Transcript Sub Saharan African ProspectsE

Insurance Pricing Conference
Inflation & the economy
July 2006
Presented by Luke Doig,
CREDIT GUARANTEE INSURANCE
Outline
• Synopsis of current state of economy & it’s drivers
• Inflation targeting
• Inflation developments
• Sectoral consideration of pricing in:
• Building & construction
• Vehicles
• Property
• Portents
Business cycle vs economic indicators
Bus cycle ('95 = 100)
Percent
175
140
80
Balance on current a/c
Inv entories : GDP
H/H debt : PDI
GFCF : GDP
Business cycle
60
105
40
Almost 7 yrs of economic expansion
70
20
35
0
0
-20
131313131313131313131313131313131313131313131313131313131313131313131313131313131313131313131
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 0506
Source : SARB
Gross capital formation and gross domestic saving (GDS) as a % of GDP
%
35
GFCF of > 8% in ’03 thru ’05 after
four years of < 1%
30
25
20
15
10
60 63 66 69 72 75 78 81 84 87 90 93 96 99
GCF
Savings
SARB
2
5
19
80
19 /01
81
19 /03
83
19 /01
84
19 /03
86
19 /01
87
19 /03
89
19 /01
90
19 /03
92
19 /01
93
19 /03
95
19 /01
96
19 /03
98
19 /01
99
20 /03
01
20 /01
02
20 /03
04
20 /01
05
/0
3
Import volume growth outstripping export volume growth….
Import volumes
Export volumes
180
160
140
120
100
80
60
40
20
0
SARB
Renewed foreign confidence…..
Net capital inflows
Rm
120000
100000
80000
60000
40000
20000
0
-20000
1980
1983
1986
1989
1992
1995
1998
2001
2004
SARB
Reuters CRB Commodities Index
Economic growth, 1947-2005
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 1
4
Real GDP & disposable income per capita (R000, constant 2000 prices)
GDP per capita
25000
23000
21000
19000
17000
15000
13000
11000
9000
Disposable income per capita
•Rising disposable income (structural change) due to
personal tax relief, rising Y from other sources such as real
estate & equity prices (wealth effect) & lower inflation &
interest rates
•Dis Y  4%, 5.7% & 6.6% in ’03 thru ’05 after 6 years of < 3%
68 71 74 77 80 83 86 89 92 95 98
1 SARB
4
Inflation targeting
• Reserve Bank’s mandate in constitution is protecting value of currency
in interests of balanced & sustained economic growth
• Inf. tar. replaced exchange rate management or money supply targeting
• Goal is to achieve & sustain low levels of inflation, i.e price stability
• Rationale is that it helps to anchor inflation expectations
• It requires strong central bank independence & minimal burden of
financing government deficits by central bank
• Target set after consultation between central bank and National
Treasury (i.e. does not have autonomy or goal independence to set
target)
• Sole mandate i.r.o. monetary policy decisions to achieve target (i.e.
instrument independence)
Inflation targeting cont.
• Requires commitment from other parties i.r.o. application of economic
policies, esp. Govt. This also implies that the central bank must be
cognisant of the attainment of sustained high economic growth &
employment creation
• By creation of financial stability, monetary policy fulfills NB
precondition for attainment of economic development
• Why target inflation:
• Inflation has NB implications for redist of income & wealth
• Generally the wealthy can hedge themselves against inflation, but
not the poor (dependent on wage bargaining power)
• Inflation also distorts tax system as generally not indexed
• Been examples of monetary policy adjustments in response to price,
employment, growth & exchange rate developments
• Latest interest rate adjustment largely due to BoP concerns?
