
International Monetary Fund
IOSRO
Intraday Overnight Supplementary Repurchase Operation
Jibar
Johannesburg Interbank Average Rate
JPMorgan EM FX Index
JPMorgan Emerging Market Foreign Exchange Index
JPMorgan GBI
JPMorgan Government Bond Index
JSE
JSE Limited
Moody’s
Moody’s Investors Service
MOVE (Index)
Merrill Lynch Option Volatility Estimate (Index)
MPC
Monetary Policy Committee
MPR
Monetary Policy Review
MTBPS
Medium Term Budget Policy Statement
MYPD
multi-year price determination
NAB
non-alcoholic beverages
NCD
negotiable certificate of deposit
NEER
nominal effective exchange rate (of the rand)

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NERSA
National Energy Regulator of South Africa
NRIR
neutral real interest rate
OPEC
Organization of the Petroleum Exporting Countries
PGM
Platinum Group Metal
PIT
personal income tax
QES
Quarterly Employment Statistics
QLFS
Quarterly Labour Force Survey
QPM
Quarterly Projection Model
RAF
Road Accident Fund
RCA
Regulatory Clearing Account
REER
real effective exchange rate
repo (rate)
repurchase (rate)
rhs
right-hand scale
RSME
root mean square error
SA
South Africa(n)
SACU
Southern African Customs Union
SARB
South African Reserve Bank
SFs
standing facility
SOE
state-owned enterprise
S&P
Standard & Poor’s
SSA
sub-Saharan Africa
Stats SA
Statistics South Africa
TFP
total factor productivity
UAE
United Arab Emirates
UK
United Kingdom
ULC
unit labour cost
UN
United Nations
US
United States
VAT
value-added tax
VIX
Volatility Index
WGBI
World Government Bond Index