Governor of SA Reserve Bank: briefing

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Finance Standing Committee

08 October 2004
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Meeting Summary

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Meeting report

8 October 2004

Co- Chairpersons: Dr Rob Davies (ANC - NA) and Mr T Ralane (ANC - NCOP)

Document handed out:

South African Reserve Bank PowerPoint presentation

In this meeting addressed by the Governor of the South African Reserve Bank, it was reported that the sharp increase in oil prices in 2004 was due to unexpectedly strong global oil demand and supply concerns by major oil exporting countries. The risk posed by high international oil prices had led the International Monetary Fund (IMF) to revise its global growth forecast. Growth in most advanced economies, many of which were South Africa's trading partners, was projected to decline in the next 12 months. This might not augur well for South Africa's economic prospects from the external account perspective.

Members mainly asked clarifying questions about global housing trends, South Africans' indebtedness and inflationary pressures, high bank charges, micro-lending interest rates, and labour market statistics.


Reserve Bank briefing
The Committee was briefed by Mr T Mboweni, Governor of the South African Reserve Bank and Dr M Mnyande (Head of Research at the Reserve Bank). Dr Mnyande said that the risk posed by high international oil prices had led the International Monetary Fund (IMF) to revise its global growth forecast. The sharp increase in oil prices in 2004 was due to unexpectedly strong global oil demand and supply concerns by several major oil exporting countries. The demand for oil had been under-estimated since the end of 2003. The Organisation of Oil-Producing Countries (OPEC) decision in November to increase oil output by 1 million barrels to 27 million barrels per day, had had almost no effect on oil prices as the cartel was already exceeding current production quotas and had limited excess production capacity. Oil demand traditionally picked up in winter, particularly in the United States of America. Oil prices were unlikely to go down soon as winter was beginning in the USA.

In its September 2004 world economic outlook, the IMF had lowered its global growth for 2005 to 4.3%. Growth in advanced countries was projected at 3.6% in 2004 before declining to 2.9% in 2005. In Europe, growth would remain at the same levels as in 2004. Inflation would remain relatively moderate given the excess capacity in many countries, moderate wage settlements and strong corporate profitability providing scope for firms to absorb price pressures.

Since September 2004, monetary policy changes took place in many countries. Most central banks increased their official interest rates. These included the USA, Switzerland and Brazil. In South Africa, domestic demand had remained the driver of South African output growth. Growth in real gross domestic product had accelerated from an annualised rate of only 1.5% cent in the fourth quarter of 2003, to 3.5% in the first quarter of 2004. The major contributors to enhanced performance of the economy were the primary and secondary sectors where growth had accelerated at a progressively firmer pace in the first and second quarters of 2004. The wheat crop in the coming harvesting season was expected to be 33% higher than in the previous season. Manufacturing production was expected to increase modestly in coming months.

Growth in aggregate real gross domestic expenditure had surged from quarter to quarter. The annualised rate had grown from 3% in the first quarter of 2004, to 13% in the second quarter. This could be mainly attributed to a sharp increase in the pace of real inventory investment. Aggregate real domestic final demand had increased strongly, albeit at a slower pace than in the first quarter.

Real final consumption expenditure by households remained strong in the second quarter of 2004. The protracted strength in household spending was evident in all major spending categories. There was a marginal slow-down in growth of non-durable goods but this was likely to change in the third quarter.

Growth in real household disposable income had slowed down from 5% in the first quarter of 2004, to 4% in the second quarter. The sustained increase in real household disposable income enabled households to maintain spending at a relatively brisk pace in the second quarter of 2004. The increase in disposable income could be partly be attributed to salary increases which remained above the inflation target.

Household debt as a percentage of household disposable income had increased from 54% in the first quarter of 2004, to 55% in the second quarter. This was consistent with the increase in the durable goods expenditure that appeared to have been partly financed by credit.

All institutional sectors had continued to raise their rate of investment spending. Growth in real gross fixed capital formation had slowed down to 10.5%.

Growth in real gross domestic final demand had slowed down to 5.5%. This was the net result of a deceleration in the growth of real final consumption expenditure by households and general government as well as in real gross fixed capital formation.

The real inventory investment had increased from R3.1 billion in the first quarter of 2004 to R13.6 billion in the second quarter. Inventory investment had contributed 6 percentage points to growth in gross domestic expenditure in the second quarter of 2004.

The national savings ratio as a percentage of gross domestic product had weakened from 15.5 in the first quarter of 2004, to 14.5 in the second quarter. This could be attributed to weaker corporate and government saving relative to gross domestic product (GDP).

