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Numerous actions were taken by the authorities in an attempt to stabilise matters. These ranged from the injection of liquidity into money markets and the expansion of the range of assets acceptable in central banks’ refinancing operations to the issuing of financial guarantees, the takeover of troubled assets, and the recapitalisation and in some instances the nationalisation of institutions. Many central banks also lowered their policy interest rates, in some instances on a co-ordinated basis. The monetary policy and financial market measures were complemented by fiscal easing in an effort to revive economic activity.


International co-operation and co-ordination in economic and financial policy were bolstered through various forums, including in the G-20 countries. Nevertheless, confidence among participants in the financial markets remained low and in many instances credit facilities were cut back or only made available on less favourable terms than before. As risk premiums rose, this trend was accompanied by a reduction in the issuance of bonds, while securitisation in many instances came to a standstill.


Simultaneously, equity prices declined considerably, while exchange rates also adjusted significantly with various emerging-market currencies experiencing downward pressure as some international investors liquidated their emerging-market exposures, favouring the familiarity of the mature economies. Global growth projections continued to be adjusted downwards, with the most recent estimates pointing towards outright contractions in real gross domestic product in the US, euro area and some other developed economies. With global demand deteriorating rapidly, the prices of commodities fell sharply. For instance, the international price of crude oil declined from a peak of more than US$146 per barrel in mid-2008 to levels around US$50 per barrel at the end of November, while international prices of food commodities receded by approximately 30 per cent over the same period. This contributed to significantly lower projected inflation rates. However, it seemed clear that Africa and other developing areas and countries would not be able to escape a slowing of economic growth in the wake of weaker global demand and declining prices of export commodities.


In South Africa the economy weakened considerably in the third quarter of 2008, recording the lowest quarterly growth rate in ten years. A substantial contraction in real value added was registered by the mining sector, which was directly affected by weaker international demand, falling commodity prices and interruptions due to maintenance, safety procedures and strikes. In a similar vein the real output originating in the manufacturing sector declined significantly in the third quarter. However, the harvesting of a bumper maize crop was reflected in a brisk positive growth rate recorded by the agricultural sector. Real gross domestic expenditure registered a reversal from negative growth in the second quarter of 2008 to a modest positive growth rate in the third quarter as fixed capital formation and government consumption expenditure strengthened. Real fixed capital formation by public corporations displayed very strong growth in the third quarter, led by outlays to expand electricity- generation capacity and to upgrade the country’s airports. By contrast, growth in capital expenditure by the private sector was generally sluggish, although the providers of telephone services increased their investment over the period. In the third quarter of 2008 real final consumption expenditure by government picked up notably, mainly on account of the acquisition of military aircraft. The tight domestic economic environment in the third quarter of 2008 was reflected in stagnant real disposable income of the household sector and a contraction – the first since the fourth quarter of 1998 – in the sector’s real final consumption expenditure.


Purchases of consumer durables declined considerably, while expenditure on nondurable goods such as food and fuel also receded, consistent with the high real prices of these items. Greater caution among consumers was reflected in a slight further reduction in the ratio of household debt to disposable income in the third quarter of 2008, after it had peaked in the first quarter and started edging lower in the second quarter of the year.


Alongside subdued sales, the level of real inventories receded further in the third quarter of 2008, albeit at a somewhat slower pace than in the second quarter. Whereas improved electricity supply to domestic industries contributed to a strong recovery in the volume of exports in the second quarter of 2008, export volumes advanced only marginally in the third quarter as global demand lost momentum and international prices of commodities fell considerably. Import volumes also rose at a subdued pace in the third quarter, mirroring the generally sluggish growth in domestic demand. The terms of trade declined further in the third quarter, contributing to a widening of the trade deficit. This was exacerbated by a moderate further widening of the shortfall on the country’s service, income and current transfer account. As a result, the deficit on the current account of the balance of payments rebounded in the third quarter to 7,9 per cent of gross domestic product. This deficit was financed through a combination of direct and other investment inflows, while portfolio investment switched to a net outflow in the third quarter of 2008.


