South Africa
...e next scheduled meeting is only a month away. The result of this “special” meeting was a 100bp rate cut. Strangely the MPC statement mentioned nothing to indicate why they called the meeting. The statement simply detailed recent economic developments and then stateed that the decision for the meeting was part of a “continuous process of keeping the monetary stance under review” and “should not be interpreted as a move to a more aggressive lowering of interest rates”. With worse than expected second quarter growth the Reserve Bank may have wanted to speed up the monetary easing policy. Another reason could be that the Reserve Bank wanted to get some rate cuts in before global rates move higher as global data suggest an earlier recovery than expected. The ZAR strengthened after the announcement, the Reserve Bank would have seen this as good news, as one of their biggest fears is that lower rates will weaken the rand and therefore undo some of the disinflationary pressure that has been created over the past 12 months. According to the Reserve Bank governor, Tito Mboweni, technically the Reserve Bank is actually inflation forecasting. There is about a 12 to 24 month lag between interest rate changes and inflation, therefore the current changes will have no affect on 2003 inflation. Real economic growth slowed down from and annualized rate of 3 per cent in the second half of 2002 to 1½ percent in first half of 2003. The weaker growth rate was a result of the contraction in real output in agriculture. Excluding agriculture the economy grew at 2% in the first half of 2003. Preliminary estimates indicate that to acquire a growth rate of about 2 per cent for 2003, and annualized rate of increase of about 1½ per cent has to be realized in the second half of 2003. While South African growth seems weak, annual growth seems to be converging with its major trading partners. Weakness in the world economy caused by the war in Iraq, the outbreak of the Severe Acute Respiratory Syndrome (SARS) caused a reduction in the demand for South African exports which in turn contributed to a slow down in real gross domestic product. Exports where also affected by the recovery in the exchange rate which reduced the international competitiveness of South African producers. Sixty per cent (poor, black, living in rural areas) of South African citizens do not have bank accounts. Making bank accounts cheaper and easily accessible will increase national savings and speed up economic growth. Government officials have be reluctant to open unprofitable branches and lend more to the poor as this could cause depositors and investor to withdraw funds. Exports in July rose despite the strength in rand beating expectations and market consensus. Year to date the trade surplus for 2003 is 15.1 billion ZAR well below the 25 billion ZAR recorded in 2002 for the same period. A positive trade balance bodes well for the ZAR and supports a slowdown in inflation. Exports seem to be unaffected by declining economic growth in US, Europe, United Kingdom and Japan. Exports were helped to a large extent by an increase in precious metals and stones (1.9 billion ZAR). It takes 8-12 months for the currency to impact the trade balance. A trade surplus of 3.3 billion ZAR is needed to keep the current account in balance. Even though the July trade balance was better than expected the current account is in deficit. In 2002 the current account recorded its first surplus (on an annual basis) since 1994. Gold exports where boosted by a significant rise in the gold price in 2002, whereas the volume of the country’s net gold exports fell back by 1 per cent compared to 2001. In the first half of 2003 the physical quantity of gold exported declined by a further 9½ per cent, mainly related to a reduction in the physical production of gold by the mines. In rand terms, however, the gold price lost some of its sparkle in the first half of 2003. The appreciation of the external value of the rand drove down the average rand price of gold to R2 813 per fine ounce in the first six months of 2003 compared to R3 242 in 2002 as a whole. Consequently the value of net gold exports contracted strongly in the first half of 2003. New Partnership for Africa’s Development (NEPAD) aims to tap massive Western aid for rapid development of the world's poorest continent in return for a commitment by its leaders to good governance and democracy. Although NEPAD is endorsed and supported by first world, Africa will have to show its commitment to democratic principles in order to reap the benefits which could be reach from the NEPAD declaration. (I still need to do more research) Investec’s () Purchasing Managers Index for Manufacturing for August came in at 50.3 compared to June 45.4 and July 50.6. Business activity came in higher at 51.7 compared to June 47.8 and July 50.2. Both this indices are indicating an expansion whereas new sales orders for August came in lower at 49.3 indicating a contraction. The price index for August came in lower than the 50 mark but higher than previous months, indicating a rise in producer prices and a sign that deflationary pressure in producer prices is coming to an end. The South African Chamber of Commerce (SACOB) releases monthly trade management indices. The Trade Activity Index (TAI) is a current conditions index measuring trade activity for the month in question. The TAI had a high of 60 in November 2002; in May it took a major dip has improved slightly over the past few months. Major affects are poor global growth, strong ZAR and weaker domestic demand. Current sales went below 50 showing that sales are subdued, selling prices remain unchanged, positive for inflation and interest rate outlook. Labor market conditions weakened further in August, new jobs are just not being created. The Trade Expectations Index (TEI) is a 6 month forward looking expectations index. August’s figure reflect a cautious attitude. Sales and new orders are expected to increase. Inventory levels are seen declining showing that there is either a level of uncertainty or a cost of carrying inventories. Selling price expectations are up nad purchasing price expectations are down. Labor market conditions remain poor. SACOB also have a business confidence index which hit at a record in August. The Business Confidence Index rose to 110.9 in August from 108 in July, and beating a previous high of 110.6 in February 2001. The new high seems to be at odds with an economic growth rate that does not inspire business confidence. Producer price inflation movements where largely led by changes in the exchange rate. In September 2002 prices of imported items drive the twelve month rate of increase in producer prices to a maximum of 15.4%, before declining abruptly, on account of the recovery in the exchange rate, to a level of 1.2 per cent in May 2003 – its lowest in 35 years. Producer price growth for July came in at 2.3 per cent and slowed again in July to 1.5 per cent. Consumer inflations typically trails producer inflation by about 3 months. On 16 May 2003 a milestone was achieved when the NOFP of the Reserve Bank recorded its first ever positive balance, having been in an oversold dollar position of more than US$23 billion as recently as 1998. This was achieved by a new €1,25 billion global benchmark bond issued by the National Treasury, the proceeds of which were used to bring NOFP to a positive figure. The Reserve Bank can now start building the reserves of the country. In the 1990’s the Reserve Bank tried to defend the rand against speculators which resulted in the Net Open Forward Position (NOFP) peaking at -$23.8 billion. Mboweni has vowed that he will not make the same mistake. Over the past year the rate of increase in the monetary aggregates slowed down significantly, consistent with the slowdown inflation, the appreciation on the rand and the monetary policies pursued by the authorities. For instance, twelve-month growth in the broadly defined money supply (M3) receded from around 20 per cent in the early months of 2002 to less than 10 per cent in most of the first half of 2003. Year to date there has been a slow down in corporate sector holdings, whereas households deposits rose. The sustained high increase rate in household deposits could partly be attributed to income tax relief given to individuals, relatively high wage settlements and by banks offering profitable interest rates on deposits. Borrowing by households and companies, known as the private-sector credit extension (PSCE) rose very rapidly in the early months of 2003. This was mainly due to a change in accounting procedures and regulations in terms of which derivative positions must be reported on the balance sheet on a gross rather than a net basis, this change more than tripled the amount of investments reported by banks. Mortgage advances remained the largest component of total credit extended to the private sector. Growth in other loans and advances, including overdrafts on current accounts, general and credit card advances slowed down significantly from mid-2002 to early 2003. This category is a major source of corporate borrowing and historical data indicate that amongst other economic variables, its trend is usually inversely related to developments in the exchange rate of the rand. Installment sale credit and leasing finance has remained stable over the past few months, financing of motor vehicles accounted for the bulk of the increase. In July money supply and PSCE grew less aggressively than expected. M3 contracted ...