SA's 1999 growth hopes fade as turmoil bites
Analysts expect the Reserve Bank to keep a tight rein on monetary policy, writes ANDREW GILL
ECONOMIC growth prospects for 1999 have been snuffed out by a return of emerging market jitters and bearish data that could put off interest rate cuts until well into next year.
Massive capital and current account outflows in the third quarter have left the Reserve Bank little option but to keep a tight rein on monetary policy. Analysts say that unless a turnaround is seen soon in trade and investment flows, the Bank may be forced to keep interest rates higher for longer due to likely pressure on the rand from emerging market uncertainty and election concerns.
Already, most economists have downgraded 1999 GDP forecasts, with some expecting a contraction after this year's flat showing. Others still forecast growth of up to 1.5%, but are unlikely to be able to retain their optimism for long. Growth is expected to pick up in 2000 to about 2%.
Analysts have not changed their forecasts for end-1999 interest rate levels, but say that the bulk of cuts are now likely to be later in the year. Rates are expected to fall by between four and six percentage points in 1999, with the majority coming in the second half.
Standard Bank's economics division, still forecasting growth of 0.5% in 1999, sees the key repurchase (repo) rate (currently 19.357%) down to 15% by end-1999. Only a one percentage point cut in prime is expected before March.
By then the rand is forecast to have fallen to R6.40 per dollar. "If there is any more pressure than that, it will be more difficult to allow the repo to fall," the bank said.
Figures provided in the Reserve Bank's latest quarterly bulletin show that heavy selling of SA bonds, after two quarters of strong inflows, and a continued high import propensity in the three months to end-September, have left SA's balance of payments in a precarious state.
The result is that the balance of payments has once again become a major constraint on the economy, forcing the Reserve Bank to keep interest rates high as the only means of supporting a vulnerable currency. It also limits opportunities to restore reserves to pre-crisis levels after a dive to the equivalent of 10.5 weeks of imports from 15 weeks at end-June.
The reversal of capital flows also means that the traditional substitute for a lack of domestic savings has evaporated.
Analysts say that any sustained deterioration in the data could ruin prospects for longer-term economic and employment growth, having already put paid to previously bullish short-term forecasts.
The implications are horrifying. Even in a growing economy, SA has failed to generate anywhere near the number of jobs necessary to address unemployment, and a delayed upswing will make future progress more difficult.
The key factor that makes SA's balance of payments position so important is the dismally low domestic savings ratio, which has declined from 18% of GDP early in 1993 to below 13% in the last quarter. Low savings means there are insufficient funds to meet the economy's investment and development needs, a deficit which is normally made up by balance of payments inflows.
There is optimism that the numbers will stabilise or turn around in coming months, with the Reserve Bank pinning its hopes on a phenomenon referred to as the "J-curve", where trade figures deteriorate following currency depreciation before improving sharply, thus boosting the trade balance. Private sector economists say an improvement in the terms of trade may actually come from a slump in imports due to low demand as exports stay mostly flat.
The capital account should steady in the fourth quarter after foreigners bought a net R1.05-billion of bonds in November, although this will do little to boost low reserves. But ABN Amro Bank economist Colen Garrow says with an election looming, foreign flows are likely to be speculative rather than investment driven, placing the Reserve Bank in a no-win situation.
"The temptation will be for the central bank to revert to using restrictive monetary policy to defend the rand, knowing that it is almost impossible to overcome the market's perception that it has inadequate resources to defend the unit."
On top of this, slack global demand and heavy supply pressures in world trade are likely in 1999 as a result of a continued slowing in the global economy.
Locally, the current account of the balance of payments recorded a seasonally adjusted and annualised deficit of R17.8-billion in the third quarter from R5.7-billion in second quarter. The capital account deficit was R5.4-billion, seasonally adjusted and annualised, from a second quarter surplus of R1.8-billion and a R10-billion inflow in the first three months of the year.
The volatility of the capital account underlines the importance of boosting SA's domestic savings, which are chiefly being dragged lower by high levels of dissaving by general government. In the third quarter, dissaving by general government came in at R22-billion, seasonally adjusted and annualised, due to high levels of consumption expenditure and higher interest payments.
Corporate saving was slower in the quarter, and the Bank said household saving was equally constrained by what it called a "desire to maintain consumption habits against the backdrop of rising debt-servicing costs and a slowdown in real income growth". Top of page