T T Mboweni: Recent economic and financial developments
Address by Professor T T Mboweni, Governor of the South African Reserve Bank, at the University of
South Africa, Pretoria, 23 August 2001.
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1. Introduction
Ladies and gentlemen, honoured guests. I wish to thank you for the honour you have bestowed on me
by choosing me as the recipient of your award for Excellence in Managing the South African Financial
Environment. In accepting this award and thanking you for extending it to me, I would like to make a
few comments about the recent economic and financial developments in South Africa. I will touch on
the recent price developments, the exchange rate, and developments in other emerging markets.
2. Recent economic developments
Towards the end of 2000 the South African economy had not been seriously affected by the world
economic downturn. But by the first quarter of this year, it became clearer that we would probably be
adversely affected by the slowing activity in the major world economies.
As we mentioned in our latest Quarterly Bulletin, published in June, the recorded decline in export
volumes contributed to a slowing down in domestic growth from 3 per cent in the fourth quarter of last
year to 2 per cent in the first quarter of this year. Although growth had already slowed from 4 per cent
in the third quarter of 2000, the slowdown had largely been confined to the agricultural sector. But in
the first quarter of this year, the weakness spread to other sectors of the economy. Of some worry is
that the sector that bore the brunt of the slowdown was the manufacturing sector. The growth rate in
this sector slowed from an annualised 4.5 per cent in the fourth quarter to a mere 1 per cent in the first
quarter. This is somewhat puzzling because there appears to be strong demand for manufactured
goods.
Domestic demand remained strong in the first quarter with household and government consumption
expenditure rising and growth in real fixed capital formation and inventory investment accelerating.
The welcome acceleration in inventory levels followed a steep drop in net inventory investment from
the third to fourth quarters of 2000. This suggests that producers are positive about South Africa's
future growth prospects and anticipate a sizeable increase in domestic demand.
3. Price developments
Inflation in the prices of consumer goods and services moderated meaningfully in the first half of 2001.
The year-on-year rate of increase in the consumer price index for metropolitan and other urban areas
excluding mortgage cost (CPIX) - the benchmark indicator for inflation-targeting purposes - has
declined from 8.2 per cent in August 2000 to 6.4 per cent in July 2001. This rate of increase is only
0.4 percentage points above the upper limit of the inflation target range of between 3 and 6 per cent
set for 2002. When measured from quarter to quarter and expressed at an annualised rate, the
shortterm pace of CPIX inflation has almost halved from 7.8 per cent in the first quarter of 2001 to 4.5 per
cent in the second quarter.
"Headline" CPI inflation or the year-on-year rate of increase in the overall consumer price index for
metropolitan areas slowed down from 7.8 per cent in February 2001 to 5.3 per cent in July.
Increases in the prices of consumer services decelerated quite significantly. In the case of
housingrelated services, price increases moderated from a year-on-year rate of 8.1 per cent in February 2001
to 2.8 per cent in July. Housing-related services include mortgage rates, house rent and domestic
workers' wages. Expressed at a seasonally adjusted and annualised rate, the rate of increase in the
prices of all consumer services fell from 13.4 per cent in the first quarter of 2001 to only 4.2 per cent in
the second quarter. Smaller increases in the prices of other services, apart from housing-related
services, also contributed to the decline in the inflation in the prices of all consumer services.
The year-on-year rate of increase in the prices of consumer goods fell back from 8.7 per cent in
August 2000 to 5.2 per cent in July 2001. Declines in the price of food, which had risen steeply in
2000, helped to bring down the inflation rate.
In contrast to the moderation in consumer price inflation, production price inflation has advanced at a
firmer pace in recent months. Measured over periods of twelve months, the rate of increase in the
all-goods production price index rose from 8.1 per cent in April 2001 to 8.6 per cent in May, June and
July.
The year-on-year rate of increase in the prices of domestically produced goods which had receded
from 8.0 per cent in November 2000 to 6.9 per cent in April 2001, accelerated to 8.2 per cent in July.
Rising food price inflation, though still at a modest level, contributed most to the pick-up in inflation in
the prices of domestically produced goods.
The higher inflation in the prices of domestically produced goods has been partly offset by a
deceleration in the rates of increase in the prices of imported goods in recent months. Imported
inflation, when measured over periods of twelve months, declined from 15.0 per cent in December
2000 to 9.2 per cent in July 2001. The decline in imported inflation over this period was primarily due
to lower international oil prices and the increase in the value of the rand in May and June 2001.
Coupled with declining inflation in trading-partner countries, this contributed meaningfully to the
slowdown in imported inflation.
4. Exchange rate developments
The performance of the rand/dollar exchange rate has been disappointing in recent times. It has
traded between R8.01 on 4 July 2001 and R8.45 on 22 August. Whilst I have often said that
commentators should focus on the trade-weighted value of the rand, as a deterioration in the value of
the rand against the US dollar might merely reflect the strength of the US dollar on the international
exchanges, the traded-weighted value of the rand has also succumbed to negative sentiment. It is
currently around 8 per cent weaker than at the end of last year.
