T T Mboweni: A review of economic and financial developments in South Africa
during 2002
Address by Mr T T Mboweni, Governor of the South African Reserve Bank, at the dinner for Heads of
Foreign Missions, Pretoria, 10 December 2002.
* * *
Mr El-Herfi, Acting Dean of the Diplomatic Corps,
Ambassadors,
High Commissioners,
Heads of International organisations,
Senior management of the Department of Foreign Affairs,
Senior management of the Reserve Bank
and honoured guests, all protocol observed
1. Introduction
Integrating dinner with discussions of finance is not unfamiliar to central bankers. The key ingredients
are good food and brevity and relevance of the discussion. I will do my best to adhere to the latter two
ingredients. The former is out of my hands.
2. The global economy in 2002
The developed countries were already experiencing a slowdown in economic activity in 2001 when the
events of 11 September shocked the world. Transport and tourism in particular were hit very hard, with
some fallout continuing to this day. World growth in 2002 has been subdued and for the full year is
expected to amount to around 2,8 per cent, slightly better than the 2,2 per cent recorded in 2001 but
still way below the 4,7 per cent recorded in 2000.
Alongside the uninspiring growth performance, however, inflation has been very low. In Japan prices
are in fact falling, while in the Euro area the latest average inflation rate is 2,2 per cent. In the United
States, inflation is running at 2,0 per cent.
Beyond the lacklustre world growth and low inflation, there were a number of key events in 2002.
Argentina's one-to-one peg of the peso to the American dollar, that had led to a significantly
overvalued peso, collapsed. Against the one-to-one rate at the end of last year, the current exchange
rate is 3,54 peso per dollar. The Argentinian economy has been contracting, while their inflation rate
has accelerated to more than 40 per cent.
Brazil experienced some problems, partly related to the country's high government debt and its
linkages with troubled Argentina. IMF funding is helping to soften the adjustment process.
In the Northern reaches of the American continent, the demise of Enron led to disillusionment with
corporate governance and accounting practices. This has led to a greater awareness of the need for
sound structures and practices, revised codes of conduct and a sharpening of regulation.
And, closer to home, there were unfavourable climatic conditions in large parts of Southern Africa
together with policies in some of our neighbouring countries which disrupted food production. As a
result, the region is becoming dependent on large-scale imports of food.
3. The South African economy in 2002
The exchange rate of the rand has been at the centre of most discussions of economic developments
this year. Against a basket of currencies the rand lost 34 per cent of its value during 2001 - mostly in
the final two months of the year. Its gyrations were the topic of an official enquiry led by Judge
Myburgh. Not surprisingly, it was found that quite a number of factors could have contributed to its
sharp depreciation. Some of these factors reinforced each other, causing an exceptional overshooting
of the exchange rate. At one stage importers speeded up payment for imports, afraid that they would
otherwise have to pay even more rand for their import consignments, while at the same time exporters
delayed repatriating their export proceeds, expecting that by doing so they would be able to exchange
their foreign earnings for even more rand later on. Of course, this could not last indefinitely. With
imports becoming horrendously expensive and with South African exports extremely price-competitive,
supply and demand fundamentals came to the fore and the exchange rate had to turn around. From
the beginning of 2002 to date the rand has appreciated by 24 per cent against a basket of currencies.
To illustrate what happened to the rand's international purchasing power, in terms which may be
diplomatically familiar: a 25 pound dinner in a London restaurant would have set a South African
diplomat back R280 at the beginning of 2001. Just before Christmas 2001, it would have cost the
diplomat R500. Today, the same meal's bill will amount to R360.
Looking back at 2002, the competitiveness gained by the South African economy on account of the
(overdone) exchange rate depreciation helped to smooth domestic production and income during a
period of general weakness in the world economy. Import substitution progressed and South African
exports penetrated various markets quite successfully. This was helped along by improved market
access. In this regard, the Africa Growth and Opportunity Act of the United States should be
mentioned, along with the European Union Free Trade Agreement and the Southern African
Development Community Free Trade Agreement. Most importantly, numerous South African
companies are reorienting their strategies, aiming to structurally raise their share of output flowing to
the export market. In the process, upcoming markets such as China and India are also receiving due
attention.
