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SARB Annual Report
From FNB - PDF Strydom
21 September 2006
The following notes emphasise the main features of the 2006 Annual Report that distinguish it from the conventional official exposition on the South African economy.
EMPLOYMENT
Over the 4 years ending September 2005 employment was up by more than 1 million people. Major employment sectors are construction, finance insurance, real estate and business services. Employment creation is the most important measure fighting poverty.
MANUFACTURING
Except for autos and communications manufacturing industry is under pressure and its growth rate is falling. This is because of the strong rand and exposure to international competition. Manufacturing granted relatively low wage increases. Increasing the growth rate in manufacturing is imperative if the employment rate is to be accelerated.
SAVING
Household saving is falling rapidly but net household wealth is rising from 247% of disposable income during the first half of 2005 to 264% in the first half of 2006. Government is dissaving and the major source of saving is the corporate sector, although the rate is falling. In the South African economy with well developed and globally integrated financial markets the accumulation of household wealth could be an important substitute for household saving because an accumulation of household wealth could, in a similar fashion as saving, postpone present consumption into the future.
INFLATION
Price inflation is following a dissimilar pattern across different sectors. Furniture and equipment showed falling prices at a rate of 2.2% from June 2004 to June 2006. Clothing and footwear booked falling prices at a rate of 10.5% over this period while prices of vehicles fell by 2.5%. Administrative prices are rising at lower rates and administrative price increases are managed over a longer period. Eskom, for instance, was awarded price increases of 5.1% from 1 April 2006 to 31 March 2007 and 5.9% for the following year with a 6.2% increase in the subsequent 12 month period. Price increases in the public sector followed a dissimilar pattern owing to different wage increases. Nominal wage increases in government's national departments were 4.7% in 2005 and 13.7% in local governments.
EXPORTS
Disappointing performance is evident. In mining, rising commodity prices were neutralised by the strong rand. Moreover, gold production is falling because of lower grade gold mining and the closure of loss making mines.
Manufacturing exports were under pressure despite the economic recovery in the EU. The strong rand was an important inhibiting factor. Exports were adversely affected by industrial actions; the regulatory environment and lacking capacity of the transport infrastructure. Moreover, the overvalued currency encouraged domestic manufacturers to source their final products from abroad.
The tourism industry performed disappointingly by showing no additional growth.
IMPORTS
Strong import demand from vehicles and transport equipment that was up by 20% in 2005. There were distorting items such as imports of aero planes and a naval vessel in 2005. An important component of import demand was intermediate goods i.e. machinery and electrical equipment. These components are primarily associated with fixed capital formation. It is important to note that the creation of growth capacity in South Africa normally goes hand in hand with rising imports owing to the demand for intermediate goods. Apart from the effect of high oil prices on imports there were distorting elements that encouraged higher crude oil imports owing to the fact that domestic oil inventories were replenished. The strong rand encouraged import demand as import prices became relatively competitive. The most prominent feature of the rising imports is the negative trade balance with Asia. This figure almost doubled from the first half of 2005 to the first half of! 2006. If one relates this data to company annual reports it would appear that domestic companies have sourced a significant proportion of their stocks from abroad, particularly Asia. Clothing and textiles appear to have featured prominently in these transactions. It follows that domestic production capacity was adversely affected by these events and one could even speak of de-industrialisation effects. This has occurred in sectors of manufacturing industry that are characterised by relatively high anti-export bias. This signals the relatively uncompetitive position of these sectors and lacking elements in South Africa's industrial policy.
MONETARY DEVELOPMENTS
New developments in the banking sector are the new funding procedures as well as the rising importance of securitisation. New cost cutting technologies are featuring prominently. Following the financial charter the banks are extending their services to low income earners. Housing finance and consumer payments are prominent new services. Over the year 3.3 million new accounts have been opened by the banks.
The growth in M3 is closely related to the rise in access to banking services, the rise in employment, non-bank financial institutions increasing deposits with the banks and the capital redemption of the R150 government bond in February 2006. All in all, M3 growth is signaling strong bank intermediation. The present growth in M3 is closely related to important and economically favourable changes in the country.
BANK CREDIT
Debt to income ratio has reached record levels yet the debt service costs remain well contained. Non-performing loans are at low levels. Household credit is primarily used to buy cars and houses. The latter via mortgage finance.
FINANCIAL MARKETS
Financial market reforms regarding transparency and regulatory advancement are evident, particularly with respect of pension funds. ETFs are developing and in the year under review 9 were listed in South Africa. Some of the ETFs are enabling South Africans to invest abroad without being inhibited by foreign exchange controls. Domestic ETFs are to be expanded to cover Asian and American markets. Financial derivatives and options on future contracts, interest rate derivatives and warrants are new and developing features of the domestic financial markets.
FISCAL POLICY
Fiscal policy has become more and explicitly growth oriented. The aim is to boost expenditure on infrastructure. The corporate governance of state owned enterprises is receiving more attention. Government spending is emphasising social and economic services.
Original articles published at www.fnb.co.za.
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