Gill Marcus: Crisis and confidence
Address by Gill Marcus, Governor of the South African Reserve Bank, to the Nordic Business
Chamber of South Africa, Johannesburg, 2 October 2012.
* * *
Good afternoon, and thank you for the invitation to address you today.
As you know, on the 20th of September we made our latest interest rate decision. As with all of
our deliberations on the Monetary Policy Committee, this decision to keep rates at the current
level was not an easy one. The global economy remains a source of extreme uncertainty, while
the domestic economy is beset by its own challenges - some related to the travails of the rest
of the world and others home-grown. I thought it might be useful to speak today about current
economic conditions and our latest interest rate decision, before moving on to say a few words
about rebuilding confidence in our economic future.
Crisis
The global growth outlook has weakened in recent months, despite some moderation in the
risks surrounding Europe's financial situation. The European Central Bank, the Federal
Reserve and the Bank of Japan have launched new programmes to add liquidity to key
markets and to encourage economic growth.
The QE3 decision by Chairman Bernanke and the FOMC seeks to improve outcomes in a
US labour market struggling with slow growth. But the economic outlook going forward is weak,
clouded over by the risk that the US will walk over a "fiscal cliff" of combined tax increases and
spending cuts, causing a sharp slowing in US growth. Despite renewed stimulus in the United
States and agreement to continue funding the government until March 2013, growth is
expected to remain subdued at least until the "fiscal cliff" issue is resolved.1
In the Eurozone, the immediate risks posed by the continuing debt crisis appear to have
abated somewhat. The ECB's Outright Monetary Transactions (OMT) programme, the decision
of the federal constitutional court in Germany to uphold the ratification of the treaty to establish
the European Stability Mechanism, and the pro-euro outcome of the Dutch election have lent
some stability to the zone. Nonetheless the risk of a Greek exit from the Eurozone remains
high, and growth prospects in the region have deteriorated as banks deleverage further and
cross-border lending falls.
Growth has also slowed in some of the systemically important emerging market economies,
particularly in China, Brazil and India.
In line with weaker growth worldwide, global inflation remains relatively benign. And yet supply
side shocks in the form of higher food prices, due to droughts in the US and some parts of
Eastern Europe, and resilient international crude oil prices pose potentially serious risks to the
outlook. The combination of slowing growth and rising prices presents difficult challenges for
monetary policy.
Global conditions impact on South Africa, and this, alongside domestic factors, has been
reflected in our own downward revisions to the forecast for domestic economic growth. For
2012 we expect the economy to grow by about 2.6 per cent, rising to 3.4 per cent in 2013 as
the global economy starts to recover.
The economy grew by 3.2 per cent in the second quarter of 2012, but this reflects a distortion
arising from the strong contribution from the mining sector which recovered from a deep
contraction in the first quarter. Non-mining real output growth measured a low 1.7 per cent.
Household spending continues to provide much of the growth in the economy. Investment
strengthened in the latter half of 2011 and growth has been sustained into 2012, rising by
5.7 per cent in the second quarter of this year. However, private sector gross fixed capital
formation remains weak, with the balance of growth in investment arising from activities of
public corporations.
Job creation has picked up, but again remains sluggish. Statistics South Africa shows
123,000 jobs created from mid-year 2011 to mid-year 2012, about one third of which were in
the public sector. The current level of formal sector employment is still about 60,000 less than
that reached before the onset of the crisis.
The stronger growth in the domestic economy that we saw in the first half of 2012 was
reflected in better credit extension figures. These have since moderated from 9.2 per cent in
March, to 7.3 per cent and 7,8 per cent in July and August respectively. Credit extension to
households rose by 8.1 per cent in July and 9,0 per cent in August, while credit extended to the
corporate sector eased somewhat. Mortgage loans remained subdued, while instalment sale
credit and leasing finance reflect robust vehicle sales. Unsecured lending has continued to rise
rapidly, although again somewhat slower in recent months than in the first quarter of this year.
Partly as a result of this lending, household debt as a ratio to disposable income increased
slightly, from 75.6 per cent to 76.3 per cent between the first and second quarters of 2012. The
asset quality of the banking sector however remains sound. Impaired advances as a
percentage of gross loans and advances measured 4.4 per cent in July 2012 compared with
5.5 per cent a year earlier.
The trends in wage growth have been relatively benign from an inflation perspective, with
nominal unit labour cost growth of 6.1 per cent in the first half of 2012 compared to a year
earlier. However, there is a risk that the recent wage settlements in the mining sector could set
a precedent for wage demands more generally.
We expect consumer prices in South Africa to remain contained within the target range over
the forecast period. The decline in inflation in recent months to 4.9 per cent in July appears to
have stopped with the August outcome of 5.0 per cent.
