It is not exactly clear why South Africa's growth slowed down so suddenly. A possible reason may be the reappraisal by international investors of risk-return opportunities in emerging markets generally. This prompted sales of South African bonds by non-resident investors — on net, capital left the country in the first half of 2000. A further reason is the torrential rain and flooding in the north-eastern parts of the country and veld fires in the south-western parts which disrupted farming activities and caused widespread damage to crops. Through forward and backward linkages, other sectors of the economy, notably the manufacturing sector, were affected by the conditions in agriculture. Negative perceptions also contributed to the weak economic performance: unfounded fears that troubles in other parts of sub-Saharan Africa might spill over into South Africa not only influenced perceptions of non-resident investors negatively, but seem to have had a depressing effect on business confidence in the country.
Although economic activity was at a low ebb in the first half of 2000, there are signs that the worst is over and that economic growth is at the point of accelerating once more. This view was generally shared by non-resident investors who returned to the domestic market as net buyers of bonds in July and August. Growth of just more than 1½ per cent was recorded in the second quarter of 2000, up from only 1 per cent in the first quarter. Output growth in the secondary and tertiary sectors accelerated from the first to the second quarter, led by growth in the communications sector where the expansion of the cellular telephone network made an important contribution. Activity in the highly cyclical construction sector was apparently picking up too, and the manufacturing sector seems poised to move to higher levels of output.
Whereas the growth rate in real gross domestic product decelerated, though still remaining firmly positive in the first half of 2000, the rate of change in real gross domestic expenditure turned negative in the second quarter. Total real gross domestic expenditure in the second quarter of 2000 was not much more than in the second quarter of 1999. This was first and foremost the result of efforts by manufacturers and traders to reduce the cost of carrying inventories and to improve their return on total assets. Inventories were still accumulated, but at a far less aggressive rate than in the first quarter, leaving the ratio of inventories to gross domestic product broadly unchanged in the second quarter of 2000.
Growth in final consumption expenditure by households slowed down slightly in the second quarter of 2000, but still maintained a brisk pace. Far more impressive was fixed capital formation by private-sector companies. In most of the production sectors of the economy, producers were either replacing equipment or adding to production capacity at rates not seen over the past two years or so, signalling that stronger demand and output growth are expected to materialise shortly.
The disparate movements in the growth in aggregate output and in aggregate demand over the past year established a far healthier balance between aggregate supply and demand in the domestic economy. Although merchandise export volumes levelled off, the depreciation of the rand pushed the realised prices of exported goods higher, giving export earnings a boost in the second quarter of 2000. Import volumes, in turn, responded strongly to the decline in total real spending, and probably also to the rise in the prices of imported goods. The consequent fall in import volumes, together with the rise in export values, contributed most to a turnaround in the current-account of the balance of payments from a deficit in the second half of 1999 to a surplus in the first half of 2000.
The emergence of a surplus on the current account of the balance of payments coincided with the sudden reversal of net capital flows into the economy. Non-resident investors sold on a net basis part of their South African bond portfolios. In addition, foreign direct investment capital left the country as South African companies in search of profitable opportunities transferred larger amounts of capital to foreign markets than the amounts offshore companies were bringing into the country.
In the end, the deficit on the financial account of the balance of payments exceeded the absolute value of the surplus on the current account, leaving the country with a deficit on the overall external accounts and a decline in net holdings of international reserves in the second quarter of 2000. As a result, the rand experienced downward pressure in the first half of 2000, declining on a weighted basis by about 4 per cent from the end of December 1999 to the end of August 2000.
Employment growth in the formal sectors of the economy was still weak in the first three months of 2000, but the findings of recent surveys conducted by Statistics South Africa suggest that the informal economy is expanding rapidly and that it is providing a considerable number of new jobs and employment prospects. The growing importance of the informal economy as a provider of jobs, and its corollary the shrinking demand for labour by the formal economy, are relieving pressure on the formal labour market which is slowing down the growth in nominal wages and salaries. This helped to contain overall price inflation in the economy.
Despite the slowdown in the growth of labour compensation, South Africa could not escape the inflationary consequences of steeply rising international petroleum prices. However, these inflationary pressures are transitory and should more accurately be seen as random price shocks rather than the start of a new round of continuous price increases. Furthermore, government's commitment to fiscal prudence, continued trade liberalisation, moderate increases in salaries and wages and relatively modest growth in aggregate domestic demand, are all favourable factors for the containment of domestically generated inflation.
