Presentation to the Parliament Committee on Finance The South African economy: recent developments and monetary policy Ben Smit BUREAU FOR ECONOMIC RESEARCH UNIVERSITY OF STELLENBOSCH 28 March 2007
Jan 15, 2016
Presentation to the Parliament Committee on Finance
The South African economy: recent developments and monetary
policy
Presentation to the Parliament Committee on Finance
The South African economy: recent developments and monetary
policy Ben Smit
BUREAU FOR ECONOMIC RESEARCH
UNIVERSITY OF STELLENBOSCH
28 March 2007
OutlineOutline
Overview of the March 2007 SARB
Quarterly Bulletin
The MPC statement of 15 February 2007
The performance of Monetary Policy
Overview of the March 2007
SARB Quarterly Bulletin
Overview of the March 2007
SARB Quarterly Bulletin
The SA economy continues to produce quite high and stable economic growthThe SA economy continues to produce quite high and stable economic growth
-6
-4
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
% c
han
ge
Ave 1985-94:0.8% pa
Ave 1995-04:3.1% pa
5.2%
Growth in the 4th quarter supported by all the main production sectorsGrowth in the 4th quarter supported by all the main production sectors
2006 Share of GDP
Q1 Q2 Q3 Q4 Year 1994 2006
Primary sector -9½ -7¼ -4 1 -4½ 11,9 10,6
Agriculture -18¾ -30 -15 -8½ -13 4,6 2,7
Mining -5½ 3½ ¼ 4½ -¾ 7,3 7,9
Secondary sector 4¾ 7¼ 5½ 8½ 5¾ 27,7 23,0
Manufacturing 3¼ 6¼ 4¾ 8¼ 4¾ 20,9 18,2
Tertiary sector 7¼ 6¼ 4¾ 5¼ 6 60,4 66,4
Total 5 5½ 4½ 5½ 5 100 100
While both household consumption expenditure and gross fixed investment contributed strongly to expenditure
While both household consumption expenditure and gross fixed investment contributed strongly to expenditure
(constant 2000 prices)
-10
-5
0
5
10
15
94 96 98 00 02 04 06
% c
hange
Household consumption exp Gross fixed investm
Household consumption expenditure supported by real disposable income …..Household consumption expenditure supported by real disposable income …..
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Y.o
.Y. %
change
Real household consumption expenditure Real disposable income
…. and by credit extension…. and by credit extension
Household debt as % of disposable income
30
35
40
45
50
55
60
65
70
75
80 82 84 86 88 90 92 94 96 98 00 02 04 06
… and by consumer confidence… and by consumer confidence
-40
-30
-20
-10
0
10
20
30
inde
x
FNB/BER CCI 3m mov ave
2006Q4
1994 election WC soccer bid
announcement
Gross fixed capital formation increased in all three institutional sectors, led by the public corporations
Gross fixed capital formation increased in all three institutional sectors, led by the public corporations
(constant 2000 prices)
80
100
120
140
160
180
200
00 02 04 06
General Govt Public corps Priv enterprises
RMB/BER Business Confidence Index
0
20
40
60
80
100
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
The upbeat overall economic conditions is reflected in, and supported by, continued high business confidence ……The upbeat overall economic conditions is reflected in, and supported by, continued high business confidence ……
•To 81 in 07Q1 from 83 in 06Q4
•Manufacturing ( 78(75))
•Building (90(90))
•New vehicles ( 72(71))
•Retail ( 87(91))
•Wholesale ( 76(88))
Employment continues to recover(BER Surveys: net balances)Employment continues to recover(BER Surveys: net balances)
Wholesale: Gowth in number of people employed
-80
-40
0
40
80
00 01 02 03 04 05 06 07
Manufacturing: Number of factory workers
-80
-40
0
40
80
00 01 02 03 04 05 06 07
Retail: Gowth in number of people employed
-80
-40
0
40
80
00 01 02 03 04 05 06 07
Building Contractors: Growth in employment
-80
-40
0
40
80
01 02 03 04 05 06 00
0
3
6
9
12
15
18
21
J-80 J-85 J-90 J-95 J-00 J-05
CPIX actual 36m mov ave
3-6% target range
CPIX inflation increases but remain in target rangeCPIX inflation increases but remain in target range
January 2007
CPI = 6.0
CPIX = 5.3
PPI = 9.8
… but production prices have increased substantially during 2006… but production prices have increased substantially during 2006
-15
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006
Yo
Y %
ch
an
ge
SA produced goods Imported goods Total
The deficit on the current account increased to very high levels …….The deficit on the current account increased to very high levels …….