Food and petrol prices continue to be the main drivers of consumer prices, set largely in
international markets and then feeding through into South Africa. Food prices increased by
5.1 per cent, petrol by 9.3 per cent and electricity by 10.0 per cent in the year to August. Core
inflation, as measured by the exclusion of food, petrol and electricity from CPI measured
4.6 per cent, up from 4.5 per cent in July. Administered prices excluding petrol increased at a
year-on-year rate of 7.5 per cent.
The inflation forecast of the Bank reflects a moderate deterioration for 2013 compared with the
previous forecast, and a relatively flat trajectory over the entire forecast period. Inflation is now
expected to average 5.3 per cent in the final quarter of 2012 and 5.6 per cent for the year,
5.2 per cent in 2013, and 5.0 per cent in 2014. Inflation expectations continue to be roughly in
line with the Bank's forecast, although anchored near the upper end of the 3 to 6 per cent
target range.
The rand exchange rate has fluctuated generally within a range of R8.10 and R8.50 against the
US dollar since May, and continues to be affected by changing risk perceptions in global
financial markets and domestic issues, such as the tragic events at Marikana.
Capital flows into South Africa remain robust this year, rising by a net R72.5 billion. Investor
interest in emerging market debt and South Africa's inclusion in the Citibank World
Government Bond Index (WGBI) have contributed to the inflows. In recent months, the rand
depreciated against the euro by about 7.5 per cent and about 2.4 per cent against the
US dollar.
The current account of the balance of payments has emerged as a risk to the exchange rate
outlook following the widening of the deficit to 6.4 per cent of GDP in the second quarter. This
widening deficit is a consequence of declining commodity exports and increased imports and
service payments. We expect the current account for 2012 to moderate somewhat to about
51⁄4 per cent of GDP.
Food and petrol prices continue to be the main upside risks to the inflation outlook. Following a
sharp spike in July, global grain prices appear to have stabilised and then moderated
somewhat. Domestic prices of maize and wheat have followed global trends, increasing by
about 40 per cent and 20 per cent respectively between the beginning of June and the end of
July. These increases are expected to filter through to domestic consumer prices in the coming
months.
Following sharp decreases in petrol prices earlier this year, since August, the price of petrol
has increased by a cumulative R1.15 per litre. A further increase is expected in October. These
petrol price increases are driven by international oil prices, which reached US$117 per barrel
on 14 September.2
Oil prices have moderated in recent days to US$110 per barrel as Saudi Arabia committed to
increase the supply of oil, but geo-political factors will remain a source of underlying volatility in
the oil price.
Creating confidence
With this backdrop in mind, let me turn now to say a few things about how we might think about
steps to improve confidence in South Africa and the region.
As some of you will know, we participate in many international forums, the G20, the governors'
board of the IMF, the Financial Stability Board in Basel and the Bank for International
Settlements, among others. Participation enables us to give voice to our concerns about the
trajectory of the world economy, make suggestions on how to approach or resolve problems,
and influence the development of regulatory frameworks that affect us. And yet, there is little or
nothing we can do, other than express our views, to help other countries find their way out of
the difficult prevailing economic circumstances.
The spill over of global factors to our economy can be profound, changing the size and
direction of capital flows, global inflation, trade, commodity prices, and more.
This means that as South Africans, we need to develop the policy and regulatory frameworks,
and adjust our policy stance, to do as much as we can to offset harmful economic effects from
abroad while taking advantage of the beneficial dynamics. Above all, it means encouraging
local economic growth and development, including the development of an active, integrated
regional economy.
Our basic macroeconomic policy framework cushions against global economic shocks. It
allows for flexibility in our approach to achieving the inflation target. The Reserve Bank has the
responsibility and the latitude to identify and understand shocks to consumer prices as being
temporary or permanent, and to view inflation pressures alongside economic conditions and
developments in key markets. The gap between the economy's potential growth rate, which is
currently 3,5 per cent, and its actual growth performance is an important factor in
understanding the domestic economy. South Africa's economic stability is further supported by
a macroprudential framework that has adjustable limits to the foreign currency exposure of
South African households and institutions.
The inflation targeting framework allows the exchange rate to be determined more fully by
market forces than under a policy framework that tries to fix the currency. This has various
advantages, with perhaps the key one being that movements in the currency help to moderate
the very forces causing the currency's value to move. When the currency depreciates,
moreover, the costs to some economic agents are balanced by gains to other agents, like
exporters. This in turn reduces the cost of international contagion to the domestic economy.