Tourism is also doing well in spite of, and perhaps even because of, the unease following the
September 11 attacks. South Africa is a pleasant destination. The number of non-residents visiting
South Africa rose from 4,8 million in the first 10 months of 2001 to 5,3 million in the same period of
2002. Visitor numbers from virtually all countries have increased significantly, with the exception of
Argentina - the worsening of the exchange rate in that instance caused a decrease from 13 000
persons in the ten months to October last year to 4 000 this year.
Under these circumstances, South Africa maintained a healthy growth rate in the first three quarters of
2002. It seems likely that growth in real gross domestic product this year will amount to around 3 per
cent, compared to 2,8 per cent in 2001. It is also heartening that the growth is spread across virtually
all sectors of the economy.
A further gratifying aspect of the economy's current performance is the acceleration in real fixed
capital formation, so necessary to boost the future production potential of the economy. From a
contraction in 1999, real fixed capital formation reversed to 0,8 per cent growth in 2000, 3,6 per cent
growth in 2001 and 7,6 per cent year-on-year growth in the third quarter of 2002. Once again, the
acceleration is fairly widely spread over the various sectors of the economy.
The accusation is often heard that South Africa grows, but without creating jobs for the huge number
of unemployed people. However, in the second quarter of 2002 our quarterly surveyed non-agricultural
employment series picked up, rising by about 0,6 per cent. This may be early days, but it stands in
welcome contrast to the declining trend in such employment recorded since 1989.
Sadly, the 2001 fall in the external value of the rand caused a strong surge in inflation in 2002. This
was first and foremost visible in production prices, which accelerated from a twelve-month rate of
increase of 7,8 per cent in September 2001 to double-digit rates right from January 2002, peaking at
15,4 per cent in both August and September. In October it abated somewhat to 14,6 per cent.
Consumer price inflation took longer to pick up. Twelve-month CPIX inflation accelerated from 5,8 per
cent in September 2001 to double-digit levels from August 2002, reaching 12,5 per cent in October.
Both at the production and consumer level, food price inflation picked up dramatically, reaching
maximum year-on-year levels of 30 and 20 per cent respectively. This was related to the exchange
rate depreciation coupled with the need to import grain into the Southern African region.
In the face of these inflationary forces, and given the imperative to work inflation down again to the
6 to 3 per cent target range, the South African Reserve Bank responded by tightening monetary
policy. On each occasion, in January, March, June and September 2002, the Reserve Bank's
repurchase rate was raised by one percentage point, leading to corresponding increases in the
interest rates charged by commercial banks. The banks' prime overdraft rate for instance rose from
13 per cent at the beginning at the year to 17 per cent at present. At that level, the public is clearly
feeling the impact of monetary policy. Our assessment is that this will be sufficient to bring inflation
down in a fairly dramatic fashion during the course of next year. But dishing out this medicine doesn't
make the Bank very popular.
Partly in reaction to the tighter monetary conditions, growth in credit extension has come down from a
twelve-month rate of 15,6 per cent in January 2002 to 8,8 per cent in October. Growth in M3 has been
more sticky, receding from 19,7 per cent to 17,8 per cent over the same period. This still doesn't leave
any room for complacency, but calls for ongoing scrutiny of all available information about our
economy.
An extremely positive element of our financial situation is the reduction in the Reserve Bank's
exposure to foreign exchange rate risk, as captured in the decrease in the our net open foreign
currency position (NOFP). This has receded from US$23,2 billion in September 1998 to $4,8 billion at
the end of 2001 and $1,7 billion at present. At the same time, South Africa's foreign exchange reserve
level is quite strong at around 20 weeks' worth of imports, double as much as 5 years ago.
It is my pleasant duty to also point out that South Africa's government finances are in a healthy shape,
with tax revenue again exceeding earlier projections and the deficit before borrowing for 2002/03 now
projected to amount to only 1,6 per cent of GDP.