Why is the exchange rate of the rand currently under pressure? The reasons cited in the market are
the following: in the first instance, currencies perceived to belong in the emerging markets asset class
have been adversely affected by, in particular, developments in Argentina and Turkey. There are
concerns in the market that, notwithstanding the official aid packages, with their accompanying
conditionalities, Argentina's economic problems could prove difficult to resolve. Sentiment towards the
rand has been clearly affected by fears of contagion.
Secondly, developments in Zimbabwe, in particular with respect to their land-reform programme, have
also been cited as explanatory factors. The impact of these developments was compounded this week
following a report on Bloomberg. Mr Thami KaPlaatjie, Secretary-General of the Pan-Africanist
Congress of South Africa, reportedly supported Zimbabwe's approach to land reform and criticised
those who oppose it as negating the interests of Africans. Furthermore, he reportedly also told
journalists that the problem of land in South Africa will, when it explodes, be of enormous proportions
- "too ghastly to contemplate" were his words. (I believe Mr KaPlaatjie was not speaking in his official
capacity but, I must stress, the damage was done.)
I would like to repeat what I said yesterday at the Annual African Investment Conference held in
Stellenbosch. I am concerned that developments in Zimbabwe have tended to have an adverse effect
on our markets, in particular our currency and bond markets. I would like to reiterate that firstly, the
land question in Zimbabwe needs to be resolved in accordance with the law and in an orderly fashion
which finds a solution that is beneficial to the political and economic imperatives of Zimbabwe and the
region.
Secondly, the current state of restlessness in Zimbabwe should really be brought to an end to allow
the economies of Southern Africa to stabilise. Thirdly, our markets need to learn to differentiate
between developments in one Southern African country and another. Here in South Africa the political
leadership has consistently stated that land reform will take place according to the law as guided by
the Constitution and the need for historical redress and food production. I hope the market players are
listening to what is being said.
Fourthly, from the Reserve Bank's point of view we are highly appreciative of the efforts of the
Southern African Development Community in trying to assist in a resolution of the Zimbabwean
question. And finally, we should always be aware that the financial markets are affected by a
multiplicity of factors, not just one factor. Since developments in one emerging market will from time to
time affect another, it is therefore important that emerging markets design their policies and
programmes to receive the maximum benefit from globalisation. An "injury to one tends to be an injury
to all".
The final factor which has been mentioned in the market has been the perceived increase in strike
action and threatened labour unrest. Of course, the rand sometimes is pressurised by the perception
that it is a "commodity currency", or concerns may emerge regarding the privatisation process in South
Africa, or regarding the so-called NOFP, the net open foreign currency position of the Reserve Bank.
Movements in the value of the rand can also, of course, be exacerbated by pure speculative trading
activity in the foreign exchange market. Undoubtedly, however, the first three factors I mentioned
earlier have dominated market sentiment and commentary in recent days.
I believe that the pressures on the rand are really, truly and honestly overdone. Cognisance has to be
taken of South Africa's sound economic fundamentals to allay these contagion fears which might
emerge if economic conditions in Argentina, Zimbabwe and Turkey deteriorate. Secondly, the South
African Government has given a clear and unequivocal commitment to the rule of law and has recently
been seen implementing court decisions without delay in respect of a land-occupation problem at
Bredell. Fears regarding any land-reform programme in South Africa are unfounded. The best defence
of a currency lies in the economic management of the country. South Africa pursues and will continue
to pursue prudent macro-economic policies. I have no doubt that a carefully considered analysis of
South Africa will lead to a retracement in the value of the rand's trade-weighted index.
5. Developments in other emerging markets
The increase of international financial transactions and international capital flows has brought with it
an increase in the potential risks of a reversal. This sudden and large reversal of short-term capital
flows has caused international financial crises in Mexico (1994-1995), Asia (1997-1998), Brazil
(19981999) and more recently in Argentina and Turkey.
Argentina's economic performance deteriorated significantly from mid-1998 in the aftermath of the
Asia, Brazil and Russia crises. After a short-lived pickup in the last quarter of 1999, the economy again
stagnated in 2000. This reflected the fiscal tightening on domestic demand, a drop in business and
consumer confidence, and the progressive hardening of financing conditions in international markets.
The government responded with a strengthened growth-oriented economic strategy aimed at
promoting and ensuring medium-term sustainability of the fiscal and external financial situations. It
centred on a strong commitment by the government to reduce fiscal deficits.
The IMF supported this strengthened economic programme and increased Argentina's access to IMF
financing in January this year. Argentina also received new loan commitments from other sources.
Favourable developments that followed the agreement on the programme and financing package were
interrupted in early March 2001 by a new crisis. The principle catalyst was evidence of a major
deterioration in the fiscal performance, but internal political disagreements and increased uncertainty
in international markets were contributing factors.
In June 2001, the government completed a nearly US$ 30 billion debt exchange with its major
domestic and international creditors. Argentina's financial conditions improved somewhat but this
proved to be temporary and Argentina's financial asset prices started falling in mid-July 2001 as
analysts questioned Argentina's ability to meet payments on almost US$ 130 billion public debt.
