Key economic issues: South African Reserve Bank (SARB) March 2013 Quarterly Bulletin briefing

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Finance Standing Committee

15 April 2013
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The South African Reserve Bank Governor described how the global crisis had mutated from the onset, beginning  with the banking sub prime crisis in the United States and developing into a systemic banking crisis across the advanced economies in which liquidity became a problem, and lending stopped. Governmental interventions led to mutation into a fiscal crisis for many countries with subsequent austerity measures and fiscal consolidation followed by a crisis of sovereign debt. Austerity measures led to very high unemployment. Other consequences  included capital flows to emerging markets and such flows had generally resulted in very strong exchange rates. However, South Africa had deviated from that particular trend. The world tended to move to the United States (US) dollar - a flight to familiarity rather than a flight to quality because the US had huge difficulties itself. Confidence was very fragile. China was seen as the engine for growth to take the world out of this problem. However, a marginal drop in China's growth rate had a huge impact, while South Africa was envious of China's now expected growth of 7.7%. The Eurozone was in huge trouble, and the UK would be for some time to come. The USA had postponed addressing many of its core problems. However, a glimmer of light was that the USA was growing, but the challenge was whether the USA could maintain growth, deal with the uncertainties that it itself had generated, and pull the rest of the world out of this synchronised downturn. Whereas the USA and Japan feared deflation, South Africa feared inflation. It had slowing growth together with inflation.  As to the Brazil, Russia, India, China, and South Africa (BRICS) group of countries - China was, in the Reserve Bank's view, doing well in the circumstances. Russia was also doing well. Although one of the power houses, Brazil had a growth rate of only 0.9% last year. The difference was that Brazil had not had a problem of unemployment, but it was now concerned about inflation. The indication was that it would now raise [interest] rates, although it had lowered them dramatically, in a similar way to South Africa. South Africa had a pedestrian rate of growth but compared to the zero or 0.1% growth in the advanced economies, South Africa's growth was still very positive. If South Africa got itself really organised, it could be an [investment] destination of choice. Confidence was key. Such measures as taken in Cyprus did not exactly bode well for the resolution of a country's problems. In essence, the Reserve Bank saw a three speed global economy. Firstly there were those countries that were functioning - largely the emerging markets. Secondly, there were those that showed signs of life, such as the USA.  Thirdly, there were those in real difficulties, such as the Eurozone and Japan. Since governments had very little fiscal room, the focus had fallen on central banks. There were unrealistic expectations of central banks.  The independence of the central bank depended on its ability to make decisions on interest rates without fear or favour.

The Reserve Bank's Deputy Head of Research, briefed Members on perspectives on key economic issues in the context of the global and domestic economy and selected issues – unsecured lending, the South African balance of payments, and monetary policy. Sub-Saharan African growth was buoyed by favourable prices of most export commodities, infrastructure spending, and new production facilities becoming operational. The growth of the Brazil, Russia, India, China and South Africa group of countries (BRICS) had slowed somewhat, particularly in Brazil, but remained brisk when compared with the advanced economies.

South Africa had moderately better growth in the final quarter of 2012 as the secondary sector picked up while the primary sector contracted further. In South Africa, banks' general loans extended to the household sector rose strongly over the past three years. However, there were tentative signs of moderation most recently. With unsecured lending constituting less than 15% of total lending to households, the household debt ratio inched lower in the final quarter of 2012. Widening current-account deficits reflected weak export volumes, largely due to structural impediments while import volumes surged, largely driven by rising domestic expenditure. The rise in import volumes was also supported by the growth in remuneration between 2008 and 2010. Even as the global crisis hit, South Africa's real wages were increasing quite robustly.  A significant part of the deficit was attributable to imports of capital goods that were needed to address the infrastructure backlogs, modernise the production structure, and facilitate higher exports in future. The rand had a floating exchange rate, and large exchange rate movements might have implications for inflation. Advanced economies were dealing with a deflationary situation, whereas most emerging markets had a problem with high inflation. The rand in recent months had started to depreciate again relative to almost every other world currency. Foreign debt though rising had remained within fairly conservative boundaries. South Africa had also become more robust in the face of possible external shocks through building up the country's stock of international reserve assets. The overall picture was one of sluggish growth, with the advanced economies registering a slight contraction in the final quarter of 2012. Domestic growth continued to be sluggish but less so than in the third quarter. Capital inflows in various forms had been sufficient to fully finance the deficit on the current account. Inflation remained inside the target range, and measures of underlying inflation were currently below the headline inflation rate. Monetary policy was mindful of the need to support growth - to this end South Africa currently had the lowest nominal policy interest rate in three decades.

ANC Members asked what lessons might be learned from the recent banking crisis in Cyprus. Members of Parliament (MPs) were also among the victims of ponzi schemes. Members were especially concerned about commodity prices and that South Africa did not have sufficient ability to manufacture. If South Africa was to host the proposed BRICS central bank, would South Africa benefit, and would it seize the opportunity to pose issues such as currency and inflation? Members were concerned at the consequences of high unemployment.  An overemphasis on policy and regulations might deter investors. Members called for the Reserve Bank's research department to provide the Governor with more data on foreign direct investment.  Without the trust and confidence of the international community, South Africa was not going to go anywhere.

A Member commended borrowing to finance infrastructure spending to ensure that there was no more postponement of service delivery especially were there were big infrastructure backlogs. Members asked if South Africa would do better to have more banks, and were concerned at insufficient beneficiation.