This is a lesson learned well in some Nordic economies. Exchange rate flexibility has critical
macroeconomic advantages for small open economies that either have diversified trade and
financial connections to other economies and regions, or that desire some autonomy to
determine their own monetary policy. Sweden and Norway, for instance, have extensive trade
ties with the Eurozone but also with North America and Russia. Economies much more closely
integrated with larger dominant economies may find fixed exchange rates a more useful way of
maximizing the economic gains of their relationship to the main trading partner.
The floating currency and independent monetary policy become especially beneficial for
economies that need to adjust to negative economic shocks - both self-imposed and external.
Sweden discovered this as it adjusted to a severe balance of payments crisis in the period after
1991.3 It enabled Swedish banks and industry to restructure at a more favourable exchange
rate and allowed the economy to achieve a more sustainable long-run growth path. The current
global crisis provides further support to this notion. Sweden's growth rate rebounded
post-crisis, but should be roughly in line with its average over the previous decade as the
global economy recovers in coming years.
In South Africa's case, the floating currency supported economic growth in the wake of the
Argentine crisis of 2001, and in the current crisis the economy suffered a quite modest decline
in the economy of 1.7% in 2009. Other factors also played an important role in supporting the
economy in this period, including counter-cyclical fiscal policy and sustained high commodity
prices.
Real currency depreciation is, however, only one part of what it takes for economies to weather
adverse shocks or to counter domestic economic developments that weaken competitiveness.
Achieving a new sustainable economic growth rate after a shock or internal adversity requires
economic adjustment - changes in rates of return to different economic activities and shifts in
labour and capital between those activities. Adjustment should be easier to achieve when an
economy is reasonably diversified. For South Africa, large commodity, manufacturing, financial
and services sectors helps to keep the economy going even when one or more of them runs
into trouble.
This economic diversification is also critical to thinking about where to get the financial means
to assist the economic adjustment process. And here an important idea comes from Norway,
with which South Africa shares a commonality in a strong natural resource base. The idea is to
shepherd natural resource earnings and use it for long term, inter-generational, development.
There are various ways this use of resource rents can be channelled into higher welfare,
through direct transfers of income to households, stronger communitarian claims on private
sector firms involved in extraction, or through more highly developed public services.
But achieving anything via these channels depends on some ground rules being set out and
protected in policy, regulation and/or law. One ground rule is the approach taken by the fiscal
authorities to set the taxation of the resource rent at a level commensurate with sustainable
long-term extraction and the life of the endowment. Another ground rule is how to manage the
pay out of the revenues accruing from the resource. The benefit to citizens needs to spread
over generations, rather than consumed up-front. This implies that public borrowing needs to
be carefully managed to ensure that future resource revenues are not committed in advance to
debt repayment. A focus on long-run infrastructure development by the public finance
authorities could help to ensure that additional borrowing pays back the debt without reducing
the benefit of future resource revenues for future generations.
Once all that is in place, how do we benefit from the resource endowment? Clearly there are
various options, with spending to enhance the potential growth rate of the economy the most
important. But where should we focus such efforts? In my view, the greatest gains over the
longest period of time are likely to come out of efforts to develop a well-integrated regional
economy, founded on real economy links of trade, transport, telecommunications, energy, and
labour mobility. These are the fundamentals that enable talent to find opportunity and firms to
grow.
This kind of focus is a far cry from the integration vogue of the last 20 years, which emphasised
the integrating-effects of common monetary systems. Greater regional economic integration
should not be founded on common monetary arrangements. Sweden implicitly recognized that
it was not feasible to be part of a European economic arrangement that approximated an
optimal currency area. And, that after monetary union, it was unlikely that the common
currency would generate the optimal currency area conditions. This was prescient of course as
the Eurozone's present circumstances show.
In the Southern African Development Community a set of ambitious programmes were drawn
up and agreed about 10 years ago, including moving to the Africa-wide monetary
arrangements (agreed by the African Union), a Regional Indicative Strategic Development
Plan, and a macroeconomic convergence framework. The macroeconomic convergence
framework deliberately eschewed formal mechanisms for forcing convergence on the grounds
that asymmetric shocks to regional economies would dominate and more formal arrangements
would lack credibility. Without considering optimal currency area criteria, a convergence
programme needed to be more of a peer review mechanism where policy dialogue and sharing
of ideas could occur rather than an exercise in grilling wayward economic officials.
As a peer review mechanism, the convergence programme should generate some benefits to
SADC members. At the same time, however, African monetary integration initiatives are still
going ahead in various forums, for example initiatives by SADC and the AU, with different and
overlapping timetables, and with inordinate haste in some instances. Unfortunately the thinking
behind these initiatives continues to ignore the criteria for optimal currency areas.
An important lesson of the European crisis is that macroeconomic convergence is not enough.
