Publication Details


1. Real economic activity

 Real gross domestic product

Although national accounts statistics are not yet available for the fourth quarter of 1995, indications are that the South African economy performed reasonably well last year. During each of the first three quarters of the year, the seasonally adjusted annualised rate of growth in real gross domestic product amounted to 1½, 2 and 3 per cent respectively. Projections indicate a growth rate of between 3 and 3½ per cent for the year, which will be the highest rate of economic growth established since 1988.


This reasonable performance was achieved despite the adverse climatic conditions which led to a marked decline in agricultural output, and a lower production of gold. Excluding the primary sector, that is mining and agriculture, the rest of the economy expanded at a rate of over 5 per cent last year, particularly due to strong expansion in manufacturing production.


Over the first nine months of the year, total output in manufacturing was about 8½ per cent above the level of the first nine months of 1994, although signs appeared of a slowdown in the fourth quarter. Capacity utilisation in the manufacturing sector rose from about 78 per cent two years ago to about 85 per cent in the third quarter of 1995. Strains are therefore developing in the ability of the manufacturing sector to maintain high growth, although large capital investment in this sector over the last two years is now beginning to add to total capacity.


Real gross domestic expenditure

As in 1994, real gross domestic expenditure in 1995 continued to increase at a faster rate than aggregate production. Over the first three quarters of the year, real gross domestic expenditure increased at seasonally adjusted annualised rates of 1½, 6½ and 2½ per cent, to remain at a level of about 5 per cent above total demand in 1994. Gross domestic fixed investment continued to increase at the relatively high rate of about 8 per cent established in 1994, whereas private consumption expenditure accelerated to an even higher growth rate than the 3 per cent of the previous year. There was also a substantial further accumulation of inventories in 1995. It should also be noted that consumption expenditure of general government made but only a small contribution to the high rate of increase in aggregate demand, although there were signs of some acceleration also in this component of total expenditure.


Indications are that there occurred a slight slowdown in the rate of increase in gross domestic expenditure in the fourth quarter, but the level of expansion nevertheless remained above the growth rate in domestic production.


Employment and wages

Official statistics for employment are only available up to the first quarter of 1995. There were encouraging signs of an increase in total employment in the second half of 1994, but a small decline in total employment occurred again in the first quarter of 1995, when total employment in the public sector declined sharply. In the private sector, more people were employed in manufacturing, electricity generation, wholesale and retail business, transport and finance. The aggregate rate of increase nevertheless remained between 1 and 1½ per cent per annum, which is well below the estimated rate of increase in the total labour force.


The rate of increase in the nominal wages and salaries paid per worker slowed down from 14,5 per cent in the second quarter of 1994 to 10,8 per cent in the first quarter of 1995, which led to an important slowdown in the rate of increase in real per capita wages and salaries. Indeed, in the first quarter of 1995, an increase of only 1,7 per cent in real wages and salaries was matched by a rise of 2 per cent in labour productivity, with the result that the real unit labour cost of production showed a small decline. If this trend could have been maintained throughout 1995, which is doubtful, it would of course have contributed to an improvement in South Africa's competitiveness in world markets.


Gross domestic saving

An important structural deficiency in the South African economy remains the low level of saving. In the first nine months of last year, there was a further decline in the level of total gross domestic saving as a percentage of gross domestic product, changing from 17,2 per cent in 1994 to 16,7 per cent.

This deterioration was mainly attributable to continued net dissaving by government, whilst personal saving as a percentage of personal disposable income declined further to only 2,1 per cent. It should also be noted that, with an estimated deficit of 5,8 per cent in the budget of the central government, there is still about 4 per cent of dissaving by government, which indicates the extent to which private savings are absorbed to finance current consumption expenditure of the public sector.


2. The balance of payments

The current account

As could have been expected against the background of the relatively large increases in gross domestic expenditure, imports last year rose very sharply. Over the first nine months of last year, the physical quantity of imports increased by 23½ per cent. With a rise in the average level of import prices, the total nominal value of imported goods rose by over 30 per cent.

Over the same period, exports of merchandise also performed extremely well, with a rise of almost 20 per cent in the total volume, and also a rise of about 8 per cent in prices, almost to match the rise in the nominal value of imports. There was, however, a decline of about 10 per cent in both the volume and the value of gold exports, and a rise in net service payments to the rest of the world, with the result that the current account deficit increased from only R2,2 billion in 1994 to about R12 billion in 1995.


Towards the end of the year, the current account deficit was indeed running at a seasonally adjusted annualised rate of over R15 billion.


The capital account

One of the most significant changes in the South African economy over the past three years has been the remarkable switch in the capital account of the balance of payments. From a net outflow of R15 billion in 1993, the capital account switched to a net inflow of R5,4 billion in 1994 and an estimated net inflow of more than R20 billion in 1995. From the second quarter of 1994, that is when the Government of National Unity came into power, a net inflow of more than R30 billion was registered on the capital account of the balance of payments.

Although the initial inflows in 1994 were mostly of a short-term nature, the composition of the capital inflows improved gradually and, in the second half of 1995, the major part of the inflow represented capital transactions linked to underlying assets with maturities of more than twelve months (not necessarily "permanent" capital). Non-residents became important investors in listed securities traded through the Johannesburg Stock Exchange and total net purchases of such securities by non-residents last year exceeded R6 billion. Net borrowing of medium and long-term funds by the South African government, parastatals and the private sector in the first nine months of last year amounted to R7,4 billion.


Another significant development last year has been an almost explosive expansion in the Euro-rand market where non-residents of South Africa invest in rand-denominated paper issued by non-residents of South Africa. These placements, which take place mostly in Europe, now add up to the staggering figure of more than R6 billion. Possible future implications of this emerging Euro-rand market, over which South Africa has little direct control, are not yet clear.