-10
-8
-6
-4
-2
0
2
4
6
8
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
% o
f G
DP
Current account: Including / excluding oilCurrent account: Including / excluding oil
-8
-6
-4
-2
0
2
4
6
8
10
1980 1985 1990 1995 2000 2005
% o
f G
DP
Current account Current acc ex oil
The exchange rate has broadly stabilizedThe exchange rate has broadly stabilized
0
2
4
6
8
10
12
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
R/$
R/$ PPP (1970; PPI)
Monetary Policy Committee Decision
15 February 2007
Monetary Policy Committee Decision
15 February 2007
The decision:The decision:
“….the MPC is satisfied that the inflation outlook has
improved somewhat and expects inflation to remain
within the target range for the forecast period. As the
mandate of the Bank is to keep inflation within the
target range, the MPC has decided to leave the repo
rate unchanged for now at 9 per cent per annum.”Statement of the Monetary Policy Committee
15 February 2007 p4
MPC Statement: June 06 – Feb 07MPC Statement: June 06 – Feb 07
Causal factors / Motivation Decision
Inflation outlook
Breach target
Strong demand
Current account deficit
Oil price Repo rate
MPCA 8/06 Deteriorate Q107 Yes Concern Concern +0,5
MPCS 3/08 Deteriorate Q107.Q207 Yes ConcernLess
concern+0,5
MPCS 12/10 Upside riskAround 6% Q2-Q407
Yes ConcernLess
concern+0,5
MPCS 7/12 Improved Q207 YesDeficit
improve somewhat
Concern +0,5
MPCS 15/02 Improved No YesSharp
deterioration (but oil)
Less concern
0
MPC statements on the BoP current account deficitMPC statements on the BoP current account deficit
1. “In previous statements the MPC expressed concerns about the expanding deficit on the current account of the balance of payments. Current account deficits are a reflection of higher domestic expenditure and in themselves inflationary. There is however a possible risk to the exchange rate if the deficits are perceived to be unsustainable, particularly if the deficits are reflecting higher consumption expenditure.”
MPCS 3/08/07
2. “We have explained on a number of occasions that the MPC does not have a target for the current account, nor does the MPC view deficits on the current account to be inflationary in themselves. The mandate to the Bank is to maintain inflation within the target range of 3 to 6 per cent. The risk to inflation arises if the market perceives a particular level of the current account to be unsustainable, which could have implications for the exchange rate and, consequently for the inflation rate. To date the current account deficit ….. Has been adequately financed. Current developments appear to indicate that the current account deficit will continue to be adequately financed given the coherent macroeconomic policy framework of the country and positive growth prospects.”