Fiscal conditions need to be supporting of macroeconomic convergence and of monetary
arrangements, and institutions built to ensure that fiscal policy sustains those conditions over
time. While the need for harmonised fiscal policies was recognised by the architects of the
Eurozone, the issue was dealt with through the Stability and Growth Pact, which has turned out
to be a loose, often ignored and unenforceable agreement that countries would abide by
certain fiscal guidelines. We have seen the implications of the lack of a centralised fiscal
authority, or fiscal counterpart to the ECB. Reaching agreement on, and implementing
monetary policy is difficult enough. Fiscal policy is far more complex and political, as it involves
policy levers that have more pervasive distributional impacts.
At the end of the day, the hard work of developing markets, laying out infrastructure, and
enabling the flow of factors of production will develop our regional economy more effectively
than any monetary arrangement or international institution to enforce sound fiscal policy. Such
economic integration initiatives can be supported by a sustainable and far-sighted resource
revenue policy.
Efforts to develop the regional economy need greater impetus. It is not hard to see why. South
Africa's long-standing economic ties to Europe and North America, important as they are,
made it vulnerable to the collapse of these economies.
African economies have displayed remarkable resilience during the crisis. Although most
countries experienced lower growth, mainly a result of lower global commodity prices, in
general they managed to avoid recession. Unlike South Africa, the trade channel was less
important because of the predominance of intraregional trade, and the stronger trade links with
Asia. Since then, most sub-Saharan African countries have returned pre-crisis growth rates, in
line with those in developing Asia.
Africa is the second-fastest growing region in the world, and this looks likely to continue for
some time. Foreign direct investment into Africa remains quite high, at USD$42.7 billion last
year. This is lower than at its peak of USD$57.8 billion in 2008 but still robust, and reflects a
fall-off in investment to parts of North Africa. For Sub-Saharan Africa, FDI declined from the
USD$34.7 billion achieved in 2008 to USD$27 billion in 2010 and then rebounded to
USD$35 billion in 2011. The rebound was caused by large inflows to South Africa
(USD$5.8 billion) and Nigeria (USD$8.9 billion).4 Direct investment into Africa will continue to
grow as oil and gas exploration continues to expand known reserves and markets for
telecommunications and other services are opened to competition.
Our goal should be to expand trade broadly but not in the interest of trade diversion, but to
grow the level of economic activity in South Africa, the region, and farther flung trading partners
like the Nordic economies. Africa still has a multiplicity of, and in some instances overlapping
regional trade blocs, and has some way to go to achieve full trade integration. Further trade
integration in Africa should be pursued more purposefully, supported by network industry
development.
Conclusion
Confidence is a critical factor in whether our economies sink or swim. South Africa has in place
a range of policy frameworks and a fairly developed level of diversification that cushions the
domestic economy from adverse international conditions. These create confidence for
domestic businesses and have in recent years contributed to inflows of capital from abroad.
We need to build confidence much more, however, by ensuring that the people behind the
numbers are able to respond to the demands of economic adjustment in constructive ways.
Using our resources wisely can provide the means for developing our human capabilities over
successive generations, in part by developing markets and creating economic opportunities
across the region.
Thank you.
19 September 2012 GDP
Annual percentage growth rate
Year Swede Norwa Finlan
n y d
1971 0.94 5.62 2.36
1972 2.29 5.27 7.74
1973 3.97 4.48 6.98
1974 3.2 3.82 3.24
1975 2.55 5.03 1.8
1976 1.06 5.79 0.34
1977 -1.6 4.14 0.24
1978 1.75 3.85 2.92
1979 3.84 4.36 7.12
1980 1.7 4.5 5.39
1981 -0.2 1.55 1.29
1982 1.19 0.12 3.05
1983 1.81 3.87 3.02
1984 4.27 5.89 3.11
1985 2.19 5.35 3.3
1986 2.86 4.04 2.64
1987 3.46 1.78 3.49
1988 2.67 -0.17 5.22
1989 2.78 1 5.08
1990 1.01 1.93 0.51
1991 -1.12 3.11 -6
1992 -1.2 3.52 -3.48
1993 -2.06 2.79 -0.81
1994 4.01 5.05 3.65
1995 3.94 4.19 3.96
1996 1.61 5.1 3.57
1997 2.71 5.39 6.21
1998 4.2 2.68 5.03
1999 4.66 2.03 3.91
2000 4.45 3.25 5.32
2001 1.26 1.99 2.28
2002 2.48 1.5 1.83
2003 2.34 0.98 2.01
2004 4.23 3.96 4.12
2005 3.16 2.59 2.92
2006 4.3 2.45 4.41
2007 3.31 2.65 5.34
2008 -0.61 0.04 0.29
2009 -5.03 -1.67 -8.35
2010 6.13 0.68 3.73
2011 3.94 1.6 2.85

BIS central bankers' speeches
BIS central bankers' speeches