When the rand's stability was ultimately restored in the foreign exchange market towards the end of the year, some of the more positive results of the process of currency depreciation became clearer. Especially the robust growth in merchandise export volumes, which is a prominent element of the government's growth and development strategy, raised prospects for growth and job creation in the domestic economy. Of course, the competitive gains made during 1996 still need to be consolidated by preventing secondary rounds of wage and price increases. If not, the benefits of the depreciation will be short-lived and the economy will be left in its structurally weak state, but with a considerably higher overall level of prices.
Aggregate output seemingly responded positively to the weakening of the rand and growth accelerated in the fourth quarter of 1996. Real value added in the non-agricultural sectors regained some of the momentum it had lost in the first three quarters of 1996. Of particular significance was the turn-around of production in the manufacturing sector; whereas manufacturing production shrank in the third quarter of 1996, it recovered quite strongly in the fourth quarter. The recovery in output levels in some of the non-agricultural sectors of the economy in the final quarter of 1996, together with a large increase in agricultural production, especially of field crops, resulted in an economic growth rate of 3 per cent in 1996 moderately lower than the growth rate experienced in 1995.
Owing to the relatively strong growth in real domestic production and despite a sharp rise in the real value of net factor payments to the rest of the world, the real gross national product of South Africa increased by 3½ per cent in 1996. When population growth is taken into consideration, the real gross national product per capita rose by 1½ per cent in 1996. This was the third year in succession in which real national income per capita increased and the result is that the "average South African" was 4½ per cent better off in 1996 than in 1993.
Although part of the rise in real domestic production was related to a high level of domestic final demand, the major force behind non-agricultural output growth in 1996 came from the strong increase in the volume of exports. This was especially the case in the second half of the year. The strong build-up in fixed investment spending appeared to have lost momentum in the second half of last year. Similarly, the growth in private consumption expenditure also tended to decelerate in the last three quarters of 1996. Consumers have ostensibly become aware of the risks involved in their high debt-to-income ratios and began to hold back on spending growth. Government consumption expenditure, however, accelerated, thereby preventing a faster reversal in the high levels of dissaving by the general government. The country's overall saving ratio in 1996 was consequently still too low to adequately finance domestic investment demands.
The high level of economic activity was accompanied by an absolute decline in aggregate employment since the third quarter of 1995, largely because of determined efforts among private-sector producers to reduce costs and raise efficiency. The rate of increase in nominal wages and salaries per worker nevertheless remained downwardly inflexible. In fact, nominal and real wage growth began to accelerate in the second half of 1995 and rose at relatively high rates in the first three quarters of 1996. Although the inflationary impact of the rise in labour costs was partially countered by the strength of labour productivity, the increase in real remuneration per worker in an environment of rising unemployment was not in keeping with what could reasonably be expected under such circumstances.
The quickening of the growth in unit labour costs, along with the weaker rand and rising food prices, made themselves felt in an accelerating rate of production and consumer price inflation during the course of 1996. These price increases were accommodated by a strong expansion of the monetary aggregates. Steps taken during the year to curb the excessive monetary growth had the predictable but ironic short-term effect of increasing the measured rate of consumer-price inflation through their impact on home owners' cost. However, even when the temporary perverse effects of higher mortgage interest rates, and the effects of some other special factors are excluded from the consumer price index, it remains true that the underlying inflation rate accelerated in the second half of 1996. Domestic inflation, as measured by the increase in the production price index, was also higher than imported inflation, as measured by the rise in the prices of imported goods, despite the steep decline in the value of the rand. The build-up in real wage growth, the apparent long response lag in the prices of imported goods to the weakening in the value of the rand and the rise in underlying inflation, seem to indicate that latent inflationary forces are still present in the economy.
As could be expected with a decline in the overall level of aggregate domestic expenditure, the growth in the volume and value of imports showed signs of abating in the second half of 1996. Coupled with strong rises in the value of net gold exports and merchandise exports and a slowdown in net service payments to the rest of the world, the deficit on the current account of the balance of payments began to shrink in the second half of the year. At the same time, the net outflow of capital in the third quarter of the year changed in the fourth quarter to a net inflow of capital, although essentially in the form of financing facilities with a short maturity.
The inflow of capital in the fourth quarter of 1996 was larger than the deficit on the current account of the balance of payments and as a consequence the total gold and other foreign reserves of the country rose quite sharply. This contributed to a more positive sentiment in the financial markets and greater stability in the market for foreign exchange. The nominal exchange rate of the rand became more stable and strengthened moderately in the last two months of 1996, but then rose strongly in January 1997. At the end of 1996 the real effective exchange rate of the rand was about 16 per cent lower than at the end of 1995.