A COPE Member feared  that the fall in the price of commodities would have a huge impact on South Africa's income from exports. Was the Reserve Bank considering altering the reserve strategy? The same Member asked  for clarity on the reported loan to Zimbabwe. A DA Member appreciated the Reserve Bank's efforts to make administered prices, in particular, electricity tariffs, inflation related. Had the Reserve Bank any more recommendations on administered prices? He asked if monitoring the electoral process was part of the preconditions for the Zimbabwe loan? Certainly it should be a very strong precondition that there should be a very strong monitoring system when elections took place. He called for an independent and transparent process for the loan. The Chairperson believed that, at the right time, the Minister of Finance would brief the Committee, and the Committee would make a formal request. In South Africa's sluggish, pedestrian growth there were domestic factors which the Committee should examine. These included manufacturing and beneficiation. South Africa was contradicting itself in its energy policy, particularly in the mining sector. There could not be beneficiation in the mining sector with cuts in electricity consumption. South Africa had brilliant mining engineers, but it was not doing well in adding value to the products of the mines.  South Africa's mindset was still to export primary products rather than to beneficiate.  China was doing a great deal of work in Africa, but it remained for Africa to begin to use its relationship with China in BRICS and turn the current situation to its own advantage to negotiate in terms of food security so that its products entered European markets at favourable rates.
 

Meeting report

Key economic issues perspectives: South African Reserve Bank (SARB) Governor's introduction
Ms Gill Marcus, Governor, South African Reserve Bank (SARB), referred Members to the SARB's Quarterly Bulletin, No. 267, March 2013. She did not talk about it per se, but, as things were so dynamic, gave a presentation on the very latest state of affairs.

South Africa did not really fully appreciate what exactly was happening in the global economy. One was now in the sixth year of a global crisis. One came in and out of recession but never out of the crisis itself. It was important to note the difference between a country or a zone coming out of recession alone and coming out of the recession and the crisis together. 

The crisis had mutated from the onset. It had started out with the banking subprime crisis in the United States and developed into a systemic banking crisis across the advanced economies. This meant that lending stopped, and there was no inter-bank interaction. Liquidity became a problem. Thus there was a move from a banking and systemic crisis to the situation in which there was no liquidity. This meant that the banks did not deal with each other, but only with the central banks. So there were even some big multinational companies which created a banking arm so that they could deal directly with the central bank and not with the commercial banks. Such was the extent of the crisis that the banks froze, which meant that lending stopped. This meant that all kinds of things were not possible in the systems. That in itself in addressing that crisis led to governments intervening in an attempt to address the banking crisis caused the crisis to mutate into a fiscal crisis for many countries. The SARB estimated South Africa's fiscal deficit for this year to be around 5.2%, and it was hoped to bring it down. However, many countries among the advanced economies had a fiscal deficit around 8% to 12%. This huge fiscal crisis meant that there was very little fiscal room. This had led to the need for austerity and fiscal consolidation.

However, in trying to address the fiscal crisis, many countries got themselves into a crisis of sovereign debt. South Africa's debt: gross domestic product (GDP) ratio was expected to peak at a little over 40%. On the other hand, the Eurozone saw its maximum acceptable debt: GDP ratio as 60%.  Japan had a ratio of about 240%. Greece had 130%. The United Kingdom (UK) was around 100%. To bring down those deficits, such countries had taken an approach of extreme austerity. The UK was a notable example of austerity measures leading to very high unemployment. Spain had an unemployment rate of 26.8%. Greece had an unemployment rate of about 26.6% and rising. The Eurozone as a whole was just under 12%. If one focused on youth numbers, the average in these countries was around 23%.

Therefore one had to ask what the next mutation would be as one was not yet out of the crisis. The consequences included the capital flows to emerging markets, and the effects on currencies. Such flows had generally resulted in very strong exchange rates. However, South Africa had deviated from that particular trend. Another consequence was the search for yield. There was also the question of monetary policy measures that were innovative to say the least. Zero bound was no longer zero bound with quantitative easing. Therefore one had seen a very serious change. The implications for emerging-markets, and the concern for emerging-markets, was what happened to a sudden stop.

In the light of such concerns, the world tended to move to the United States (US) dollar. 'We call it a flight to familiarity rather than a flight to quality' because the US had had huge difficulties itself. Thus it was evident that confidence was very fragile.

China was seen as the engine for growth to take one out of this problem. Of course, with the balance of the emerging-markets and the tectonic plate shift to emerging markets which over time would become more and more dominant in the world economy, what one was seeing with China was that its growth had come in at 7.7% instead of the market expectation of 7.9%.  The result of this disappointment was that the bottom had dropped out of the market because this small shortfall was seen as an indication that China's growth was slowing. That difference was quite marginal but it had a huge impact. South Africa was envious of China's now expected growth of 7.7%.

One might ask if there was a glimmer of light. The Eurozone was in huge trouble, and the UK would be for some time to come, even if nothing got worse, and no one was saying that it could not get worse. It would take a long time to come out of this crisis. The US had postponed many of its issues that were core problems. Its fiscal situation, its debt ceiling, had been postponed but not resolved. However, the USA was growing. This was a huge plus. The challenge for the world was, if the USA could maintain a level of growth and deal with the uncertainties that it itself had generated, whether it could pull the rest of the world out of this synchronised downturn. The synchronised downturn in the advanced economies was the USA, the Eurozone, the UK, and Japan.

One would have to see what would happen in Japan. She reminded Members not to forget that the USA and Japan were fighting very different things. The USA wanted inflation of at least 2.5% because it was concerned about deflation. Japan was taking the measures that it was dealing with because it too was worried about deflation, not inflation.

South Africa, on the other hand, was concerned about inflation. It had slowing growth together with inflation. A country's policies of choice were different if it was fighting deflation rather than inflation. Confidence was key to all of this.

As to the Brazil, Russia, India, China, and South Africa (BRICS) group of countries China was, in the SARB's view, doing well in the circumstances. Also Russia was doing well. Brazil had had a very difficult time. Although one of the power houses, it had a growth rate of 0.9% last year. The difference was that Brazil had not had a problem of unemployment, but it was now concerned about inflation. The indication was that it would now raise [interest] rates, although it had lowered them dramatically, in a similar way to South Africa.    
South Africa had a pedestrian rate of growth – 2.5% last year, roughly the same this year. However, if one compared it to the zero or 0.1% growth in the advanced economies, South Africa's growth was still very positive. Imagine what one could do, in terms of growth if South Africa got itself really organised. South Africa could really be an [investment] destination of choice.