Inflation
25
CPI
PPI
CPIX
20
15
10
5
0
-5
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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Months
Source : SSA
CPI inflation, 1974-2005
%
20
15
10
5
0
74
78
82
86
90
94
96
98
0
2
4
SARB
19
98
19 /01
98
19 /07
99
19 /01
99
20 /07
00
20 /01
00
20 /07
01
20 /01
01
20 /07
02
20 /01
02
20 /07
03
20 /01
03
20 /07
04
20 /01
04
20 /07
05
20 /01
05
/0
7
Falling inflation ……
% change in CPI
%
14
12
10
8
6
4
2
0
-2
RSA
Europe
USA
Japan
SARB
Interest rates
Real interest rates
Building & construction trends
• BER 2nd qtr survey:
• Building cost index (accepted tender prices)  17.5% in ’05 & 6.2% in 1h’06
(much closer to building-input-cost inflation as measured by Haylett index,
showing that margins of contractors not widening as much as previously)
• Business confidence of contractors in non-residential sector declined slightly
in q2’06 compared to q1’06 but remains relatively high in historical terms
(notwithstanding slight moderation in business conditions & in growth in
building activity)
• Architects & QS report moderation in business confidence & business
conditions as well as reversal in number of contracts awarded
• Civil engineers experienced  in business confidence, reflecting robust
demand conditions
• Materials & skills shortages pushing up prices
Building & construction trends cont.
• eProp Commercial Property Barometer remains positive & expects to
remain in similar territory in q1’07
• In general, residential (although slowing) ahead of retail (benefited from
consumer boom) which is ahead of industrial (highest manufacturing capacity
utilisation in decades), with office being the laggard (although vacancy rates
been falling since 2003)
• Also, not talking about ‘boom & bust’ but ‘boom & correction’
• FNB sees real non-residential fixed investment growth of 9% in ’06 after 7%
in ’05 & to remain buoyant until 2010
• Lack of longer-term business confidence reduces probability of over-supply of
commercial, negating ‘boom & bust’
• MFA: future optimism dependent on interest rates,  in infrastructural
spend, severity of bottlenecks in supplies of labour & materials, keenness
of competition in tendering & long-term profitability prospects
Vehicle sales
60000
Total v ehicle sales
Cars
50000
40000
30000
20000
10000
0
1 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5
94
95
96
97
98
99
00
01
02
03
04
05
06
Source : NAAMSA
Rand exchange rate
R/Yen
R/$
10
1200
Yen
$
8
1000
6
800
4
600
2
400
0
200
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95
96
97
98
99
00
01
02
03
04
05
06
Months
Source : SARB
Vehicle price trends
• No general vehicle price increase since April 2003 (Econometrix)
• Econometrix foresee 7% vehicles price increase by end-2007 due to Rand
weakness (Euro & Yen)
• Nedbank foresees 6% depreciation in ’06 in R/Yen & 11% next year;
Absa expects stable ’06 & 19% depreciation in ’07 while Standard Bank
sees 5.5% in ’07 after flat ’06
• Nedbank expects R10-12/Euro next year but Standard & Absa foresee
only moderate depreciation
• Strong income growth vs higher fuel prices & interest rates should still imply
that affordability relatively strong when compared historically
80.0%
12.0%
70.0%
10.0%
60.0%
50.0%
8.0%
40.0%
6.0%
30.0%
4.0%
20.0%
2.0%
10.0%
0.0%
0.0%
Debt service costs
H/H debt to dis Y
H/H debt to disposable
income
14.0%
19
1990
1991
1992
1993
1994
1995
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
07
Debt service costs
Household debt servicing
Portents
• Beeld consensus has CPIX at 4.3% & 4.8% in 2006 & 2007 resp. from 3.9%
in ’05
• CPI of 3.4% in ’05 rising to above 4% in ’06 & 4.5% in ‘07
• Reuters Econometer has CPIX at 4.6% & 5.2% in ’06 & ’07 resp. & PPI at
5.6% & 5.5% in ’06 & ’07 from 3.1% in ’05
• Moving from demand-pull pressures to cost-push factors for inflation
• Curr A/C deficit was 1.3%, 3.4% & 4.2% in 03 thru ’05 & 6.4% in q1’06
• Could hit 5% in ’07 – ’08
• 5% -10% rand depreciation possible in ‘07
• Higher fuel prices as well as food (26% weight in CPIX) could test upper end
of 3-6% target guidelines
• Prime to rise from 11% to 12% in ’06 & perhaps higher
• Correction in business cycle, not reversal or downturn