Formal non-agricultural employment numbers had increased for the fourth consecutive quarter in the second quarter of 2004. Formal non-agricultural employment had increased by 5% from the first quarter. An expansion in employment had occurred in both the private and public sectors. The growth in average nominal remuneration per worker had slowed down from a year-on-year rate of 8.9 % in the first quarter in 2004, to 7.6 % in the second quarter. Output per worker continued to fall to a negative value of 0.2% in the second quarter. Growth in nominal unit labour costs had increased to 7.8 % in the second quarter of 2004.

As inflation in domestically produced products had picked up and the rate of decline in the prices of imported goods had moderated, especially on the back of higher international prices, the production price index had risen to 1.1% in August 2004. CPIX inflation had declined to 3.7 % in August 2004. This rate was the lowest since the inception of the CPIX measure of inflation. Headline inflation had continued on its downward path, recording a year-on-year rate of only 0.2% in January 2004. This was the lowest rate since 1954. It stayed at 1% in August.

The nominal effective exchange rate of the Rand had strengthened by 4.7 % from the end of December 2003, to the end of September 2004. Over the same period, it had appreciated by 3.4% against the US Dollar. The average monthly real effective exchange rate of the Rand had increased by 15% from June 2003 to June 200. Growth in money supply had declined. Although decelerating, growth in M3 remained firm and well aligned with robust economic activity. Total loans and advances extended to the private sector had decelerated but remained firm. These were mainly driven by a significant increase in asset-backed credit like mortgages. The money-market interest rates had decreased in tandem with a point reduction in the repurchase rate.

The yield on long-term government bonds had decreased, reflecting improved sentiment and inflation expectations in the wake of the recovery of the exchange rate of the Rand. The benign inflation and the lowering of the repurchase rate had contributed to a decline in the bond yield to 9.28% on 30 September. The All Share Index had increased by 20% to an all-time high on 30 September, along with general optimism regarding domestic economic growth prospects, benign inflation data, higher commodity prices and support from world equity markets.

The Governor said that the current oil prices were not sustainable. IMF researchers had expressed that if there was a permanent 5% increase in the price of oil per barrel, there would be negative consequences for the world economy. They said growth in America and Europe would decline by 0.45% and inflation would increase by 0.3%. In South Africa, real GPD would suffer by 0.4% and inflation increase by 1.2%. The trade balance would worsen by 0.9%. The question was what should be the permanent increase. The assumption was that if the oil prices were higher than OPEC's target range (US$25-28 per barrel), there would be a problem. The price had nearly doubled versus the target range. He felt that this was a major threat to the world economy.

The question was what should be done. Mr Mboweni felt that tightening monetary policies on the basis of an external shock would not take the shock away. It had been argued that one should not respond to the 'first round effect'. Another question was when did the 'second round effect' begin. Should one wait before taking any action? Some people believed in taking 'pre-emptive action' while other preferred to be flexible. Those who are flexible believed in taking action before the second effects generalised. South Africa had in the past been caught very badly by the second around effects. He alluded to the currency depreciation of 2001. Nevertheless, the Bank believed in waiting for the assessment of evidence of second round effects before tightening monetary policies.

The second threat to world economy was global imbalances. The current account deficit of USA was at around 5% of GDP. If this deficit had been occurring in any developing country, the IMF would have acted strongly. The large USA current account deficit was easily financed because other parts of the world were still willing to buy American products. Therefore, the rest of the world was carrying the American current account deficit. At some stage, this imbalance would 'give in'. When this happened, the American Dollar would collapse and this would destabilise the global currency market.

The third threat was the ageing population in the developed countries, that constantly put pressure on resource allocation. The lower rate of growth in the working population had made the situation worse. Some European countries did not have progressive immigration policies, and this meant that the deficit in the working population could not be filled due to immigration policies.

Mr Mboweni said that although the South African economy was performing very well, South Africa remained part of the global economy. He was encouraged by the performance of China, India and some of the Latin American countries. It was hoped that as time went by, the world economy would be carried by some of these countries.

The Governor was concerned that the household debt as a percentage of household disposable income was increasing. He had expected people to take advantage of the low interest rate environment and to liquidate their debts. Unfortunately however, people had been increasing their debts instead of reducing them.

DiscussionMs R Taljaard (DA) suggested that global housing trends be added as another threat to the world economy. Any bubble in the United Kingdom would have enormous consequences impact on household debt as a percentage of household disposable income. She asked the Governor to comment on this.