President Fernando De la Rua tried to reassure investors in July by announcing a series of strict
measures to cut government spending and limit tax evasion. Argentina's stocks, however, fell sharply
thereafter as investors questioned President De la Rua's proposed spending cuts and other economic
measures designed to reduce Argentina's ballooning deficit. This package of measures, designed to
achieve a zero fiscal deficit, was finally approved by Argentina's Congress at the end of July 2001
after much debate.
Fears of a regional crisis in Latin America, however, eased when Horst Kohler, the IMF's managing
director, this week informed the Executive Board of the Fund that he was prepared to recommend an
augmentation of Argentina's current stand-by credit facility by approximately US$ 8 billion to about
US$ 22 billion.
Similarly, Turkey's economy experienced considerable growth since 1994 but had entered a
recession by 1999 as a result of tight fiscal policies and the earlier Russian crisis. With high public
deficits and a public sector making net payments of external debt after 1994, the pressure grew on
Turkey's financial markets. The lack of depth of these financial markets and the volatile inflation rate
paved the way for sustained high real interest rates. The high real interest rate paid on domestic debt
therefore increased the borrowing requirements of the public sector. All this created a vicious circle of
debt and interest payments, pushing Turkey into an ever more difficult financial position.
The deterioration of the public financial balance, the rise in domestic debt due to continued high real
interest rates, the acceleration of inflation rates and the continuing economic contraction made it
necessary to embark on a medium-term economic austerity programme. This programme was
designed to free Turkey from high inflation, restore macro-economic fundamentals and address
structural weaknesses in the economy.
For most of 2000, the government's economic programme made good progress. Consumer price
inflation declined rapidly from 68.8 per cent in January 2000 to 33.4 per cent in February 2001, the
lowest level since 1986. GNP growth also accelerated sharply from a contraction of 6.1 per cent in
1999 to an expansion of 6 per cent in 2000.
However, a severe banking crisis in late November 2000 was accompanied by a massive capital
outflow. The crisis was triggered by liquidity problems in some medium-sized banks, which had
positioned themselves aggressively for continued declines in interest rates. The underlying cause of
the crisis, however, appears to be the significant deterioration in the current account and the delays in
the privatisation programme which were causing interest rates to rise from September, and more
markedly from around mid-November 2000.
The severe liquidity squeeze and growing bank distress was accompanied by pressure on overnight
interest rates and government bond yields. The capital outflow was only halted, and devaluation fears
allayed when the IMF announced in December 2000 an additional US$ 7 billion to alleviate the
balance of payment difficulties stemming from the recent crisis. Interest rates declined and there was a
modest rise in capital flows in January 2001.
In February 2001, a second financial crisis was triggered by a political dispute between Prime Minister
Bulent Ecevit and President Ahmet Necdet Sezer. The dispute raised concern that the country's
threeparty coalition government might collapse and raised doubts about the authorities' commitment to
reform. Market confidence in the system was shattered and the Turkish lira faced a fresh major attack
in February 2001. The central bank spent US$ 4.5 billion, one sixth of its reserves, to defend the lira.
These attempts, however, failed to restore confidence and the Turkish authorities decided on
22 February 2001 to allow the lira to float freely.
Turkey's economic programme was again strengthened following the crisis that led to the floating of
the lira. The new economic framework included increased transparency, accountability and good
governance in both the private and public sectors. The improved programme aimed to strengthen the
primary fiscal position of the public sector, reduce the government's immediate borrowing requirement
and address major bank restructuring. Market sentiment, however, again started to deteriorate in early
July 2001 when the IMF postponed a portion of the Turkish loan. The differences between the IMF and
the Turkish authorities were fortunately resolved and the IMF approved the eighth review of Turkey's
economic programme supported by the three-year Stand-By Arrangement on 12 July 2001.
The IMF's Executive Board also completed the ninth review of Turkey's economic programme on
3 August 2001. This decision will enable Turkey to draw an additional US$ 1.5 billion from the IMF.
The IMF is convinced that there are encouraging signs that the economic downturn in Turkey is
bottoming out, and that the targeted lowering of inflation is materialising, which could permit declines
in interest rates. The IMF is also encouraged by the considerable progress in the structural reform
agenda, especially in restructuring the banking system. However, the Turkish lira has again started to
depreciate rapidly since the beginning of August as confidence in Turkey's ability to repay
US$ 26 billion of debt (before the end of this year) has been shaken by repeated disputes between
members of the governing coalition. The Turkish authorities have also decided to formally make an
inflation target the nominal anchor of Turkey's monetary policy beginning in the fourth quarter of this
year.
The effects of the Mexican, Asian and Russian crises spread from one country to another in a process
commonly known as contagion. But in this case, the available evidence indicates no broad-based
contagion from Argentina and Turkey to emerging markets in general at this stage. However,
according to the IMF, the potential for broader-based contagion still remains. Concerns about
Argentina did spill over into the region, notably to Brazil, which is also suffering from domestic
difficulties.
I once again appeal to our markets to judge South Africa on its performance and not on the basis of
emerging market perception.
And once again, my heartfelt thanks to you.