The slower pace of economic expansion in the first half of 2000, and the reduction in inventory accumulation in the second quarter of the year, dampened the demand for money for transaction purposes. The first six months of the year also saw increased activity in the private securitised debt market, further curbing the growth in banks' balance sheets and in overall money supply. Monetary deposits were also run down in order to meet payment commitments following the net selling of fixed-interest securities by non-resident investors. The monetary slowdown was an important indication that conditions are becoming increasingly benign for the inflation outlook.
Credit extension, being the most important factor determining the growth in banks' balance sheets, was also comparatively moderate in the first six months of 2000. It was mostly business firms that showed some apprehension about continued increases in their bank indebtedness. Households, by contrast, tentatively showed some appetite for a renewed accumulation of bank debt, yet their overall debt-to-income ratio remained at a fairly low level.
In the financial markets, the Reserve Bank proactively avoided undue volatility in the daily liquidity needs of the private banks. Liquidity conditions were tightened from the beginning of the year, but were managed in a way that forestalled any turbulence in the securities markets from spilling over into the money market. The interest rate on repurchase transactions at the daily auctions has remained unchanged at 11,75 per cent since about the middle of January 2000. Other money-market interest rates settled at levels roughly parallel to that of the repurchase rate; they rarely deviated substantially for any length of time from the direction indicated by the repurchase rate.
Trading activity in the secondary bond and equity markets, as well as in the market for derivatives, remained fairly buoyant throughout the first eight months of 2000. Price movements in these markets were negatively influenced by news that the economic recovery was not as vibrant as had been anticipated and by the weakness of the rand against the US dollar. Indications that non-resident investors were becoming slightly more hesitant about investing in emerging markets, and the unfortunate incidents in parts of sub-Saharan Africa, also dampened the spirit of optimism that had prevailed in the markets towards the end of 1999.
For the greater part of the first half of 2000, non-resident investors were net sellers of South African bonds, adding to the downward pressure on bond prices. They also cut back on their net purchases of equities, contributing to a fall of some 28 per cent in share prices from mid-January to mid-April 2000. Towards the middle of April 2000 investors gradually became more confident about prospects for the South African economy, triggering a mild recovery in asset prices. By the end of August 2000, most of the earlier losses in bond yields had been recovered, but share values were still well below their mid-January peaks.
The primary capital market showed clear signs of increased private-sector activity. Against the backdrop of a shrinking public-sector borrowing requirement, private-sector organisations stepped up their demand for debt financing. There was also a strong increase in new capital raised by companies listed on the Johannesburg Stock Exchange. These capital-raising activities were mostly related to mergers and acquisitions of existing assets, and would not necessarily give rise to more fixed capital formation. Moreover, the mobilisation of debt capital was to an important extent motivated by the need of some banking institutions to augment their secondary capital resources.
The deficit before borrowing and debt repayment of national government in the first three months of fiscal 2000/01 equalled about three-fifths of the budgeted deficit for the full fiscal year. When the typical seasonal patterns in revenue and spending flows are taken into consideration, national government's net financial position was nevertheless more or less consistent with the budgeted plans for the fiscal year as a whole. Expenditures were rising faster than the budgeted increase for the full year, but revenues also performed far better than envisaged in the Budget. Income-tax collections, value-added tax collections and receipts from customs duties all exceeded the budget projections by a sizeable margin.
The bulk of national government's deficit in the first three months of the current fiscal year was financed through the issuance of short-term paper at lower interest rates than the prevailing long-term rates. This naturally contributed to the low activity levels in the primary bond market.
Although gross saving remained low relative to gross domestic product, there was a most significant development in the second quarter of 2000. After persevering with conservative and prudent fiscal policies for the past six years or so, general government bodies succeeded, on a seasonally adjusted basis, in raising their current revenues beyond the level of their current expenditures, leaving them with a small surplus. In other words, general government became a contributor to gross national saving, after having absorbed private-sector saving resources for longer than a decade. Positive general-government saving on a sustained basis is likely to boost gross saving in the economy, thereby reducing pressure on interest rates and adding to the wherewithal required for a high investment ratio, which will ultimately lead to higher rates of economic growth and development.