Confidence was affected by things such as those done in Cyprus recently. Cyprus was in difficulty. The initial proposal was that there would be a haircut of everyone's deposits, irrespective of level of deposit, in order to pay off debts. This created great consternation, as one was looking at deposit insurance and regulation across the whole of the Eurozone. Therefore it had to be asked what was safe. It was then decided to reverse the initial proposal and say that under €100 there would be no haircut. However, there was talk of taking, in essence, between 40% and 60% of a person's deposit, if the deposit was above €100 000 in return for giving shares in a particular asset of the country. Such a measure did not exactly bode well for the resolution of a country's problems. In essence, the SARB saw a three speed global economy. Firstly there were those countries that were functioning, which were largely the emerging markets. Secondly, there were those that showed signs of life, such as the USA.  Thirdly, there were those in real difficulties, such as the Eurozone and Japan.

Part of the consequences of all this was that, because governments in terms of fiscal policy had very little room, the focus had fallen on central banks. What was the role of a central bank? Could it continue to be the same as it was before?  It was to be emphasised that it was in the advanced economies primarily that central banks had stepped into roles that were not historically the roles of central banks. Therefore the challenge to central banks was where to go from here. Many central banks now, like the SARB, had explicit financial stability mandates. Central banks had always had an implicit financial stability mandate, but such mandates had now become explicit. Therefore the challenge was between monetary policy responsibility and financial stability responsibility and what those posed for central banks. Also central banks were now expected to resolve everything. This was not possible. Thus there were unrealistic expectations of what central banks could do. It was necessary to find ways to address those issue both globally and nationally.

Related to this was an important question of accountability and independence. It was important to stress how the SARB saw independence. The SARB did not see it as having a large building and not allowing people to know what was going on inside it. The SARB recognised that any central bank was integral to the life of a country. It had a particular role and responsibilities. Since 1989 the SARB has been responsible for regulation of the banking sector. Increasingly one saw regulation as a major role of central banks. With the regulatory reform, regulation was being extended to  insurance and infrastructure. Currency was another role of central banks. Supervision was another. Monetary policy was absolutely a central bank role. Also stability was a crucial role.

The independence of the central bank had to be about the central bank's stance on monetary policy decision. This was the central bank's independence, as it had to be able to make decisions on interest rates  without fear or favour. This was what the Constitution required. It took account, in the interests of sustainable growth and development, all the things that went into that. Independence required that the central bank exercised its mind, unswayed by any pressures whether from government or business or labour or society. The central bank had to take responsibility for the country as a whole and take that into account when making a decision on interest rates but it could not exercise that effectively unless it was engaged in the economy of the country.

Key economic issues perspectives: South African Reserve Bank (SARB) Quarterly Bulletin briefing
Outline
Mr Chris Loewald, SARB Deputy Head: Research, outlined the context: the global and domestic economy in a nutshell. This would be followed by selected issues – unsecured lending, the South African balance of payments, and monetary policy.

The context: the global and domestic economy in a nutshell
There was continued sluggishness in the world economy. Global real gross domestic product (GDP) growth slackened in the final quarter of 2012 as advanced economies registered a contraction. Global growth and contributions to growth from advanced and emerging-market and developing economies were indicated. (Graph and bar chart, slide [4]).

Recent global developments were a mixed bag. Events in Cyprus had again undermined confidence and cohesion in Europe. Aggressive expansionary policies adopted in Japan seemed credible enough to have resulted in expectations of somewhat higher inflation and improved growth. The United States fiscal dilemmas had been partly resolved but were mostly postponed. Sub-Saharan African growth was buoyed by favourable prices of most export commodities, infrastructure spending, and new production facilities becoming operational. The growth of the Brazil, Russia, India, China and South Africa group of countries (BRICS) had slowed somewhat, particularly in Brazil, but remained brisk when compared with the advanced economies. (Text, slide [5]).

Global inflation pressures remained muted especially in the advanced economies. Consumer price developments were indicated. (Graph, slide [6]).

South Africa had moderately better growth in the final quarter of 2012 as the secondary sector picked up while the primary sector contracted further. Real gross domestic product was illustrated. (Graph, slide [7]).

Growth in all the final domestic demand components slackened in the final quarter. Components of real gross domestic expenditure were indicated. (Graph, slide [8]).

Selected issues: unsecured lending
Banks' general loans extended to the household sector rose strongly over the past three years. The percentage of total loans and advances to households from 2007 to 2013 was indicated. (Graph, slide [10]).

However, there were tentative signs of moderation most recently, and the intention of some key lenders active in the market was to aim for slower growth in this business. The percentage change in general loans to households (mostly unsecured lending) and to companies over twelve months was indicated. (Graph, slide [11]).

With unsecured lending constituting less than 15% of total lending to households, the household debt ratio inched lower in the final quarter of 2012. (Graphs, slide [12]).

Selected issues: South Africa's balance of payments
There was an inflow of savings from the rest of the world (ROW) on the back of macro stability and stronger economic growth. the balance, as a percentage of GDP, on the financial account of the balance of payments from 1980 to 2012 was indicated. (Bar chart, slide [14]).

There had been a movement from current-account surpluses in the sanctions era to sizeable deficits in recent years. The balance, as a percentage of GDP, on current account from 1980 to 2012 was indicated. (Bar chart, slide [15]).

In recent years, widening current-account deficits reflected weak export volumes, largely due to structural impediments while import volumes surged. The volume of South Africa's imports and exports from 1994 to 2012 were indicated. (Graph, slide [16]).

Import volumes rose strongly, largely driven by rising domestic expenditure. Real domestic expenditure components and imports from 1994 to 2012 – household consumption and capital formation as compared with imports – were indicated. (Graph, slide [17]).