Prompted by the deterioration of global financial risk and the further reduction in international commodity prices, the effective exchange rate of the rand depreciated significantly during September 2008 and subsequently fluctuated around lower levels. Broadly similar behaviour was displayed by the currencies of a number of other commodity-producing countries with comparatively large current-account deficits. The depreciation of the external value of the rand presented a new risk to the inflation outlook, although the considerable reduction in international oil and other commodity prices, and the subdued global and domestic demand and increased surplus production capacity, assisted in containing inflation pressures. Accordingly, the twelve-month rate of CPIX inflation peaked in August 2008, and decelerated in the subsequent two months as the prices of fuel and food – previously strong drivers of inflation – started to run out of steam. Most recently tentative indications of moderation in underlying measures of inflation were observed, while producer price inflation also started to decelerate. A further reduction in measured inflation is expected on account of the change-over to a new consumer price index “basket”, with the first data on the new basis due to be released in February 2009. However, wage settlement rates rose steadily in the first three quarters of 2008 and increases in unit labour cost remained high. Surveyed inflation expectations also remained high.


The Monetary Policy Committee (MPC) of the South African Reserve Bank (the Bank) raised the repurchase rate in June 2008 and subsequently kept it unchanged at 12 per cent at its meetings in August and October. Other money-market interest rates remained well aligned with this policy rate. The main short-term interbank interest rates in South Africa did not rise significantly relative to the repurchase rate, as counterparty risks continued to be seen as normal. In the capital market, bond yields declined in July and August 2008, partly in response to the expected favourable impact on inflation outcomes of a reweighted and rebased consumer price index basket to be introduced in January 2009. Yields rebounded in September alongside the substantial depreciation in the exchange rate of the rand, but receded again in the final months of the year as the depreciation was stemmed and inflation prospects brightened with the further reduction in international oil and food prices. In the second half of 2008 weakening economic prospects were reflected in share prices falling considerably in share markets around the world. South African shares were no exception, with the downward movement in equity prices exacerbated by the dramatic reduction in international commodity prices, given the importance of resources shares in the local market. From their high point in May 2008 to a recent low in November, overall South African equity prices fell by more than 40 per cent. Activity in the real-estate market was also subdued, with stagnant nominal and falling real house prices. Growth in the broadly defined M3 money supply and in the banks’ loans and advances to the private sector decelerated further in the four months to October 2008, reflecting the impact of slower economic growth, generally tight economic conditions, low consumer and business confidence, and negative wealth effects arising from movements in asset prices. In the period from April to September 2008 the public-sector borrowing requirement increased notably compared with the situation a year earlier, led by the borrowing needs of public corporations and national government. The budget deficit continued to be easily financed. Looking ahead, the October 2008 Medium Term Budget Policy Statement (MTBPS) projected lower tax revenue over the next three fiscal years than was previously budgeted for, mainly for cyclical reasons. With government expenditure in 2009/10 and 2010/11 also projected to be higher and capital outlays by the public corporations set to increase further, provision was made for larger budget deficits and public-sector borrowing requirements.


In the MTBPS it was announced that, with the change-over to a new consumer price index basket from January 2009, the target variable for inflation-targeting purposes would no longer be CPIX (the consumer price index for metropolitan and other urban areas, excluding mortgage interest cost) but would be changed to the overall consumer price index for all urban areas. This followed the revised methodology for incorporating housing costs in the consumer price index that Statistics South Africa (Stats SA) decided on, following an investigation of international best practice. From January 2009 the headline measure of inflation will no longer include mortgage interest cost, but will include owners’ equivalent rent – the rental value of dwellings that owner-occupiers would have received had they let out their dwellings to other parties. Unlike with mortgage interest cost, this component does not immediately mirror movements in the repurchase rate; accordingly, its inclusion in the targeted inflation measure does not present perverse short-term incentives to monetary policy-makers.