Publication Details

A slight acceleration in output growth in the non-primary sectors added marginally to the growth thrust of the primary sectors in the second quarter of 1996. Manufacturing output responded to the stronger competitiveness of local producers in export markets, the wholesale and retail trade volumes also increased as aggregate domestic demand remained lively, and the transportation industry benefited from the increased volumes of foreign trade crossing the country's borders. All these sectors gained from the forward and backward linkage effects of the sharp rise in agricultural income.


The mild expansion of economic activity in the non-primary sectors of the economy was stimulated by increased purchases of durable consumer goods and a build-up of inventories in order to stay ahead of price increases that were expected to follow in the wake of the depreciation of the exchange rate of the rand. The acquisition of capital goods by business organisations was similarly motivated and the pace of increase in private-sector real fixed investment accelerated from the previous quarter. Real consumption expenditure by general government also contributed to the higher levels of domestic spending in the first half of the year. Domestic saving, which is meant to provide the wherewithal for domestic investment, remained at the low level relative to gross domestic product that was established towards the end of 1995 and fell far short of the investment requirements of the economy in the second quarter of 1996.


The weak response of aggregate employment to the strengthening of overall economic activity since 1993 remains a serious issue that needs to be addressed comprehensively. The urgency of this problem was reaffirmed when total employment in the non-agricultural sectors of the economy declined sharply in the first quarter of 1996. This decline in employment occurred mainly in the private sector and is an indication of the pressures to which local producers must respond in order to survive in an increasingly competitive and globalised economy. Although the public sector continued to add to its workforce, South Africa is now approaching a situation where less than half of the economically active population is gainfully employed in the modern sectors of the economy.


In spite of the decline in the level of employment, the rate of increase in the nominal salaries and wages per worker began to accelerate in the second half of 1995. This, along with the depreciation of the rand since mid-February and the growth in aggregate nominal domestic demand, put upward pressure on production costs, leading to production and consumer prices rising slightly faster in the second quarter of 1996. To the extent that these price responses were less than what had been expected when the rand began to depreciate, part of the additional costs was absorbed by local producers. The outcome was strong productivity growth, alongside further paring down of the workforce.


Reflecting the relatively weak output response to the higher gross domestic expenditure, imports rose sharply in the second quarter. At the same time, the volume and the value of net gold exports declined and the rise in merchandise exports failed to match the rise in merchandise imports. These developments were countered only partly by a decline in net payments for services to non-residents and the deficit on the current account of the balance of payments widened to about 3 per cent of the gross domestic product in the second quarter of 1996. The larger deficit on the current account is further evidence of the long time delays involved in the adjustment of real macro-economic variables to a tightening of monetary conditions.


The deterioration of the current account of the balance of payments in the first half of 1996 coincided with a shrinking in the net inflow of capital from the rest of the world. Net capital inflows in the first half of 1996 fell to less than half of the 1995 average quarterly net amounts. Although the country still experienced a net inward movement of long-term capital during the second quarter of 1996, this was predominantly in the form of investments in securities listed on the Johannesburg Stock Exchange. Foreign direct investment in job-creating projects remained at a very modest level. Although private banks borrowed short-term funds in offshore markets, leads and lags in foreign payments and receipts of the private non-bank sector caused a net outflow of short-term capital that exceeded the net inflow to the banking sector.


Even though the overall net inflow of capital was considerably higher than in the first quarter, it was still insufficient to meet the deficit on the current account of the balance of payments in the second quarter of 1996. The gross and net gold and other foreign reserves of the country accordingly declined as the Reserve Bank had to supply foreign exchange to meet the payment needs of importers. These actions of the Bank were at times erroneously construed as attempts to fix the exchange rate of the rand at certain levels, which then provoked speculative attacks on the currency. The exchange rate of the rand nevertheless declined sharply during the second quarter of 1996, with repercussions throughout the economy.


The firm rates of income growth and the persistently high levels of domestic spending called forth a strong demand for money for transaction purposes and the broadly defined money supply responded accordingly. Higher increases in the more narrowly defined monetary aggregates than in the broad M3 money supply indicate that the transactions demand for money was reinforced by a rise in the public's preference for more liquid depository-type investments. The rise in liquidity preference was, in turn, inspired by the many speculative opportunities presented by the high variability of financial-asset prices and by the perceived need to take precautionary steps when doubts concerning socio-political stability began to surface.


The main accounting counterparts of the growth in the money supply were steep rises in credit extended by the monetary institutions to the government sector and the private sector. Net credit extended to the government sector increased on account of the joint effect of banks' increased holdings of government securities and a decline in government deposits with the banking sector. Bank credit extended to the private sector continued to grow at a high rate, but compared with the first quarter, a larger portion of this increase was allocated to the private corporate sector instead of to private households.

The financial markets in the first half of 1996 were heavily influenced by developments in the international financial markets and the depreciation of the exchange rate of the rand. Responding to the upward correction in long-term yields on the American bond market, the yields on long-term government bonds began to strengthen in February. This upward movement in bond yields was spurred on by the depreciation of the exchange rate of the rand. The increase in Bank rate on 29 April 1996 seemed to have calmed the anxieties of domestic and foreign investors when long-term yields began to fall back from the middle of May 1996 and during June. When a further round of exchange rate weakness began to affect the markets in July, the downward movement in long-term yields came to a halt and yields started to rise anew.