The rise in import volumes was not only driven by rising domestic expenditure but was also supported by the growth in remuneration between 2008 and 2010. Labour productivity, nominal remuneration per worker and wage settlement rates  (percentage change over four quarters) from 2007 to 2012 was indicated. The Andrew Levy wage settlement rate (quarter-to-quarter estimates) from 2007 t0 2012 was indicated. (Graph, bar chart, slide [18]).

He pointed out that even as the global crisis hit, South Africa's real wages were increasing quite robustly.   

Digesting the current-account deficit: a significant part of the deficit was attributable to imports of capital goods that were needed to address the infrastructure backlogs, modernise the production structure, and facilitate higher exports in future. Real fixed capital formation by government and public corporations in R millions at 2005 prices from 1994 to 2012 was indicated. (Graph, slide [19]).

The above was reflected in part by the weakness of the South African rand, which had a floating exchange rate, so that deficits or surpluses deemed unsustainable by market participants resulted in exchange rate adjustment; there was an inbuilt shock absorber at play. However, large exchange rate movements might have implications for inflation and necessitate policy adjustment. The effective exchange rates (real as compared with nominal) of the rand (indices: 2000 – 100) from 2007 to 2013 were indicated. (Graph, slide [20]).

He pointed out that this was a reflection again of the difference between many emerging-markets  and advanced economies at this point in time. Advanced economies were dealing with a deflationary situation, whereas most emerging markets had a problem with high inflation. 

Exchange rate trends varied across emerging markets and commodity producers. (Graph, slide [21]).

The light blue line represented the rand. 2006 was the peak of the currency's strength. With the crisis it fell quite precipitously alongside the currencies of other commodity producers and other emerging markets. The red line represented the currency of Brazil. The green line represented the Australian dollar, which was a commodity currency. The two black lines represented the currencies of Turkey and Mexico. Post crisis the dollar bounced back, and all the currencies appreciated quite sharply into 2009/10. Then they were on a sideways track for the last few years until 2012 in which one could see quite a divergence. Thus one could see that the Brazilian Real and the Australian dollar saw a continued strengthening into 2013, while South Africa's rand had depreciated quite a bit. The point was that the rand in recent months had started to depreciate again relative to almost every other world currency.

In financing the deficit, foreign debt had been rising since 1985 but it remained within fairly conservative boundaries. (Bar chart, graph, slide [22]).

South Africa had also become more robust in the face of possible external shocks through building up the country's stock of international reserve assets. International reserves and import cover from 2007 to 2013  were indicated with a comparison of gross reserves, international liquidity position, and import cover. (Graph, slide [23]).

Selected issues: monetary policy
Monetary policy had remained expansionary with the nominal policy rate at its lowest level in more than three decades to support the economic recovery. The nominal and real repurchase rates were compared over the period 2008 to 2013. (Graphs, slide [25]).

Inflation was inside the target range, and a trimmed mean measure of underlying inflation had been added. Underlying measures of consumer price inflation were indicated. In indicating the percentage change over the past twelve months, the headline Consumer Price Index (CPI) and the trimmed mean were compared. (Graph, slide [26]).

He pointed out that South Africa had rebased the CPI and this was done by Statistics South Africa (Stats SA) and the SARB on a relatively routine basis when the survey of household income and expenditure was released. There was a detailed analysis of this in the Quarterly Bulletin.

The trimmed mean measure was also produced by Stats SA. Economists tried to find more useful measures of inflation. Therefore the SARB and Stats SA produced a variety of measures of core inflation. Trimmed mean meant basically that over time one calculated the core measure by taking out either high volatility or low volatility price changes. So out of all the components of the CPI, one removed those that moved the most. This gave one a different perspective of core inflation.    

Ms Z Dlamini-Dubazana (ANC) asked Mr Loewald to repeat the definition.

Mr Loewald referred to the headline CPI, that red line in the graph, slide [26]. From the CPI basket one deducted price categories that had moved the most in recent times. Thus one sought to find a more stable measure of core inflation. So by taking out the more volatile items, one could obtain a more stable inflation rate. However, he could not say what those set of prices were, as they changed every month.  

Market expectations were for short term interest rates to increase moderately in 2014. In an indication in percentage terms of interest rate expectations, Forward Rate Agreements (FRAs), 15 February 2013 were compared with the Reuters mean projection for the repurchase rate, January 2013 survey. (Graph, slide [27]). 

The proxy for expected inflation had hovered slightly above 6% for most of the past two years. Break-even inflation rates in percentage terms from 2007 to 2013 were indicated. (Graph, slide [28]).

At the March Monetary Policy Committee (MPC) meeting, it was observed that the inflation outlook had deteriorated slightly due to a more depreciated exchange rate and higher petrol prices, but it was still projected to be within the target range over the effective policy time horizon. (Graph, slide [29]). 

An ongoing concern of the MPC was that administered price inflation remained well above the inflation target range; greater moderation and discipline were needed. In an indication of targeted inflation and administered prices (percentage change over twelve months) administered prices (bar chart) were compared with targeted headline consumer prices (superimposed graph). (Slide [30]).

Conclusion
The overall picture was one of sluggish growth, with the advanced economies registering a slight contraction in the final quarter of 2012. Domestic growth continued to be sluggish but less so than in the third quarter. Capital inflows in various forms had been sufficient to fully finance the deficit on the current account. Inflation remained inside the target range, and measures of underlying inflation were currently below the headline inflation rate. Monetary policy was mindful of the need to support growth - to this end South Africa currently had the lowest nominal policy interest rate in three decades. (Text, slide [31]).

Discussion
After a short break to allow Members and delegates to stretch their legs, the Chairperson opened discussion. He reminded everyone present that the SARB could not be seen as a panacea to all problems. While Members were invited to pose questions beyond the presentation itself, he pointed out that these past two days there had been media frenzy around 'the meat industry' but that this was not part of the SARB. Secondly there had been newspaper reports that Members were going to grill the SARB on the loan to Zimbabwe. It was not the position of the Committee, but Members were free to ask questions along those lines: however, 'The weather is fine in Cape Town'.    