She then agreed that people should be concerned about the high price of oil. The interim Organisation for Economic Development and Co-operation (OECD) assessment of the global economy had expressed that the oil price rise had been a moderate rather than a significant shock. Uncertainty about how high the price might go, and volatility in the price, might have had a psychological effect larger than the pure arithmetic impact on global growth. However, the fact that inflation expectations remained low, suggested that the world's central banks did not have to worsen the growth impact of the oil price rise by raising rates rapidly. She asked when South Africa should react to second round effect. She also asked if the Governor's views could be seen to be pre-empting the decision of the Monitory Policy Committee (MPC), particularly in the context where arguments had been made that the 'predictability' of the Bank had increased.

Mr Mboweni replied that the OECD views would from time to time differ with those of the IMF. There was no doubt that oil prices were too high. He had asked his Research Department to re-calculate the impact of oil prices at $45 - $50 per barrel. South Africa was not totally dependent on oil imports as it generated about 40% of oil needed. With regard to whether his views could be seen to be pre-empting the views of the MPC, he replied that his views were not decisive. If anything, his views should only add to the debate.

Ms Taljaard said that Statistics South Africa had released a document around the Consumer Price Index (CPI). She asked for the Governor's views on the extent to which the document showed the government contributing to inflationary pressures through administered prices. She also asked for comment on the distinction between administered prices and regulated prices. She was happy to accept a 6% increase, especially as public servants had also been given the same increase. She asked the Governor to comment of the recommended wage increase for political officer bearers.

Mr Mboweni replied that he was encouraged that President Mbeki had given instructions to look into the matter in detail. He had not seen the report by Statistics South Africa. He could not see the distinction between administered prices and regulated prices. He gave an example of telephone fees regulated by Independent Communications Authority of South Africa (ICASA) - whether the prices were regulated by ICASA or the Department of Communications did not make any difference. The Governor declined to comment on the salary increase issue.

Dr Davies asked if the Reserve Bank was making any calculations of 'CPIX minus oil'. The domestic drivers of inflation seemed to be moderate. With regard to household debts, he said that research had shown that this was particularly high among low-income people. He asked for a comment on this and if the indebtedness was related to the unwillingness of people to take advantage of the low interest environment and liquidate their debts. He also asked the Governor to comment on a newspaper article (that appeared in Business Day of 7 October 2004) about the Reserve Bank's comments on reform in the financial sector.

Mr Mboweni replied that the quotes that in newspaper were taken from the financial stability review done by the Bank's Financial Stability Review Department. The article did not contain the official position of the Bank that were normally found in their Quarterly Bulletin. The Bank fully supported the reforms that would contribute to diversity.

On 'CPIX minus oil', Mr Mboweni said that the MPC had looked at CPIX minus oil or food to see the underlying pressures. Oil and food had always been included for the purposes of inflation targeting. It was clear that there was "a party going on out there" that must end at some stage. Consumer demand and spending were moving at a fast pace and that retail trade figures were over 10%. They needed to carefully look at the demand, unit costs and exchange rates.

With regard to household debts, he said that a correlation could be drawn between the behaviour of households and interest rates. People tended to 'loosen their belts' when interest rates dropped. The role of micro-lenders in this was also very important. Many civil servants were indebted to micro-lenders and something should be done about the interest rates charged. Even some employees of the Reserve Bank were indebted to micro-lenders. The bank had developed a debt consolidating facility and had paid off all the debts of its employees. He had been surprised that, upon hearing of the debt consolidating facility, people went out to accumulate more debts. This exercise would not be repeated and those involved would have to repay the Bank. He suggested that Parliament should conduct hearings on the indebtedness of South Africans.

The Chairperson added that the Department of Trade and Industry was dealing with some of these issues through the Consumer Credit Bill.

Ms J Fubbs (ANC) said that in South Africa, older people were left to take care of a large section of the population. She asked if the Bank had looked into the implications of this. She also said that impersonation of senior bank staff for criminal purposes was on the increase. She asked the extent to which this was a problem.

Mr Mboweni replied that South Africa was not yet facing a serious problem with an ageing population, but old people did heavily rely on grants. With regards to security at the Bank, he was generally satisfied that the Bank was secure. The "419" scam had remained a major problem. The Bank had in the past received queries about "deals" that the Governor had made. The Governor felt that one had to be crooked to believe one could make money out of the "419" scams. He could not understand how people could think that the Executive of the Bank would go around making private deals. He hoped that Reverend Meshoe (ACDP) would change his stance regarding pyramid schemes, and inform people that these were illegal.

Dr P Rabie agreed that the price of crude oil had an effect on the economy. The cost of credit was still reasonable and that the real estate market had been very buoyant. He asked if the property market had reached saturation point.

