SA Reserve Bank: Quarterly Bulletin

Quarterly Bulletin

The global economic recovery continued in the third quarter of 2010, characterised by a considerable degree of divergence in economic performance and policy direction between countries and country groupings. Emerging-market economies continued to record stronger economic growth than developed economies. Monetary policy was tightened in a number of countries in order to obviate the possibility of overheating of the economy with the associated risk of escalating inflation. However, very low interest rates were maintained in the euro area, Japan, the United Kingdom (UK) and the United States (US). The US went further by stepping up quantitative easing. In the euro area concerns about fiscal sustainability and financial stability in Ireland intensified, with a steep increase in yields on Irish bonds being recorded. By late November the Irish authorities had entered into an agreement with the European authorities and the International Monetary Fund (IMF), providing for a large support package alongside a programme of fiscal consolidation.

Patel's New Growth Path

In summary

• Create five million jobs over the next 10 years, especially in the green economy, agriculture, mining, manufacturing and tourism.
• Infrastructure investment will focus on energy, transport, communication and housing.
• An African development fund will be established to invest in African infrastructure.
• State agencies, including the Reserve Bank, will be reoriented to ensure the state "is not hostage to market forces and vested interests".
• Monetary policy will be looser to support a more competitive exchange rate.
• A state mining company and state bank must be established.
• Wage settlements will be moderate to save jobs, create jobs and address inequality. This includes a "modest increase above inflation" for employees earning between R3000 and R20000 a month, increases pegged to inflation for those earning between R20000 and R45000 and pay caps or increases below inflation for those earning over R45000.

South African development finance institution debt levels to jump

Speaking at the Industrial Development Corporations (IDC) annual results presentation yesterday, CEO Geoffrey Qhena said the IDC will spend ZAR100bn on industrial development over the next five years.

Qhena said that the corporation’s “involvement with the Industrial Policy Action Plan (Ipap) will result in us investing much more”.

Ipap, which was tabled in Parliament in February 2010, builds on the country’s National Industrial Policy Framework and represents the South African government’s efforts to “promote the countries long term industrialization and industrial diversification”.

Rating agencies more upbeat on SA economy, but warn that global risks are still a concern

Rating agency Standard & Poor’s offered a more upbeat outlook for the South African economy owing, in part, to some opportunity for successful spin-offs from the Soccer World Cup, which ended last night.

S&P’s managing director for South Africa and sub-Saharan Africa, Konrad Reuss, said that growth in the country has returned at “an astonishing rate” and that the World Cup should help to add “some impetus and momentum to the robust pace”. Reuss said that there was also further positive news for the fiscal side of the economy when it came to revenue intake, while the World Cup could also help in terms of capital flows and investment into the country.

COSATU shocked by jobs statistics

The Congress of South African Trade Unions is shocked at today’s report by Statistics South Africa that the country lost 79,000 jobs in the first quarter of 2010.

From January to March, employment in the formal, non-agricultural economy fell by 1% - to 8.08 million. This comes on top of the loss of 870,000 jobs last year. Then we were in the midst of a major recession which pushed the unemployment rate up to 25.2% - 32.5% if you include those who have given up seeking work.

In the first quarter of 2010 however, the economy expanded by an annualised rate of 4.6%, yet still the jobs are disappearing! The construction industry alone lost 7,000 jobs in the first quarter from the previous three months compared with the same period last year, mainly from the completion of the World Cup stadiums.

Overvalued rand constrains economy

The Bureau for Economic Research (BER) has revised its growth forecast for SA this year up to 3,4%, saying that if the global recovery continues, the outlook “is fairly promising”.

Its previous growth forecast for this year, affirmed in February, saw the economy expanding by 2,7% and quickening to 3,5% next year.

Its latest forecast for next year was little changed at 3,55%.

Quiet corruption

Several factors effect economic growth, the spotlight has be placed on interest rates, which is only one of them. More important is corruption, which retards economic growth directly by lowering productivity, and indirectly by
restricting investment. One lesser explored forms of corruption is “Quiet corruption”

Watch the slideshow Quiet Corruption: Impact on Africa.

“Quiet corruption” – the failure of public servants to deliver goods or services paid for by governments – is pervasive and widespread across Africa and is having a disproportionate effect on the poor, with long-term consequences for development, according to a new report from the World Bank.

The global crisis and monetary policy

In South Africa, there has been considerable focus on inflation targeting. The debate has generally revolved around the impact of monetary policy on domestic growth. Globally, there has also been a renewed focus on inflation targeting, but for very different reasons.

The argument put forward by, amongst others, Bill White, formerly of the BIS, argues that inflation targeting contributed to the global crisis precisely because it was too successful. The period of the 2000s was one where global inflation was low and, in terms of the narrow focus on inflation, it meant that central banks could keep interest rates at very low levels.

These low interest rates, the argument goes, led to excessive credit extension and asset bubbles in the housing and equity markets, and to the lending excesses that ultimately caused or exacerbated the crisis. In other words, by focusing too narrowly on inflation, monetary policy ignored the financial stability implications of low interest rates.

Sustainable growth and quickie quicksands

FNB Rex Column, by Cees Bruggermans

An economy that grows together stays together for the long haul. But an economy only expanding in some parts while reversing thrust in others does what airplanes usually do at 37000 feet when you try that kind of tomfooling. They somersault and nosedive, potentially breaking up in midair.

It isn’t as if we aren’t experienced in somersaulting and nosediving, but every expansion brings its own temptations, history easily forgotten when in a tearing hurry to deliver politically to the baying masses.

For those who haven’t quite figured this out yet, ideally demand expands uniformly and supply responds uniformly.

Nene: Inflation targeting will remain

Excerpt from the Address by the Deputy Minister Of Finance: Nhlanhla Nene on the impact of the budget on the transformation of the economy, 5 March – Bull Nose Maponya Mall Soweto

Sound policy foundations
... 
Part of South Africa’s success over the last decade can be attributedto the stabilising influence of the Reserve Bank’s inflation targeting policy. This policy will remain in place, although we will establish and maintain an open dialogue on this policy stance with our social partners. Part of this dialogue will no doubt require the Reserve Bank to demonstrate that inflation targeting necessarily takes into account a broad set of factors such as growth, employment and exchange rates. Price stability is important to people who have an income that cannot be augmented by other means when things go bad. Keeping inflation low is also an important part of ensuring a competitive real effective exchange rate, but this alone cannot raise our productivity. Competitiveness is driven over time by improving skills, reducing the costs of doing business, more efficient logistics systems and higher investment ...