Mr D van Rooyen (ANC) asked what was involved in reorganisation to take advantage of growth prospects. Also what impediments were there to such a reorganisation?

Secondly, Mr Van Rooyen asked what lessons might be learned from the recent banking crisis in Cyprus.

Mr N Koornhof (COPE) put on record that he commended the Governor and her team. He thanked her for the SARB’s input and agreed with the Governor that what the next mutation of the crisis was likely to be was a most important question. Were we not already entering that next mutation? One saw what the fall in the price of commodities was doing. There was huge uncertainty in those markets. There would be a huge impact on South Africa's income from exports.  In the light of this new mutation coming in, like the cold front that was about to hit Cape Town, was the SARB considering altering the reserve strategy?  There would be a huge pressure on the rand:dollar rate of exchange. The rand had deteriorated in the last 24 hours by almost 20 cents. 'We don't know what it will do today.' It was indeed a time of uncertainty. 

Mr Koornhof did ask for any information on the loan to Zimbabwe that had been reported in the media, but he assured Ms Marcus and her colleagues that, contrary to the media’s view, his question would not be ‘a grilling’. He thought that Zimbabwe’s finance minister had ‘jumped the gun’. One did not know the conditions for the loan or the details. The loan was reported to be in the region of $100 million, but one did not  know if it would help democracy in that country. With all due respect to the president of that country, Zimbabwe did not have a good track record of running its finances. However, he understood that it was important to have stable neighbours. However, there was 'an unnecessary cloud of secrecy' around the loan. There was need for clarity, as this uncertainty was not good for South Africa, or for the National Treasury, or for the SARB if it was involved. If the SARB was not in a position to offer any information today, it had to be asked when one could expect some kind of clarity on this loan.

Mr D Ross (DA) appreciated the SARB’s efforts to make administered prices, in particular, electricity tariffs, inflation related. This had saved South Africa R400 billion, with the Eskom application to the National Energy Regulator of South Africa (NERSA) being reduced from R1 trillion to about R600 billion.   

Mr Ross asked if the SARB had any more recommendations on administered prices. Did the SARB think that the 8% electricity pricing, although it was higher than inflation, was feasible?

Mr Ross had two weeks ago attended a joint sitting of the European Parliament and was shocked to learn that South Africa might experience further difficulties in terms of its quotas and levies and that there was a unilateral withdrawal of South Africa's access to its European markets. He understood that South Africa was moving towards 'the BRICS situation', but it was certainly of great concern.

Mr Ross asked Ms Marcus if she foresaw any intervention from the South African government in regard to the above. He believed that there was need for high level political intervention to ameliorate the export difficulties that the country was experiencing. Would the SARB take up this responsibility?
 
Mr Ross said noted that it was necessary to keep careful watch over South Africa’s debt level if its economy declined. 

Mr Ross further said that, as Mr Koornhof had indicated, the reported loan to Zimbabwe was clouded in secrecy. Perhaps there were unintended consequences. Zimbabwe’s finance minister was reported to have said that the loan was to help small and medium sized businesses, although it was not earmarked for enhancing democracy. The information available was inconsistent. What exactly was the purpose of the loan? Was the global political agreement on Zimbabwe being honoured? What was the progress on implementation of Zimbabwe's Electoral Act? He also asked about Zimbabwe's Human Rights Commission Act. Was monitoring the process part of the preconditions for the loan? It was important that Zimbabwe’s upcoming elections should be monitored. The Southern African Development Community (SADC) observation mission on the referendum was positive. However, unfortunately all the good work was undone when Mr Robert Mugabe, President of Zimbabwe, made utterances that the western observers would not be allowed at the electoral level. Certainly it should be a very strong precondition that there should be a very strong monitoring system when elections took place. He called for an independent and transparent process for the loan.

Mr Ross appreciated that the Financial Advisory and Intermediary Services (FAIS) ombud was doing a great job in respect of investments in the property syndicates. An intervention by the SARB into the syndicates had left many dormant buildings in South Africa. This had a negative impact on job creation. He referred to the Sharemax situation and others.  How could the SARB improve the timing of the interventions to ensure at least some return for investors? Many old people now had nothing on the table.

The Chairperson asked for responses first, before taking further questions. 

Ms Marcus replied that the Zimbabwe loan and its conditions was for government to government discussion. The SARB was not involved in such discussions and did not know any more than Members. If National Treasury were given a mandate, it would be for National Treasury to answer questions on conditions and terms.

Ms Marcus replied that the SARB had tried to have an ongoing information campaign to alert members of the public to issues such as Sharemax, and the whole question of ponzi schemes. She called upon parliamentarians to assist through their constituency work. Sharemax was an especially sophisticated example of such a scheme. There were no winners in a ponzi scheme. The SARB was involved because such schemes took deposits from members of the public illegally. A more proactive approach was required because one heard about these schemes only after people had lost money. 

Ms Marcus said that part of the challenge to growth prospects was that a significant part of South Africa's manufactured exports had gone to Europe. However, that was changing thanks to a concerted effort by government and the private sector. Now 36% to 37% of South Africa's manufactured goods went to the rest of the African continent. The rest of the continent was the growth story of the moment. Exports to the UK and the Eurozone were now at around 25% to 26%. There was thus for South Africa a significant growth opportunity by virtue of its very location. However, it was necessary to take a long term view. Also being a member of BRICS was a fantastic opportunity for South Africa. The weight of the emerging-markets in the global economy was shifting dramatically and countries such as Turkey and Indonesia presented great opportunities.  

