Monday, May 4, 2009

Demand from China and India will shield SA, says South African central bank governor

By Ethel Hazelhurst - Business Report - May 4 2009

Continued growth in China and India will support the local economy while advanced economies contract by 3.8 percent this year, according to Reserve Bank governor Tito Mboweni.

Mboweni, who last week cut the repo rate by a further 1 percentage point to 8.5 percent, linked South Africa's fortunes to those of the global economy, which was in a "severe synchronised downturn".

He made it clear that South Africans faced a long period of little or no growth as world trade declined by an estimated 9.5 percent this year. And he said the global downturn was likely to be "protracted" and the recovery "gradual".

However, he said, emerging and developing countries were expected to grow by 1.6 percent this year, with China and India growing fastest at 6.5 percent and 4.5 percent, respectively.

Dawie Roodt, the chief economist at the Efficient Group, said the focus of South Africa's export initiative over the past five years had fortunately shifted towards the east, which now bought more local goods - mostly commodities - than any other region.

Rudolf Gouws, RMB's chief economist, said China particularly had an indirect effect on the local economic outlook because that country's demand for commodities influenced commodity prices, and sustained growth there would support South Africa's revenue from its commodity exports.

Mboweni said the International Monetary Fund had revised its global forecast for this year, from growth of 0.5 percent to a contraction of 1.3 percent.

Recent data on the local economy "suggest that the negative conditions recorded in the final quarter of 2008 persisted in the first quarter of 2009".

Gross domestic product (GDP) shrank 1.8 percent in the fourth quarter, the biggest decline since the fourth quarter of 1992, when GDP fell 3.5 percent.

On the bright side, South Africans can look forward to lower interest rates and falling inflation. Last week's repo rate cut allowed benchmark prime rates to fall to 11 percent, from a peak of 15.5 percent last December. The cumulative cut has reduced monthly repayments on a R1 million mortgage bond by about R2 500, to just more than R11 000.

The Reserve Bank targets an inflation rate of between 3 percent and 6 percent. Measured on the consumer price index, inflation has been above the ceiling since March 2007. To fight spiralling inflation, the bank raised the repo rate by 5 percentage points to 12 percent from June 2006 to June 2008.

Mboweni said inflationary pressures remained, "particularly administered prices, which include the risk of higher-than-expected electricity tariff increases", and food price inflation at the consumer level, "which remained relatively unresponsive to lower inflation at the producer level".

However, inflation was expected to trend downward, with food inflation showing "signs of moderation. Should this trend accelerate, it could have a significant downward impact on the inflation trajectory."

World inflation "is likely to remain subdued", he said, and recent strength in the rand, "if sustained", would "reduce the upside risks to inflation".

Three sets of figures released on Thursday came in better than expected and will allow for further interest rate cuts: producer inflation, credit extension and trade.