Mr Mboweni replied that South Africa was not yet experiencing a house price bubble. However, there was a danger that it could develop. There were signs of stress in the market because speculators would buy all the property in a housing development, and then try to sell them at almost double the price. Such speculators might also be forced to sell at real prices and lose their margins. People should spend 30% of their income to buy a house. There were signs that more and more "for sale" signs were being changed to "to rent" and this meant that people had been unable to sell properties.

Ms B Hogan (ANC) commented that there had been no significant changes in labour market statistics. She asked if the changes were primarily related to the revision of the labour force survey, and if they were indicative of any trend. The rise in the secondary sector was fairly insignificant, but she asked about the trends underlying this rise.

Mr Mboweni replied that the evidence from Statistics South Africa indicated broad-based employment generation and this was encouraging. There had been some structural changes to the economy. The services sector had overtaken the manufacturing and mining quarrying sectors as the largest contributor to GDP. One should expect jobs to be increasingly created in the services sector but this posed the challenge of creating a pool of skilled labour.

Ms Hogan had assumed that figures on household debt had come from Statistics South Africa. She asked if the figures included debts relating to credit extended by the micro-finance sector. The interest rate sensitivity of credit supplied by the micro-lenders was not great. They normally did not bring their interest down rates whenever the Reserve Bank lowered interest rates.

The Governor confirmed that the statistics were from Statistics South Africa. There had been some contact between the Bank and the Micro-finance Regulatory Council. Some officials from the Bank sat on this Council.

Mr M Johnson (ANC) said that commercial banks largely derived their income from exorbitant bank charges. Access to banking institutions remained a major problem for most people. Mr Mboweni replied that many poor people did have access to banking facilities.

Mr T Vezi (IFP) said that in the past, whenever there was a lending agreement outside the ambit of the Usury Act, the borrower could take the agreement to a Magistrate where the agreement would be declared contra bona mores so the lender would not get their money. He wondered if the Governor was thinking of going back to this position to protect borrowers from micro-lenders. The growth rate in Africa was 4% and he asked the extent to which South African investors had taken advantage or contributed to this growth. He also asked if the Governor thought that Africa could ever be in a position to fully exploit its own oil resources to meet its demand.

Mr Mboweni replied that South African businesses were taking advantage of this growth. A number of South African banks were present in African countries and companies were investing in the whole of Africa. With regards to oil resources, he said that Africa had a number of oil producing countries but prices were the same all over the world. He was concerned with violence in some African countries that posed a serious problem for Africa's economic growth. On the issue of micro-lenders, Mr Mboweni said that the issue could best be dealt with by the DTI.

Ms Taljaard was concerned about the extent of the outflow of fixed investment, because it challenged the 'four-pillar policy'. She also asked the Governor to give reasons for the rise in the public sector borrowing requirement from 1.8 % to 6%, and whether there was reason for concern.

Mr Mboweni replied the four-pillar policy meant that the Reserve Bank and National Treasury preferred that the largest four banks should be owned by South Africans. This policy was still in place unchanged. He questioned whether this policy should be changed just to accommodate Barclays Bank. Policies should only be changed to keep in touch with the changing environment. Barclays Bank had wanted an over 50% stake of ABSA bank, and that ABSA had accepted the bid. ABSA bank should now go back to its shareholders and then approach the independent Registrar of Banks with a very clear representation for consideration. In line with existing policy, the Registrar would go back to the Reserve Bank and indicate problems with the Barclays Bank bid. The media had got a little bit ahead about what the financial structure of the deal. The structure would all be in foreign currency. International banks should be welcomed into the South African market. The participation of such banks would be important in establishing South Africa as a financial centre.

Mr Mboweni declined to comment on the public sector borrowing requirements, as the question could best be dealt with by National Treasury. Generally, there was no problem with the deficit situation as it was very supportive of monetary policies. The reserve position was also good. Latest figures showed that the gross gold and other foreign reserves had gone up. The foreign exchange market was also very active. He thanked members for allowing the amendment of the National Payment System Act.

Ms Fubbs said that some time ago, a 'hacker manager' had got into the accounts of several clients of a certain bank. When this was made public, a number of banks said that they would not be held liable even though the hacking did not occur through the fault of the client. She added that banks were not competitive.

The Chairperson said that the Reserve Bank and National Treasury had commissioned a study that showed that South African banks were more profitable than the top 100 banks globally, and charges were higher than elsewhere worldwide. He asked for a comment on this.

Mr Mboweni replied that he was also concerned about bank charges. Banks would normally ask how administrative costs could be carried. There was a need to communicate with clients and to encourage the poor to open accounts. The problem was that some people used their accounts as transmission facilities.

The meeting was adjourned.



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