MPCS 15/02/07
Current account vulnerabilityCurrent account vulnerability
Balance of payments as % of GDPBalance of payments as % of GDP
-10
-8
-6
-4
-2
0
2
4
6
8
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
% o
f G
DP
Current account balance as % of GDP – 2005 relative to EM countriesCurrent account balance as % of GDP – 2005 relative to EM countries
-8 -6 -4 -2 0 2 4 6 8 10 12 14
TURKEY
PANAMA
SOUTH AFRICA
EL SALVADOR
PAKISTAN
URUGUAY
THAILAND
COLUMBIA
TUNISIA
DOMINICAN REPUBLIC
ECUADOR
MEXICO
CHILE
AVERAGE
MOROCCO
INDONESIA
PERU
ARGENTINA
BRAZIL
EGYPT
PHILIPPINES
CHINA
NIGERIA
2006
X (-6,4)
Whose the culprit?Trade balance & services and income balance as % of GDPWhose the culprit?Trade balance & services and income balance as % of GDP
-8
-6
-4
-2
0
2
4
6
8
10
12
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
% o
f G
DP
Trade blance Services balance
(Disappointing) export and (booming) import volume indices and the Terms of Trade(Disappointing) export and (booming) import volume indices and the Terms of Trade
95
105
115
125
135
145
155
165
175
00 01 02 03 04 05 06
Exports Imports Terms of Trade
2000 -2006
Exports: 100 121.4
Imports: 100 171.3
ToT: 100 113.6
Saving and investment as % of GDPSaving and investment as % of GDP
13
14
15
16
17
18
19
20
21
2000 2001 2002 2003 2004 2005 2006
% o
f G
DP
Savings Investment
2000 -2006
Saving % GDP: 15.8 13.9
Investment % GDP: 15.9 20.3
Does the current account matter?
Empirical evidence
Does the current account matter?
Empirical evidence
Size of deficits (Edwards (2004,2005))
– 157 countries, 1970 – 2001
– >50% of countries, deficits >3,1% of GDP
– >75% of deficits (3rd quartile) ≤ 7,2% of GDP
– 26 of 157 countries experienced high deficits for 5 years or longer once
Reversals
– Edwards (2005)
Incidence 9,2% (11,8%)
– Milesi-Ferretti and Razin (1997)
116 reversals in 60 countries (1974 – 1990)
– Output cost of reversals
SA’s resilience to sudden stop/reversalsSA’s resilience to sudden stop/reversals
Floating currency
Borrowing small part of inflows
Rand denominated foreign debt (“original
sin”)
Forex reserves improve
MPC – The right decision?MPC – The right decision?
Trade-off between improved inflation outlook and continued strong domestic demand and the associated balance of payments deficit.
Choice determined by judgment of risk of deficit becoming unsustainable and associated exchange rate, inflation and output consequences and of strong demand fuelling inflation.
Performance of Monetary PolicyPerformance of Monetary Policy
Inflation recordInflation record
1
2
3
4
5
6
7
8
9
10
11
12
00 01 02 03 04 05 06 07
CPIX
Anchoring inflation expectationsAnchoring inflation expectations
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
2003Q1 2004Q1 2005Q1 2006Q1
Average Analysts Business Labour
2006Q4
Handling of supply shocksHandling of supply shocks
“The response of monetary policy to supply shocks
appears to be countercyclical, i.e. dispelling somewhat
the idea that monetary policy may have been overly
procyclical in response to supply shocks.”
Frankel, Smit & Sturzenegger (March 2007):
Macroeconomic challenges after a decade of success, p68
Policy transparencyPolicy transparency
“Central bank transparency in South Africa has improved
greatly under inflation targeting, from a score of 5 in
1994, to 9 in 2004 (out of a possible 15)”
Aaron and Muellbauer (March 2007):
Transparency, Credibility and Predictability of Monetary Policy in South Africa, Mimeo, p5
Forecast accuracyForecast accuracy
“… no other forecasting agency consistently produced
more accurate inflation forecasts than the Bank in the
period May 2003 to December 2005.”
SA Reserve Bank (Nov 2006):Monetary Policy Review, p31
Other issuesOther issues
Contribution to output and price stability
Room for the “pursuit” of other goals
such as exchange rates/Bop, growth
Overly conservative / too high interest
rates
Bureau for Economic Research
Economic information that works for you
Bureau for Economic Research
Economic information that works for you
Website: www.ber.sun.ac.za
E-mail: [email protected]
Tel No: 021-887 2810
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