Ms Marcus said that the impediments included the cohesion that South Africa required, and the uncertainties of energy supply. The infrastructure programme that was under way needed to be given effect. The Eurozone mattered because it remained an important export destination for South Africa. Exports had been very poor in the last quarter of last year, and were not very good this year. There had been a boom cycle for commodity prices but South Africa had not really taken advantage of that because it had not got the goods to market. For investment one needed certainty. 
Ms Marcus said that the mining sector remained hugely important, as much of the mining sector drove manufacturing. One acknowledged that a strong exchange rate had impacted on manufacturing. However, now that there was a depreciated currency manufacturing still faced difficulties.   

Cyprus was very much a unique case. It was the European Central Bank (ECB) which really determined what happened in the Eurozone, as it set interest rates not the Eurozone countries' central banks. Part of the challenge for the Eurozone countries was that they did not have flexibility around depreciation. There were many lessons from Cyprus but it was more a question of regulation and who dictated conditions. The real challenge for South Africa was not to get into the same kind of mess in which other countries told South Africa what to do. She was not sure whether the next mutation was simply about commodities.  Basel III looked at consolidation. There were fewer but bigger banks now than when the crisis started. Thus the systemic issues had not gone away. Space had been created largely by the initiatives taken by central banks for governments and policy makers to take hard decisions and implement them.  The challenge was how to rebuild confidence. The events overnight were primarily the results of an expectation of China that did not materialise, and demonstrated how fragile the system was. 

Ms Marcus thought that the National Energy Regulator of South Africa (NERSA) had done a very sound job. However, it was necessary to have certainty about energy. It was also necessary to ask questions about choices of energy supply. What would be the basis of going nuclear? The country should debate this. It should also examine green energy.

The SARB was emphasising the need for consistency in administered prices. If one was serious about containing inflation, one had to examine the impact of such prices, not only of electricity but of health care and education. The SARB did not have specific recommendations but pointed out the economic implications.

Ms Marcus said that South African miners were superb, but were not necessarily able to advise on beneficiation. It was necessary to examine not only how to add value but how to create an environment conducive to beneficiation.

Mr Loewald explained that the rand floated, unlike the currency of Cyprus. Thus external shocks did not fully translate to the real economy of South Africa.

Ms Soda Matsau, SARB Senior Deputy Head: Financial Markets, said that the government and the SARB accumulated reserves when it was able to finance them. For South Africa the process of accumulating reserves was a very expensive exercise. At the same time, when South Africa invested reserves with rates in industrialised countries being so low it received almost nothing in return for its investment. However, South Africa was in this respect at about the same level as some of its peer countries. 

Mr Nkosana Mashiya, SARB Head: Deputy Registrar of Banks, said that while that banks' general loans extended to the household sector rose strongly over the past three years. (Graph, slide [10]), this figures tended to be exaggerated as they represented not just exposure to the low income market. They included overdrafts, credit card loans, as well as lending to small and medium enterprises (SMEs). The total gross credit exposure was about R450 billion, while the banking system as a whole contained about R3.6 trillion in December 2012. There had been a good deal of credit extension to the corporate sector as well. The total credit exposure to the retail market was about R1.4 trillion and to the corporates about R1.2 trillion. To the other banks and securities firms in asset management it was about R800 billion. Altogether over R2 trillion had been extended to the corporate sector. Unsecured lending, which carried higher risks, had increased both to the middle income and lower income groups, while mortgage loans which were the most stable banking assets had flattened out. However, unsecured lending remained relatively small in relation to the total extension of credit. (Slide [12]). 

Mr Hlengani Mathebula, SARB Head: Strategy and Communications, said that an aware public was the first line of defence against property syndication/pyramid schemes. The SARB was publishing information to make members of the public aware that if they entrusted their money to anyone who was unregistered with the Financial Services Board (FSB) or the Credit Regulator or the SARB they were bound to lose their money. Many such people currently were losing their money. Currently such losses were happening especially in Limpopo, after unscrupulous operators had moved from KwaZulu-Natal. Their modus operandi remained the same, but their names changed.   

Ms J Tshabalala (ANC) said that Members of Parliament (MPs) were also among the victims of ponzi schemes. She thanked Ms Marcus and her team. She was especially concerned about commodity prices and that South Africa did not have sufficient ability to manufacture. China was entering South Africa with its  imports at the same time as it was assisting South Africa in its development. Therefore it had to be asked what the overall benefit of this arrangement was. For China it was beneficial and the financial benefits were invested in China's banks. Was there any regulation to require China to have some kind of economic activity in South Africa's banking system rather than only in its own banks?

Ms Tshabalala asked secondly about BRICS. There were high expectations of central banks and greater definition was needed of their role. If South Africa was to host the proposed BRICS central bank, would South Africa benefit, and would it seize the opportunity to pose issues such as currency and inflation?  

Ms Tshabalala anticipated difficulties around infrastructure. If South Africa had to import in such large quantities, would it be able to realise its plans?

Ms Tshabalala asked further about the debt: GDP ratio. She was concerned at the consequences of high unemployment.  There was a problem in that the policy was not being implemented, and investors did not have confidence in South Africa for the future. An overemphasis on policy and regulations might deter investors.  

Ms Dlamini-Dubazana said that Ms Marcus had anticipated all her questions except foreign direct investment and private sector investment. She sought more information on foreign direct investment. She called for the SARB's research department to provide the Governor with more data. On private sector investment, she referred to the fourth quarter of 2012, in which the figure was 3.8% for private sector capital investment. In which direction was South Africa moving? She said that the Minister of Finance had highlighted confidence and trust. But what was the SARB doing about it? Without the trust and confidence of the international community, South Africa was not going to go anywhere.

Dr Z Luyenge (ANC) was concerned at the sluggish economic growth both globally and domestically. Monetary policy was mindful of the need to support growth. South Africa had the lowest nominal policy interest. One foresaw a situation in which these effects would have a problem for infrastructure spending and development. He recalled that the former Member of the Executive Council (MEC) for Finance in the Eastern Cape seven years ago had said that rather than postponing service delivery it was better to borrow in order to finance infrastructure spending. Dr Luyenge himself belonged to that school of thought. He wanted to ensure that there was no more postponement of service delivery or infrastructure development, especially were there were big backlogs.