Less pleasant to point out are the setbacks to our banking system in early 2002. One troubled bank's
business was eventually sold off to other institutions, while a second medium-sized bank was acquired
by one of the big four banks. This episode tested numerous depositors' and bankers' nerves to the
extreme; many elderly investors now choose to keep their deposits with more than one institution,
which is a wise move.
4. Financial markets
South Africa's financial markets are robust, liquid and well-developed. Turnovers remained brisk in
2002 to date. In the bond market, for example, the value of turnover in a single month is approximately
equal to South Africa's annual gross domestic product of one trillion rand. Non-residents also take a
keen interest in these markets. In an average month non-residents buy more than a R100 billion in
bonds and R18 billion in shares on our bourses. They of course usually sell bonds and shares of a
roughly equal amount, but some net inflow or outflow is recorded from month to month. During the first
half of 2002 nonresidents bought a net amount of R13 billion in shares and bonds on the South
African formal exchanges, but sold R17 billion during the third quarter. Further net sales in October
were followed by net purchases in November. Predicting foreign portfolio capital flows is clearly
dangerous, only to be surpassed by bargaining on net inflows from that source.
South African share prices performed well up to May 2002, but then fell back sharply, partly in
sympathy with foreign bourses as Enronitis took hold. In rand terms, the JSE overall price index is
currently 10 per cent down on its value at the end of last year. Nonresidents, because of the 24 per
cent stronger exchange rate of the rand, nevertheless made substantial profits on the JSE in foreign
currency terms. Those who had invested in South African bonds or real estate in early 2002 of course
recorded even better returns, since in contrast to shares those asset prices also rose handsomely in
rand terms.
But beyond these events on the formalised exchanges involving portfolio capital flows, South Africa
has an important role to play in the area of foreign direct investment. In particular, numerous direct
investment projects into other parts of Africa are being undertaken, fitting in under the broad NEPAD
initiative. South Africa's involvement ranges from the Mozal smelter in Mozambique to SAA's
participation in Tanzania, and includes hotels, factories, cellphone operators and shops in numerous
countries on the African continent. South Africa's investments in Africa at the end of 2000 exceeded
R24 billion.
Other continents are also attracting the attention of South African companies that are leaders in their
respective fields and some of these companies have sought listings on foreign exchanges. Companies
like the resources giants Anglo American and Billiton, the financial services companies Investec and
Old Mutual, the brewer SABMiller and Sappi, the pulp and paper company now have global reach and
are making their presence felt beyond their home market.
5. Conclusion
In short, then, the South African economy is in fairly good shape, with the exception of the inflationary
consequences of the 2001 exchange rate depreciation. And the four interest rate increases as well as
the notable appreciation of the rand in 2002 will in due course brake the inflation spiral decisively.
While my address tonight focused on broad macroeconomic trends, it is worthwhile to stress that the
macroeconomy is built up from the microeconomic decisions and actions of millions of participants.
Real life happens at the microeconomic level. As diplomats you will know that it is your individual
encounter with the businessperson or potential tourist that counts - where interest in South Africa or in
your country is either nurtured, or nipped in the bud. A sparkling, enthusiastic, well-informed diplomat
is a catalyst forging friendship and economic ties across borders. Indifference or ignorance sabotages
these linkages.
Accordingly, I would like to challenge you to continue deepening your knowledge of our country, its
people, its economy, its incentives, rules and regulations, its magnificent places. True expert
knowledge takes many years to build up, plus a lifetime of ongoing study to maintain. But it enables
one to sparkle, to catch the attention of the key investor or potential tourist, to make things happen. I
wish you well in 2003 and beyond in sparkling for your fraternal countries, forging links that are crucial
to our mutual economic success and our ability to understand and appreciate one another.
Once again it is our honour and privilege to host you at this function which has become one of the
highlights of the calendar of the South African Reserve Bank. May the friendships between South
Africa and your countries continue to go from strength to strength.
Thank you.