Transcript Recommending a Strategy

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
Outline
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
The SA economy continues to produce
quite high and stable economic growth
8
5.2%
6
Ave 1995-04:
3.1% pa
% change
4
Ave 1985-94:
0.8% pa
2
0
-2
-4
-6
1980
1985
1990
1995
2000
2005
Growth in the 4th quarter supported by all
the main production sectors
2006
Q1
Q2
Q3
Q4
Year
1994
2006
-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
4¾
7¼
5½
8½
5¾
27,7
23,0
3¼
6¼
4¾
8¼
4¾
20,9
18,2
7¼
6¼
4¾
5¼
6
60,4
66,4
5
5½
4½
5½
5
100
100
Primary sector
Secondary sector
Manufacturing
Tertiary sector
Total
Share of GDP
While both household consumption expenditure
and gross fixed investment contributed strongly
to expenditure
(constant 2000 prices)
15
% change
10
5
0
-5
-10
94
96
98
00
Household consumption exp
02
04
Gross fixed investm
06
Household consumption expenditure supported
by real disposable income …..
10.0%
8.0%
Y.o.Y. % change
6.0%
4.0%
2.0%
0.0%
- 2.0%
- 4.0%
91
92
93
94
95
96
97
98
99
Rea l household consumption expenditure
00
01
02
03
04
05
06
Rea l disposa ble income
…. and by credit extension
Household debt as % of disposable income
75
70
65
60
55
50
45
40
35
30
80
82
84
86
88
90
92
94
96
98
00
02
04
06
… and by consumer confidence
30
20
2006Q4
1994 election
WC soccer bid
announcement
index
10
0
- 10
- 20
- 30
- 40
M ar
-82 ar-84 ar-86 ar-88 ar-90 ar-92 ar-94 ar-96 ar-98 ar-00 ar-02 ar-04 ar-06
M
M
M
M
M
M
M
M
M
M
M
M
FN B/ BER CCI
3m mov ave
Gross fixed capital formation increased in all
three institutional sectors, led by the public
corporations
(constant 2000 prices)
200
180
160
140
120
100
80
00
02
General Govt
04
Public corps
06
Priv enterprises
The upbeat overall economic conditions is reflected in, and
supported by, continued high business confidence ……
RMB/BER Business Confidence Index
100
•To 81 in 07Q1 from 83 in
06Q4
80
•Manufacturing ( 78(75))
60
•Building (90(90))
40
•New vehicles ( 72(71))
20
•Retail ( 87(91))
0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
•Wholesale ( 76(88))
Employment continues to recover
(BER Surveys: net balances)
Wholesale: Gowth in number of people employed
Retail: Gowth in number of people employed
80
80
40
40
0
0
-40
-40
-80
00
01
02
03
04
05
06
07
-80
00
Manufacturing: Number of factory workers
01
02
03
04
05
06
07
Building Contractors: Growth in employment
80
80
40
40
0
0
-40
-40
-80
-80
00
01
02
03
04
05
06
07
01
02
03
04
05
06
00
CPIX inflation increases but remain in
target range
21
January 2007
18
CPI
= 6.0
15
CPIX
= 5.3
PPI
= 9.8
12
9
6
3-6% target range
3
0
J-80
J-85
J-90
CPIX actual
J-95
36m mov ave
J-00
J-05
… but production prices have increased
substantially during 2006
20
15
YoY % change
10
5
0
-5
-10
-15
2000
2001
2002
2003
SA produced goods
2004
2005
Imported goods
2006
Total
The deficit on the current account
increased to very high levels …….
8
6
4
% of GDP
2
0
-2
-4
-6
-8
-10
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Current account: Including / excluding oil
10
8
6
% of GDP
4
2
0
-2
-4
-6
-8
1980
1985
1990
Current account
1995
2000
Current acc ex oil
2005
The exchange rate has broadly stabilized
12
10
R/$
8
6
4
2
0
75
77
79
81
83
85
R/$
87
89
91
93
95
PPP (1970; PPI)
97
99
01
03
05
07
Monetary Policy Committee Decision
15 February 2007
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 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
Concern
Less
concern
+0,5
MPCS 12/10
Upside risk
Around 6%
Q2-Q407
Yes
Concern
Less
concern
+0,5
Yes
Deficit
improve
somewhat
Concern
+0,5
Yes
Sharp
deterioration
(but oil)
Less
concern
0
MPCS 7/12
MPCS 15/02
Improved
Improved
Q207
No
MPC 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 vulnerability
Balance of payments as % of GDP
8
6
4
% of GDP
2
0
-2
-4
-6
-8
-10
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Current account balance as % of GDP –
2005 relative to EM countries
NIGERIA
CHINA
PHILIPPINES
EGYPT
BRAZIL
ARGENTINA
PERU
INDONESIA
MOROCCO
AVERAGE
CHILE
MEXICO
ECUADOR
DOMINICAN REPUBLIC
TUNISIA
COLUMBIA
THAILAND
URUGUAY
PAKISTAN
EL SALVADOR
SOUTH AFRICA
2006
X (-6,4)
PANAMA
TURKEY
-8
-6
-4
-2
0
2
4
6
8
10
12
14
Whose the culprit?
Trade balance & services and income balance as % of GDP
12
10
8
% of GDP
6
4
2
0
-2
-4
-6
-8
1960
1965
1970
1975
Trade blance
1980
1985
1990
Services balance
1995
2000
2005
(Disappointing) export and (booming) import
volume indices and the Terms of Trade
175
165
2000 -2006
155
145
Exports: 100  121.4
135
Imports: 100  171.3
125
ToT:
115
105
95
00
01
02
Exports
03
Imports
04
05
Terms of Trade
06
100  113.6
Saving and investment as % of GDP
21
20
2000 -2006
% of GDP
19
18
Saving % GDP: 15.8  13.9
17
16
Investment % GDP: 15.9  20.3
15
14
13
2000
2001
2002
2003
Savings
2004
Investment
2005
2006
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/reversals
Floating currency
Borrowing small part of inflows
Rand denominated foreign debt (“original
sin”)
Forex reserves improve
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 Policy
Inflation record
12
11
10
9
8
7
6
5
4
3
2
1
00
01
02
03
04
CPIX
05
06
07
Anchoring inflation expectations
11.0
10.0
9.0
8.0
7.0
2006Q4
6.0
5.0
4.0
3.0
2.0
2003Q1
2004Q1
Average
2005Q1
Analysts
Business
2006Q1
Labour
Handling 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 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 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 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
Website: www.ber.sun.ac.za
E-mail:
Tel No:
[email protected]
021-887 2810
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