A visiting Member said that there were fewer banks in South Africa than any other country. Was this situation of value to South Africa? Businesses without competition did whatever they liked.  Would it not be better for South Africa to have more banks?

The same Member asked if the Chinese investors in South Africa banked with South African banks. She noted that Pakistani investors took their money back to their own country. What policy did South Africa have around that?

The same Member asked about the coming infrastructure project for South Africa, which imported more than it exported. South Africa exported raw material but then imported very expensive finished products made from those materials.

A second visiting Member asked for more detail on South Africa's pedestrian rate of growth. Was this rate of growth the cause of South Africa having the lowest nominal policy interest rate in three decades?

She understood from Ms Marcus that the banks did not talk to each other, but the central bank did everything for them. She asked for the SARB's view on the small banks such as Capitec.

She asked why South Africa had to import chickens from Brazil. Could South Africa itself not export chickens?

A third visiting Member asked why 'stokes', whether registered or unregistered, were dominating the South African economy.

Ms Marcus replied that  'stokes' had an underestimated roll and offered great opportunities because client and lender knew each other.

South Africa was one of the few countries in the world that had not had a banking crisis. By and large South African banking was sound. It was not easy for foreign banks to enter as South African banks were strong. Thus foreign banks tended to  partner local banks. Small banks such as Africa Bank were doing well but served a different sector of the economy from the large banks. Without being complacent, she thought that South Africa's banking sector was doing reasonably well. South Africa did not allow foreign banks into the system unless they met regulatory requirements. The foreign banks present in South Africa were involved in the business, personal wealth and investment sector not in the retail sector.

Ms Marcus agreed that South Africa was importing for infrastructure. However, it was better to import at a time when the currency was strong. At the same time, building infrastructure was extremely important to improve economic efficiency going forward. 

Ms Marcus said that one should think differently about China, which had great interests in the African continent and a relationship with almost all the African countries. Was there not an opportunity for a win-win situation in the long term? There was the possibility in cooperation with other countries to help transform the infrastructure. At present, South Africa could produce the goods but was not able to get them to market.

As to whether anyone did not pay a fair share of tax, she was confident that the South African Revenue Service (SARS) would detect any non-compliance.

Ms Marcus denied that BRICS was establishing a central bank. Instead it was thinking of establishing a BRICS development bank. Such a proposal would fall under the National Treasury, not under the SARB. It would be an additional resource and the benefits would be substantial.

Ms Marcus said that South Africa now had an agreement with China that it could invest reserves in China's currency, the Renminbi.  Brazil also had an agreement with China, but it was different. These two countries had agreed that each could use its own currencies for trade, rather than the US dollar. South Africa could consider such an agreement in future. One of the agreements in BRICS was to create a reserve amount. This was one of a number of initiatives that would especially benefit South Africa.   

Mr Loewald said that foreign direct investment (FDI) was related to confidence and trust but also to harder economic factors such as prospects for a long term market for products, how fast that market was likely to grow over time, and where the competition was. FDI decisions tended to be hard-nosed economic decisions. It was also true that FDIs were much impacted by the general competitiveness of the economy. So in South Africa there was more FDI in the financial sector which was seen to be very competitive. He could send the Committee the long term FDI figures.

Mr Loewald gave some detail on gross fixed capital formation. Private sector investment last year was at about 3.8%, which was considerably weaker than expected. That again was very much a function of confidence and trust. He expected much higher private sector investment if confidence was higher. In the government and sector, decisions were longer term, so general government capital investment was growing 'at quite a nice pace' and had been doing so for a long time. There had been a fall in 2009/10,but last year had grown at 10% and it was expected to maintain that growth his year. From a growth perspective one hoped to see gross fixed capital formation covering the private sector, general government, and the public sector corporations to be considerably higher with a return to the levels in 2005  to 2007 of 12% to 15%.    

The Chinese government sought to shift the focus of China's economy from exports to domestic consumption. However, the conventional view was that this was a long term process. The effect for South Africa would be that the Chinese currency's exchange rate would rise in real terms. It had already risen considerably in the past four or five years. This would tend to alleviate concerns about the ease with which South Africans could buy Chinese imports.
 
It was fair to say that the monetary transmission mechanism in recent years had not worked in the way that one would have expected prior to the crisis. So despite low interest rates the demand for loans and credit across households and firms was lower than expected. Thus low interest rates were not necessarily encouraging growth  in the way one would have expected. 

Mr Mashiya replied that there were 37 registered banks in South Africa. Besides the main banks, the others were small specialist banks, of which the best known were African Bank and Capitec. Then there was a whole range of foreign banks such as JP Morgan, HSBC, and the Construction Bank of China. When the SARB registered foreign banks, it regulated them according to South African standards. South Africa followed Basel lII, so, in the case of a USA bank, it thus applied the higher standard as the USA still followed Basel I. 

Mr Mashiya said that South African banks and insurance companies had not had to ask for bailouts at any time in the global crisis. One knew that there was financial stability if one was able to go through a financial crisis without having to provide any fiscal or monetary support to the financial companies. One also knew that there was financial stability if, in the case of distress to any one of the banks or financial companies, one was able to manage that distress from the resources of the financial system without causing any disruption of the financial system or without slowing down lending. South Africa had achieved that. He acknowledged that South Africa could do with more competition in banking. There was a good deal of competition with unsecured lending. Basel III encouraged banks to diversify their funding base away from short term deposits. The USA and Europe had not yet implemented Basel III, but South Africa had already done so.