The continuation of relatively strong real income growth during 1996 and the accompanying high level of aggregate domestic demand for goods and services gave rise to rapid growth in the transactions need for money. The transactions demand for money was strengthened by a rise in the public's demand for more liquid monetary assets. This rise in the public's liquidity preference was probably motivated by the relatively attractive yields on deposit-type investments and by the many speculative opportunities presented by movements of financial asset prices during 1996. Firm growth in the broadly defined money supply and even stronger increases in the narrower monetary aggregates during 1996 were coincident with these portfolio preferences of the public.
During the second half of 1996 the growth rate in the broadly defined money supply slowed down, at first somewhat modestly in the third quarter, but then more evidently in the fourth quarter. Although this was a welcome development and a signal of a positive response to earlier policy steps which had been taken to curb excessive monetary expansion, the level of the M3 money supply in the fourth quarter of 1996 was still higher than the upper limit of acceptable money supply which had been indicated by the 1996 money growth guideline range. This indicates that the threat of inflation and expectations of rising inflation were still prevalent and that continuation with a conservative monetary policy posture is justified.
Credit extension advanced rapidly during 1996, albeit at a decelerating rate in the second half of the year. Moreover, the composition of the assets of the monetary institutions indicates that credit was a prominent source of funding for the growth in private consumption expenditure. This, of course, had serious implications for the already uncertain financial situation of the private household sector. High levels of household debt and the future servicing of such debt do not augur well for the national savings ratio, and thus for the output and employment-generating capacity of the economy in the long run. The rise in overall domestic credit extension was also the principal statistical counterpart of the rapid expansion of the monetary aggregates; the impact of credit growth was only partially undone by a decline in the net foreign assets of monetary institutions during 1996.
In the financial markets, the public sector's mobilisation of funds in the primary capital markets fell back from levels that prevailed in the previous fiscal year. This development was the result of substantial government stock redemptions, the run down of cash balances by the national government and extraordinary receipts in the current fiscal year. This may point to some alleviation of the crowding out of private-sector investment activity by the borrowing activities of public-sector organisations. Private-sector companies accordingly raised considerably more capital through rights issues of fixed-interest securities and equity issues in 1996 than in 1995.
The government raised more funds in the international primary bond market in 1996 than in 1995. Apart from the positive impact these borrowings had on pressures in the domestic capital market and on the country's level of gold and foreign reserves, it also established a benchmark for the pricing of future offshore borrowing by private-sector and parastatal entities.
Activity in the secondary bond and equity market was lively and turnovers in both markets increased substantially in 1996 compared with 1995. Non-resident participation in the domestic market was also boosted by the introduction of an electronic screen-trading system in the equities market and by the admission to membership of the Johannesburg Stock Exchange of foreign-owned banking institutions and broking firms. Nevertheless, price movements in both the secondary bond and equity markets were without clear upward or downward direction as from May 1996 until the year-end. Prices in both these markets rallied in the first six weeks of 1997.
Money market conditions remained relatively tight for the major part of 1996. The Reserve Bank occasionally injected liquidity into the market to relieve extremely tight conditions, but generally allowed the money market shortage to reflect the unbalanced position created by the excessive expansion of credit by monetary institutions against the background of a large decline in their net foreign assets. Since May 1996 the yields on short-term and long-term securities have moved broadly in tandem, leaving the general shape of the yield curve intact. In January 1997, the yield curve declined over the entire maturity spectrum and became somewhat more inverted in the less-than-three-year maturity spectrum, whilst maintaining its flat shape in the area beyond three years. This could be interpreted as an indication of expectations of imminent declines in short-term money market rates, whilst reflecting continued scepticism about the longer-term prospects for durably lower inflation.
The public-sector borrowing requirement, i.e. the deficit before borrowing and debt repayment of the national government and all other tiers of the public sector, declined as a percentage of gross domestic product in the first nine months of 1996/97 compared with the corresponding period in the previous fiscal year. This improvement in public finances occurred primarily at the level of the Central Government. The information for the first ten months of fiscal 1996/97 indicates that the government is likely to achieve success in its stated objective of reducing the Exchequer deficit relative to gross domestic product. Of some concern is that Exchequer issues were increasing well above the rate which had been foreseen in the Budget for 1996/97. Fortunately, the growth in Exchequer revenue exceeded the growth projected in the Budget by an almost similar margin. The stock redemptions during the fourth quarter of 1996 contributed to a small decline in the ratio of total government debt to gross domestic product from March to December 1996.