The problems that producers of primary commodities encountered were compounded when the Russian Federation unilaterally restructured its rouble-denominated debt and declared a moratorium on the servicing of debt in August 1998. The effects of these measures were felt throughout the mature and emerging financial markets of the world. Conditions in the global financial markets generally tightened and governments and other public-sector borrowers in emerging-market economies faced sharply higher borrowing costs.
Despite these setbacks, the South African economy has fared better than anticipated over the past year. Although the economy has not yet experienced boom conditions, the potential economic impact of the Asian crisis on South Africa was moderated by the relative strength of the United States economy, which acted as a locomotive for global recovery, and the prompt response of a number of central banks in the main financial centres of the world by lowering official interest rates and stabilising financial markets.
To this must be added the efforts made by the Asian economies affected by the crisis to deal with the weaknesses in their economic and regulatory structures. These efforts helped to restore confidence and generally improved international economic conditions. The impact of these stabilisation measures was partly diluted by the steep rise in crude oil prices in 1999, but so far the higher oil prices have not seriously disrupted the international economic recovery that is currently under way outside the United States.
The success that South Africa achieved in coping with the international crisis was also influenced by the fact that the economy was operating from a base stronger than in many years. This was reflected in a number of improvements in domestic economic fundamentals, of which the more important ones were
Because of these structural adjustments, the economy has performed well over the past year or so. At the height of the international problems in the third quarter of 1998, real gross domestic product contracted. The economy nevertheless quickly recovered from this setback and positive growth in output had already been restored in the last quarter of 1998. Assisted by repeated relaxations in domestic monetary policy, and a recovery in agricultural production, output growth gathered momentum. By the second half of 1999 the real gross domestic product was growing at annualised rates of more than 3 per cent from quarter to quarter. For 1999 as a whole, growth in real gross domestic product was approximately 1 per cent.
A particularly promising development in the last months of 1999 was the strong showing of production activity in the secondary sectors of the economy. Output in the manufacturing sector took off, growth in the supply of electricity picked up and the decline in construction activity levelled out. Provided that there are no major setbacks in the global economy, the outlook is positive that economic growth in 2000 could at least match that of the second half of 1999.
The quarter-to-quarter growth in real gross domestic expenditure vacillated during 1999, but there was a firm rise in the fourth quarter. Consumers became more confident and stepped up their current expenditure, without resorting to debt for financing their rising consumption standards. Real final consumption expenditure by general government declined from quarter to quarter throughout 1999, steadily reducing general government's contribution to overall gross domestic expenditure. This should be seen as a deliberate step taken by government to lower the inflation potential of the economy and to pave the way for meaningful tax reform which will ultimately strengthen the supply side of the South African economy.
Total gross fixed capital formation still declined in the fourth quarter of 1999, but there was a healthy increase in fixed investment by private-sector companies. The creation of additional production capacity, in the midst of ample unutilised production capacity seems to reflect producers' positive assessment of the prospects for demand growth in the near to medium term. At the same time, manufacturers and traders were prepared to make significant additions to their holdings of inventories in anticipation of rising demand over the short term.
Gross saving relative to gross domestic product strengthened somewhat in the fourth quarter of 1999. Net dissaving by general government was reduced further and companies improved on their overall saving performance. There was no further deterioration in the household saving ratio. Nonetheless, the low saving ratio of South African society remains a structural impediment to enduringly faster economic growth.
There has been virtually no indication that the recent strengthening of economic growth is leading to a pick-up in the demand for labour. Official estimates indicate continuing declines in the level of formal-sector employment in the private and the public sectors during the first three quarters of 1999. In his address at the opening of Parliament in February 2000, the President recognised that certain aspects of the legislative instruments aimed at giving effect to government's labour market policies have had unintended consequences. The President indicated that certain amendments to elements of the legislative framework would be introduced during the current Parliamentary year.
During the first three quarters of 1999, the growth in earnings per worker slowed down more than the average settlement rate in collective bargaining agreements. This compression of "wage drift" indicates that regular pay is accounting for a growing proportion of overall worker compensation. Performance-related compensation and other types of bonuses are apparently becoming a smaller portion of worker compensation. Labour productivity remained buoyant in 1999, reducing the growth in unit labour costs to a rate of about 5 per cent per year.
Production prices have risen sharply in recent months, mainly on account of the rise in international crude oil prices, but there was also evidence of some widening of producers' operating margins. By contrast, overall consumer price inflation slowed down noticeably over the past year to rates approximately on a par with those of the country's major trading partners. This fall in inflation was largely a reflection of declining mortgage-bond interest rates. Core inflation, which does not capture the fall in mortgage bond interest rates, remained at a level of about 8 per cent during 1999. Core inflation is expected to slow down somewhat in the coming year, but as the economy begins to produce at higher rates of capacity utilisation, policy will have to be mindful of the potential for price pressures.
The recovery in economic activity and the greater aggregate demand resulted in an increase in the importation of intermediate goods, final consumer goods and capital goods during the fourth quarter of 1999. Furthermore, the strong inflows of investment capital into the economy in recent years and the subsequent increase in interest and dividend payments to non-resident investors led to a widening of the deficit on the services account of the balance of payments during 1999.