Increase in net foreign reserves

With net capital inflows consistently in excess of the growing current account deficit, the Reserve Bank last year repaid all its outstanding foreign borrowings, and the gross foreign reserves, held by the government, the Reserve Bank and private banking institutions, increased to a level of R18,2 billion. Despite this good improvement, the level of the foreign reserves as at the end of 1995 represented sufficient cover for only seven weeks of imports. There remains therefore a need for a further increase in the official foreign reserves.


Relatively stable exchange rate

Throughout 1995, the Reserve Bank on balance remained a net buyer of foreign exchange in the foreign exchange market. Although this policy made it more difficult for the Bank to achieve its guidelines for an acceptable rate of increase in the domestic money supply, the intervention actions were nevertheless justified by:-

the equally important objective of increasing the level of the foreign reserves;

the need to prevent an appreciation of the exchange rate of the rand; and

the presence of the remaining exchange controls which will be removed gradually.

The upward pressure on the exchange rate of the rand caused by the relatively large net inflow of capital was successfully depressed by the Bank's intervention activities with the result that the average weighted value of the rand measured against a basket of the currencies of South Africa's major trading partners, depreciated in nominal terms by 3,6 per cent from the end of 1994 to the end of 1995. This depreciation was less than the inflation differential between South Africa and its trading partners, with the result that the effective exchange rate of the rand in real terms appreciated by 1½ per cent.


3. Domestic financial developments

The rising tempo of real economic activity placed some pressure on the domestic financial situation. This was clearly illustrated by a rise of 19,5 per cent in the total claims of the banking sector on the private sector over the twelve months up to June 1995. The rate of increase in the M3 money supply over twelve months periods also accelerated to 16,8 per cent in June 1995.

Against this background, interest rates rose quite sharply in the first half of 1995. The yield on 3 months' Treasury bills, for example, rose from 12,5 per cent in December 1994 to 14,2 per cent in June 1995. The Reserve Bank followed the trend in the market place and raised its lending rate (the Bank rate) from 13 per cent in December 1994 to 14 per cent in March 1995, and further to 15 per cent in June 1995.


During the second half of 1995, however, the financial situation became more stable. Bank credit extended to the private sector receded slightly from the peak of 19,5 per cent reached in June and fluctuated between this level and 16,7 per cent for the rest of the year. The rate of increase in the M3 money supply declined slightly to 13,8 per cent in November, before increasing again to 15,3 per cent in December.

Certain market interest rates, particularly long-term rates, started to decline in the second half of last year. The yield on long-term government stock for example declined from 16,7 per cent in June 1995 to 13,7 per cent in January 1996. Short-term rates remained more stable and declined only marginally from June onwards.


4. Inflation

The most important measure of the effectiveness of monetary policy is, of course, the rate of inflation. The rate of increase in the consumer price index over the twelve months up to October 1995 was only 6,3 per cent, which was the lowest rate of increase in this index since 1972. After October it increased again to 6,9 per cent in December. The average rate of increase in consumer prices for the year was 8,7 per cent, which was also the lowest rate of increase in any calendar year since 1972.


The rate of increase in production prices declined gradually from a peak of 11,5 per cent over the twelve months up to April 1995 to 8,3 per cent in November 1995. The lower rate of increase in the producer price inflation was caused mainly by a lower rate of increase in the prices of imported goods, mainly because of the relatively stable exchange rate of the rand.



At this stage, projections made by the Reserve Bank's Economic Department indicate that the well-balanced macroeconomic situation of 1995 can be sustained throughout 1996. Relatively good growth in real economic aggregates, equilibrium in the overall balance of payments and relative financial stability in the domestic economy will be attainable for the second year in succession.


Elements of strain are beginning to appear in the economy, particularly in the manufacturing sector where utilisation of the existing capacity is now nearing the full-employment zone. An increase in the production capacity as a result of the large new investments over the past two years should, however, provide some relief, whereas increases in the value added of the primary sector should compensate for some slowdown in the secondary sector of the economy. On balance, some marginal further increase in the economic growth rate in 1996 is not impossible.

Strains are also developing on the demand side where excessive increases in various expenditures financed with an ever-increasing amount of bank credit cannot be sustained. It will be particularly difficult to maintain the momentum in private sector consumer expenditure which has been rising in real terms at a seasonally adjusted annualised rate of more than 6 per cent in the second half of last year. Many private individuals are now getting over-extended in the amount of bank-credit utilised, and prudency will require from the South Arican banks to be more cautious in their credit extension policies in 1996.


Imports may rise further and an even larger deficit on the current account of the balance of payments can develop in 1996. At this stage, there are, however, no indication of any decline in the net capital inflows from abroad. The exchange rate of the rand should therefore on the average remain relatively stable.

The relatively high level of interest rates in South Africa at this stage contributed to the slowdown in the rates of increase in the more important financial aggregates, such as the money supply and bank credit extension in the second half of last year. The rate of expansion in these aggregates is, however, still too high for comfort, and there is a continuing danger that inflation can accelerate again at some later stage. Monetary policy will therefore have to remain relatively conservative to ensure financial stability, also in the longer run.

The improvement in the balance of payments situation, and particularly in the capital account of the balance of payments, justifies a further relaxation of the exchange controls in 1996. Indeed, a situation is developing where excessive capital inflows are contributing to the inflationary pressures in the domestic economy. Some fine balance must now be struck between the need to increase the official foreign reserves to a more comfortable level, and the desire to relax the exchange control restrictions on residents.


A stable financial environment remains the main objective of monetary policy. South Africa must maintain low inflation and a stable exchange rate for the rand, supported by well managed banking institutions and well-functioning financial markets. In such an environment, real economic growth at the maximum possible level will be sustainable throughout 1996, and also in the longer term.