South African Reserve Bank Quarterly Bulletin: briefing by Governor

FINANCE PORTFOLIO COMMITTEE AND FINANCE SELECT COMMITTEE
22 June 2006
SOUTH AFRICAN RESERVE BANK QUARTERLY BULLETIN: BRIEFING BY GOVERNOR

Chairpersons: Mr N Nene (ANC) and Mr Ralane (ANC)

Documents handed out:
Reserve Bank Quarterly Bulletin

SUMMARY
The Governor of the South African Reserve Bank met with the Committee to present information on the Quarterly Bulletin. Recent international economic developments were explained and the current world economic prognosis conveyed. Detail on local economic events was provided. High consumer demand was fuelling excessive levels of personal debt. The current account deficit was adversely affecting the value of the local currency. The South African economy was relatively strong but certain inherent dangers should not be ignored.

Members asked questions on the impact of increased mortgages on the strength of the economy, the negative consequences of higher interest rates, reasons for decline in remuneration for non-agricultural workers, the benefits of high state savings in the face of service delivery needs, debt cancellation for developing countries, effective communication of the need to curb spending and the effect of the restraint of trade agreement with China on the balance of payments deficit.

MINUTES
South African Reserve Bank presentation
Dr Johan Van Den Heever (Reserve Bank Review, Statistics and Research Department Head) provided an account of recent international economic developments and the current world outlook. Projected growth figures were presented. Recent economic developments in the South African context were explained. Consumer confidence was high and a 68% ratio of debt to income currently prevailed. Detail on government consumption expenditure was provided. The current account deficit was approximately R100 billion. Foreign exchange reserves stood at $24 billion. A 23% growth in money supply had been recorded and mortgages had advanced 30% year-on-year.

Mr Tito Mboweni (Reserve Bank Governor) stated that the South African economy maintained a positive outlook but certain inherent dangers had to be considered. Strong domestic demand and credit extension threatened the inflationary outlook. High oil prices and imbalances in the balance of payments were also of concern. High import demand also had an adverse effect on local manufacturers.

Discussion
Mr B Mnguni (ANC) noted that some analysts had projected an oil price over $80 per barrel and he asked whether South Africa could find alternative sources of oil at cheaper rates. The increase in mortgages could be perceived as a positive sign. The role of the petrol price in the inflation index was controversial.

Mr I Davidson (DA) sought reasons for the recent interest rate increase particularly as the inflation outlook appeared benign. He said that the recent Monthly Policy Review had not indicated any major concerns for inflation. The weakness of the Rand should not be regarded as a justifiable reason for interest rate increases. Instability in monetary policy could result in a re-rating of the South African equities market. Higher interest rates result in lower domestic investment that would have an adverse impact on economic growth and job creation.

Mr Mboweni reiterated that certain dangers had been listed initially and the overall Reserve Bank position was that the availability of cheap money resulted in imbalances. The current account deficit could eventually lead to higher inflation. The lowering of interest rates in the past had contributed to the problem as an over-enthusiasm in consumer spending had characterised the local economy. Inflation forecasts were not a definite prediction and were based on certain assumptions. A $5 gap between the Brent crude price and the contract price had to be taken into account. Geopolitical tensions such as political instability and rising oil prices would also have an impact on forecasts and tended to alter over time. Interaction between Stats SA and the Reserve Bank could occur to discuss the issue of the petrol price in the inflation index. The price of oil could rise to the $80 mark. A dramatic increase in the oil price had occurred in the past eight years. The increase in mortgage advances could be perceived as a positive development as it indicated asset acquisition and personal wealth creation. An increase in the buying-to-let phenomenon had transpired in Johannesburg recently.

Ms J Fubbs (ANC) referred to the drop in remuneration per worker and sought clarity on reasons for the decline. The reduction could contribute towards the low savings rate.

Dr M Van Dyk (DA) noted that the primary mandate of the Reserve Bank was to maintain a low inflation rate but asked whether the Bank also had a concomitant responsibility to contribute to economic growth. The increase in the interest rate would have a negative impact on consumer expenditure. Expenditure should continue to be stimulated by low interest rates. The low level of domestic investment was a primary contributing factor towards high unemployment.

Ms S Mabe (ANC) asked how the state had achieved such high levels of savings when service delivery shortfalls remained. She asked whether foreign reserves could consist of currencies other than the dollar.

Mr T Vezi (IFP) supported the notion that developing countries should enjoy debt cancellation. High production costs in rural areas contributed towards poverty and unemployment.

Mr M Johnson (ANC) asked how the need for people to reduce spending could be effectively communicated. He asked what effect the reduction in textile imports due to the recent Chinese restraint of trade agreement would have on the balance of payments imbalance.

Dr Van Den Heever stated that the fourth quarter of 2004 had been characterised by high remuneration that had set a high base for comparison. On the other hand, the last quarter of 2005 had a lower number and therefore the discrepancy appeared pronounced. The remuneration rate of increase was stabilising in 2006. Employment figures had increased contributing to a higher wage bill.

Mr Mboweni stated that the mandate of the Reserve Bank was wide-ranging. Other responsibilities included the monitoring of the national payment and settlement system and the licensing and regulation of banks. The price stability function could not be abandoned in favour of economic growth. Various Central Banks adopted different approaches to their line function responsibilities. For example, the European Central Bank focused on the maintenance of price stability whereas the United States pursued a complicated mandate comprising full employment, low inflation and economic growth. The Cabinet had decided to maintain low inflation as a priority and as a mechanism to achieve other economic goals. Continuing financial inflows financed the current account deficit. Recent emerging market concerns had disrupted the flow to some extent. Geopolitical tensions were separate developments to Reserve Bank decisions. Large current account deficits were more acceptable if coupled with significant levels of fixed domestic investment. The current account deficit of 6% of gross domestic product was a major concern.

Cheap money was fuelling the high consumer demand that impacted on the balance of payment imbalance. Gold comprised a small percentage of South Africa’s reserves. A mixture of currencies existed but the total amount was demarcated in dollars for convenience. The dollar was the common international reserve currency. The predominance of informal businesses in developing world countries particularly in the African context resulted in lower tax revenue. Countries had to counter this effect by registering businesses and improving revenue collection. A country’s debt problems tended to be exacerbated by weak revenue collection. Debt cancellation and aid increases had to go hand in hand. Alternative energy sources to oil would be advantageous. Members could contribute to the communication challenge through interaction with their respective constituencies. Change in behaviour was difficult to facilitate. The restraint of trade agreement with China was a sound development.

Dr Van Den Heever stated that government expenditure in the first quarter of 2006 was less than expenditure in the last quarter of 2005. The latter had been characterised by high military expenditure. Tax revenue in the first quarter of 2006 was exceptional including both company and secondary taxes. An increase in customs duties had also contributed to increased savings.

Mr Ralane commented that the meeting with the Reserve Bank had provided Members with important information prior to the constituency period.

The meeting was adjourned.