Perspectives on key economic issuesPerspectives on key economic issues

April 2013

Presentation to the Parliamentary Portfolio Presentation to the Parliamentary Portfolio Committee on Finance by the South African Committee on Finance by the South African

Reserve BankReserve Bank

Outline

Context: The global and domestic economy in a nutshell

Selected issues

Unsecured lending

The South African balance of payments

Monetary policy

Context: The global and domestic economy in a nutshell

Continued sluggishness in the world economy:Global real GDP growth slackened in the final quarter of 2012 as advanced economies registered a contraction

2,5%

Recent global developments: a mixed bag

Events in Cyprus have again undermined confidence and cohesion in Europe

Aggressive expansionary policies adopted in Japan seem credible enough to have resulted in expectations of somewhat higher inflation expectations and improved growth

US fiscal dilemmas have been partly resolved but mostly postponed

Sub-Saharan African growth is buoyed by favourable prices of most export commodities, infrastructure spending, and new production facilities becoming operational

BRICS growth has slowed somewhat, particularly in Brazil, but remains brisk when compared with the advanced economies

Global inflation pressures remain muted, especially in the advanced economies

South Africa: Moderately better growth in the final quarter of 2012 as secondary sector picked up while primary

sector contracted further

2,1%

Growth in all the final domestic demand components slackened in the final quarter

C : 2,4%

I : 4,3%

G : -0,7%

Selected issues: Unsecured lending

Banks’ general loans extended to the household sector rose strongly over the past three years

D 19

However, there are tentative signs of moderation most recently, and the intention of some key lenders active in the

market is to aim for slower growth in this business

With unsecured lending constituting less than 15% of total lending to households, the household debt ratio inched lower in

the final quarter of 2012

Selected issues: South Africa’s balance of payments

Inflow of savings from ROW on the back of macro stability & stronger economic growth

-6

-4

-2

0

2

4

6

8

10

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Balance on the financial account of the balance of paymentsPercentage of GDP

Surplus

Deficit

Financial sanctions Post-democratic normalisation

Movement from current-account surpluses in the sanctions era to sizeable deficits in recent years

-8

-6

-4

-2

0

2

4

6

8

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Percentage of GDPBalance on current account

Surplus

Deficit

In recent years, widening current-account deficits reflect weak export volumes, largely due to structural impediments, while

import volumes surged

80

120

160

200

240

280

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Indices, 1994=100Volume of South Africa's imports and exports

Imports

Exports

Import volumes rose strongly, largely driven by rising domestic expenditure

80

120

160

200

240

280

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Household consumption and capital formation

Imports

Indices: 1994=100Real domestic expenditure components and imports

And supported by growth in remuneration between 2008 and 2010

Digesting the current-account deficit

A significant part of the deficit is attributable to imports of capital goods that are needed to address infrastructure backlogs, modernise the production structure and facilitate higher exports in future

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Rm, 2005 pricesReal fixed capital formation by government and public corporations

Reflected in part by rand weakness

The South African rand has a floating exchange rate, so that deficits or surpluses deemed unsustainable by market participants result in exchange rate adjustment; there is an inbuilt shock absorber at play

However, large exchange rate movements may have implications for inflation and necessitate policy adjustment

Exchange rate trends vary across emerging markets and commodity producers

South Africa has also become more robust in the face of possible external shocks through building up the country’s

stock of international reserve assets

Selected issues: Monetary policy

Monetary policy has remained expansionary, with the nominal policy rate at its lowest level in more than three decades to

support the economic recovery

Inflation is inside the target range, and a trimmed mean measure of underlying inflation has been added

Trimmed mean

Headline CPI

Market expectations are for short-term interest rates to increase moderately in 2014

This proxy for expected inflation has hovered slightly above 6 per cent for most of the past two years

0

2

4

6

8

10

12

14

2006 2007 2008 2009 2010 2011 2012 2013 2014

Per centActual Forecast

Target range

50% Confidence interval

75% Confidence interval

March MPC meeting: Inflation outlook has deteriorated slightly due to a more depreciated exchange rate and higher petrol prices, but is still projected to be within

the target range over the effective policy time horizon

Targeted inflation

2013Q3 6,3

2014Q4 5,2

Source: SARB core model

An ongoing concern of the MPC is that administered price inflation remains well above the inflation target range; greater

moderation and discipline are needed

Conclusion

The global picture is one of sluggish growth, with the advanced economies registering a slight contraction in the final quarter of 2012

Domestic growth continued to be sluggish but less so than in the third quarter

Capital inflows in various forms have been sufficient to fully finance the deficit on the current account

Inflation remains inside the target range, and measures of underlying inflation are currently below the headline inflation rate

Monetary policy is mindful of the need to support growth – to this end South Africa currently has the lowest nominal policy interest rate in 3 decades