The combined value of merchandise and net gold exports also increased in 1999, but not enough to prevent the balance on the current account of the balance of payments from changing from a healthy surplus in the first quarter of 1999 to growing deficits in the last three quarters of the year. Although steadily deteriorating, the deficit on the current account of the balance of payments was still within ½ per cent of the gross domestic product in the fourth quarter of 1999.
South African residents continued to accumulate assets in other parts of the world, but these outward movements of capital were more than fully counteracted by a strong inflow of international capital into the economy. Portfolio investments, which have proved to be easily reversible in times of market uncertainty, dominated the inflows but foreign direct investment strengthened appreciably in the second half of the year. For 1999 as a whole, however, foreign direct investment amounted to about 1 per cent of gross domestic product, which is considered inadequate to boost meaningfully the long-run growth and labour absorption capacity of the South African economy.
The surplus on the financial account of the balance of payments was more than ample to finance the deficit on the current account, and led to a substantial increase in the country's international reserves in the fourth quarter of 1999. Gross international reserves have now risen from the equivalent of 10 weeks' worth of imports of goods and services at the end of 1998 to 15½ weeks' worth at the end of 1999.
The rising international reserves of the country helped to calm down the currency market after the excessive turbulence of 1998. Movements of the rand against the United States dollar were mostly offset by movements in the opposite direction against other currencies. The nominal effective exchange rate of the rand accordingly rose only marginally from the end of 1998 to the end of 1999. Significant progress was also made in removing another perceived source of rand vulnerability: the net open position in foreign currency of the Reserve Bank was reduced from US$22,5 billion at the end of 1998 to US$11,1 billion at the end of February 2000.
The year-on-year growth in money supply in 1999 remained mostly within the medium-term guideline range of 6 to 10 per cent that was still applicable at that time, but there was a rapid acceleration in the quarter-to-quarter money growth in the second half of 1999. Although this was a response to increased activity and higher growth in the economy, the rate of growth in the money supply exceeded by a wide margin the growth in real aggregate demand and output. This indicates that the threat of inflation and expectations of rising inflation were still prevalent and that caution should be exercised in the conduct of counter-inflationary policies.
A large part of the recent rise in the broad money supply was concentrated in the narrower monetary aggregates. This increased preference for more liquid assets was partly influenced by concerns about date-related problems with computer systems at the millennium changeover, as well as the bunching of public holidays over the year-end. But it could also have been signalling future growth in real aggregate spending, giving justification for persevering with a conservative monetary policy stance.
Fairly liquid conditions prevailed in the financial markets in the last quarter of 1999. The money market, which had already eased somewhat towards the end of the third quarter of 1999, became more flush with funds in the fourth quarter. The Reserve Bank had deliberately injected liquidity into the market in order to ward off any difficulties arising as a consequence of the millennium date-change. As the millennium changeover had been virtually uneventful, the Reserve Bank almost immediately thereafter began to increase the private banks' dependency on central bank funds.
In such liquid market conditions, and guided by the Reserve Bank's signals, money-market interest rates continued their declines of the first nine months of the year into the fourth quarter. In January 2000 the securities repurchase rate of the Bank was reduced further. The private banks followed the lead given by the repurchase rate and lowered their retail lending rates in October 1999 and again in January 2000 by 100 basis points.
Most of the fears concerning instability in emerging markets had faded by the third quarter of 1999. This, together with the downward trend in short-term interest rates and a steady stream of news confirming the improvement in the economy and the reduction of external vulnerability, caused long-term bond yields to move strongly downwards from the end of October 1999 and into January 2000. The share market also took off and the all-share price index recorded impressive gains from September 1999. The losses suffered at the time of the emerging-markets crisis of 1998 had been recovered in full by mid-December 1999. The real-estate market also bounced back from its depressed levels in late 1998 and early 1999 and returned to pre-crisis levels of activity.
In the primary capital markets, the public sector's mobilisation of funds declined sharply in the fiscal year 1999/2000. This development was the result of continued sound financial management practices as well as the proceeds derived from the sale of certain public-sector assets. However, an increase in the demand for capital from the private corporate sector did not compensate for the decline in the demand for funds by the public sector. Bond financing by the private corporate sector was almost non-existent and there was a sharp decline in capital raised by companies listed on the Johannesburg Stock Exchange in the fourth quarter of 1999.
Greater progress was made with the consolidation of public finances in the first three quarters of fiscal 1999/2000 than had been envisaged in national government's Budget of February 1999. National government receipts rose at a higher rate than budgeted, while expenditure growth remained well contained. The steady reduction in the national government's budget deficit is beginning to bear fruit: the slow growth in government debt over the past five years or so, together with the decline in capital-market interest rates, has kept growth in government interest payments to a fairly modest percentage.
The improvement in the management of provincial governments ensured that their consolidated financial balances remained in surplus. The proceeds from the restructuring of government assets derived from the selling of the South African Special Risk Insurance Association (Sasria) assets and an equity interest in the Airports Company of South Africa (ACSA), have reduced the borrowing requirement of the public sector by almost a half in the current fiscal year so far. In this manner, scope is being created for the private corporate sector to satisfy its funding needs at increasingly affordable costs in the domestic primary capital market.