Mr Mashiya replied that it was unlikely that foreigners took their money back home illegally unless they took it in cash. There were some thresholds which allowed one-off transactions where a person could deposit a certain some of money below a certain threshold; however, if the person wanted to deposit often he or she would have to be captured in the system. The controls at the airports and the ports made it too difficult to take any significant amount of cash out of the South African banking system. Therefore, even though there was much economic activity taking place, he doubted that any form of illegal removal of cash to outside of South Africa was happening on any significant scale. If any illegal removal of cash did happen it would most probably be circulated within the country but not through the banking system.        

Mr Mashiya said that perhaps the best place to manage credit risk was in the financial activities that took place in the communities. Lending did not take place according to some mathematical model which determined whether a person was likely to be able or unable to pay back the money that he or she borrowed. It depended on the person's reputation in the communities. Credit risks were the lowest, as the Governor had indicated, where cooperative banks and 'stokes' were concerned, as if a client did not repay the money borrowed, people knew where he or she stayed. For the two cooperative banks that had been registered, credit risks were significantly low, much lower than in the corporate banks. There were many  'stokes', and one encouraged them to register as cooperative banks. In being registered as a cooperative bank there was the implicit protection of the taxpayer as the entity's activities would be regulated. If any loss occurred, which was highly unlikely, a depositor had the same protection as a depositor in a regular commercial bank. There were about 26 financial cooperatives which were not yet registered as cooperative banks, but whom one had given an exemption from the Banks Act to operate. One would rather have registered cooperative banks than cooperative finance institutions (CFIs) since at least one had oversight over what the cooperative banks did.

Ms Matsau referred to the diversification of South Africa's reserves into the Renminbi (the Chinese currency). Until recently all South Africa's reserves were invested in the currencies of major economies.  South Africa's cooperation with China had enabled South Africa to diversify into the Renminbi. This was not only advantageous in terms of the prudence of diversifying but it also reflected South Africa's trade patterns with China. It was a good move to diversify into currencies from which South Africa could enhance its return, because, as she had said earlier, the interest rates in major economies had been close to zero. Some other country's central banks offered very low interest rates on other countries' deposits as they were disinclined to take addition reserves from other countries. So investing in the Renminbi had been very good for South Africa's reserves.   

The Chairperson said that while discussions were in progress between the governments of South Africa and Zimbabwe, somebody, elsewhere, had 'jumped the gun'. He believed that the ministers concerned had a responsibility to brief Parliament, through the Finance Standing Committee. Howe over, they could do so only if they were certain of the details about which they would speak. In the case of a similar loan to Swaziland, one had heard about it in the media from a source in Swaziland. mentioned several issues that the Committee needed to examine. He believed that, at the right time, the Minister of Finance would brief the Committee, and the Committee would make a formal request.

The key question from Members was what lay ahead. As one entered the period of the Medium Term Budget Policy Statement (MTBPS) one would try to get certainty in terms of the fiscal framework into the future. The SARB Governor had outlined three key areas that would continue to pose challenges to the global economy. She had referred to the three speed economy – the challenges of the USA economy and what the USA did to extricate itself from the situation. The Chairperson's view was that South Africa was, in this context, not a prize giver, but rather a taker of the prize. However, there were key issues that had not been resolved in the USA, except for  what had happened in the past few weeks on the fiscal cliff, which was consumer spending cuts and taxes for a particular bracket. Obviously how the USA resolved its issues and came out of the crisis would have a large impact on the global economy and global confidence. 

The Eurozone countries had a very strong monetary policy. It was a union at the monetary level but with federal government. The extent to which this government would be able to move depended on what the electorate said.  

In South Africa's sluggish, pedestrian growth there were domestic factors which the Committee should examine. These included manufacturing and beneficiation. South Africa was contradicting itself in its energy policy, particularly in the mining sector. There could not be beneficiation in the mining sector with cuts in electricity consumption. South Africa had brilliant mining engineers, but it was not doing well in adding value to the products of the mines. This needed to be looked into in terms of infrastructure development, including rail. South Africa's mindset was still to export primary products rather than to beneficiate.

The Chairperson thought that African countries should relate with China as partners in development. As one travelled through Africa one could see that China was doing a great deal of work in Africa, but it remained for Africa to begin to use its relationship with China in BRICS and turn the current situation to its own advantage to negotiate in terms of food security so that its products entered European markets at favourable rates. A key issue was whether the products of the agricultural sector found their way into the real markets.    

Ms Marcus said that these were very challenging times. It was necessary to ensure that South Africa did not do things by rote. It was necessary for South Africa  to think about what it was doing and why and whether it was effective in what it did and ensure that had a cohesive and focused policy. South Africa could be, and should be, a destination of choice. South Africa really had much going for it. Sometime it allowed its own internal wrangling to allow it to lose sight of what was happening. It was a matter of taking some tough decisions and to acknowledge that to be effective it might be necessary to make short term sacrifices for longer term gains. The SARB was committed to working with its colleagues on the continent. It participated both in the Common Monetary Area (CMA) and in SADC. It examined the prime lending rate to ensure that there was a focus on a regional approach and the economic efficiencies on which one could work together. As one knew, the region was growing extremely well. Many countries in the region were growing at between 5% to 7%. If South Africa consolidated the infrastructure requirements, the coordination, and ability to have the desired trade, it would be in the interests of all. The SARB also had good relations with Nigeria's central bank.

Ms Marcus offered that the SARB should meet with the Committee more often. She noted that the Annual Report contained a review of monetary policy which was a prime responsibility as well as a description of all the SARB's operational tasks. She looked forward to presenting the Annual Report later in the year and having ongoing discussion on what was happening in the economy from the SARB's perspective. She noted that South Africa participated in a huge number of international forums. This was important to ensure that South Africa's view was heard. In many of these forums South Africa was often the only African country present. The country as a whole should be aware of this role. Such opportunities as today's meeting helped the SARB to be accountable in the way that it felt that it should be and to ensure that the public, through its elected representatives, was aware of the role of South Africa's central bank.  She thanked the Committee.

The meeting was adjourned.
 

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