Short-term money market rates responded slowly to the changes in the bond market: it was only late in April that short-term rates began to change in a way that approximately resembled the changes in long-term bond yields. Since the beginning of May, short-term interest rates have changed more or less in tandem with long-term yields. The yield curve, which had shifted upwards between January and May 1996, drifted to a lower level in August, but maintained its general flat and somewhat inverted shape.


In the primary bond market, public-sector entities issued new securities in the first half of 1996 to an amount that was considerably less than the value of net new issues in the corresponding period of 1995. Listed private-sector companies were absent from the primary bond market in the first two quarters of 1996. These companies also abstained from issuing bonds in foreign capital markets, unlike some of their non-financial counterparts in the public sector who maintained a presence in the offshore primary bond market. However, the amount of capital raised by listed private-sector companies through new equity issues increased quite sharply from the first to the second quarter of 1996. The relatively high cost of borrowing in the bond market has evidently increased the corporate sector's preference for financing from sources other than bond issues, such as internally generated resources and equity issues.


On the whole, equity prices broadly held steady at the level established at the beginning of 1996. Since June, a softening of gold-mining share prices was at first partially countered by new-found strength in the prices of industrial and commercial shares, but the average prices of all shares nevertheless declined from May to August 1996. Activity in the secondary bond and equity markets remained brisk and the monthly turnover was at a high level during the first eight months of the year. Despite the depreciation of the rand, non-residents remained net buyers of bonds and equities from May to July 1996, but subsequently they became net sellers in August.


Money market conditions were strongly influenced by the ebb and flow of net foreign reserves, but remained generally tight during the second quarter of 1996 and in July and August. In April 1996 the amount of accommodation which the Reserve Bank had to provide to the private banks reached an unprecedented high level when the tightening effect of a sharp decline in net foreign reserves was exacerbated by an increase of government deposits with the Bank. Subsequently, the tight conditions eased somewhat as government deposits with the Bank were run down and the net foreign reserves position improved sporadically. Assistance was given to the money market through appropriate adjustments in the asset portfolio of the Corporation for Public Deposits and through swap arrangements between the Reserve Bank and private banks when conditions became very tight.


The public-sector borrowing requirement, as a percentage of gross domestic product, deteriorated marginally from the first quarter of fiscal 1995/1996 to the first quarter of fiscal 1996/1997. This was mainly due to the strengthening of administrative capacity in some of the new provincial governments which solved many of the problems previously encountered with the delivery of public services. At the level of the Main Budget, however, the borrowing requirement was reduced meaningfully from the first quarter of fiscal 1995/1996 to the first quarter of 1996/1997. The increase in Exchequer issues in the first four months of fiscal 1996/1997 was slightly below the increase envisaged in the Budget for the full fiscal year, whereas Exchequer receipts ran slightly ahead of the budgetary projections.


A major event during the second quarter was the announcement on 14 June 1996 of government's macro-economic strategy for growth, employment and redistribution. The main objective of the strategy is to increase growth to 6 per cent per year by the year 2000 and to raise the number of new jobs to an annual average of 270 000 in the period from 1996 to 2000. In order to move the economy onto a steeper growth path, a number of "supply-side" measures will be introduced, including certain tax incentives for approved projects. The aim of these measures is to redirect investment flows into those areas and industries that will improve the export orientation of South African producers. This will be strengthened through a process of tariff reductions which is expected to encourage investment in industries where the country has a proven competitive advantage. A key element of the strategy is that the real exchange rate should become more stable, which is seen as essential for export growth and for attracting long-term investment into the economy.


The Minister of Finance reiterated government's commitment to containing inflation and indicated that the implementation of the strategy is expected to reinforce this commitment and reduce the excessive burden on monetary policy as the major instrument for achieving macro-economic balance. Fiscal policy will be strengthened by reducing the budget deficit to 4 per cent of the gross domestic product in the 1997/1998 fiscal year as against 5,1 per cent forecast for the year 1996/1997. Further reductions to 3 per cent of gross domestic product are indicated for subsequent years.


The entire budgetary process is to be revised and it is envisaged that future public expenditure trends will be determined within the context of a medium-term expenditure plan. The redistributive thrust of annual government spending on social services such as education, health care, welfare and housing will be strengthened within this longer-term fiscal planning framework. A programme for the restructuring of state assets forms part of the strategy. This programme will address issues regarding the ownership and governance of state assets.


As an integral part of the strategy, the Minister announced the relaxation of various exchange control measures. These included the lifting of restrictions on the domestic borrowing capability of non-resident-owned entities, the doubling in size of the facility allowed to resident institutional investors for acquiring foreign assets through swap arrangements with foreign counterparties and permission granted to certain resident institutions to make foreign currency transfers during 1996 of up to 3 per cent of their domestic current income surplus in 1995. The strategy recognises that labour-market institutions should be sufficiently flexible to avoid job losses. The Minister also concluded that there is an important role for a national social agreement between government and its social partners to create an environment for rapid growth and accelerated delivery of public services.