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RDM Number p1.ppt 23/05/2017 4:19 AM (1)
Budget 2002/03: Growth &
Inflation - Monetary vs Fiscal
Policy
by Nazmeera Moola
February 2002
RDM Number p1.ppt 5/23/2017 4:19 AM (2)
What did Fiscal Policy offer up?

2002/03 budget ‘heralds a period of
consolidation in tax policy, providing
more certainty to taxpayers and a
stable platform for investment and
economic expansion.’

ZAR15bn in personal tax cuts significantly higher than the
ZAR8.3bn in 01/02 and the ZAR9.9bn
in 00/01.

Bulk to benefit those earning below
ZAR150 000 - who get 57% of the tax
relief.

Most marginal tax rates cut by 2%.

Preliminary estimates suggest that on
a pure monetary basis, benefit to
consumers is equal to 400bps in
interest rate hikes
R150 000 to
R300 000
37%
Less than
R150 0000
57%
More than
R300 000
6%
RDM Number p1.ppt 5/23/2017 4:19 AM (3)
Yield Curve Leads GDP (1 year ahead)
Real GDP Growth y/y (with and without Agriculture)
8
6
GDP excluding Agriculture
4
2
Real GDP
0
-2
Yield curve
(pushed forward 1 year)
-4
94

96
We expect GDP growth to bottom
imminently and pick up during the
year on the back of the global
economic recovery: 2.2% in 2002 and
2.9% in 2003 - very much in line
with the Treasury’s expectation of
2.3% and 3.3% respectively.
98
00

02
Domestic demand is likely to stagnate
well into next year. This makes growth
almost entirely dependent on exports
and government spending. If either of
these fail to materialise, growth will
easily slip to 1.5%.
RDM Number p1.ppt 5/23/2017 4:19 AM (4)
What is currently driving growth?
2001 Growth - 2.2%
Q4 GDP growth surprised on the
upside – growing 2.5%q/q
(annualised) – well above the
Bloomberg consensus of 1.9%.
This was due to:
Transport &
Communication
(0.4%)
20%
Finance (0.7%)
35%
 financial sector - 0.7%
 manufacturing - 1.0%
 wholesale, retail and leisure 0.5%
Wholesale/Retail/
Leisure(0.4%)
20%
Manufacturing
(0.5%)
25%
 and transport and
communication - 0.5%
RDM Number p1.ppt 5/23/2017 4:19 AM (5)
Composition of Growth - Expenditure Side
26/2/02
0.70
0.60
0.50
0.40
Increasing Export Dependence
0.30
0.20
0.10
1993
1994
1995
1996
1997
1998
1999
2000
2001
SA GROSS FIXED CAPIT AL FORMAT ION CURA
SA GOVERNMENT CONSUMPT ION CURA
SA PRIVAT E CONSUMPT ION CURA
SA EXPORT S OF GOODS & SERVICES CURA
Sourc e: DAT AST REAM
RDM Number p1.ppt 5/23/2017 4:19 AM (6)
Where is inflation headed
10
Uptick expected in
ML
January due to
Core
FORECASTS
reweighting of basket
8
CPI(X)
6
Divergence between CPIX
& Core likely to continue
4
due to food prices
2
0
Jan-2000
May
Sep
Jan-2001
May
Sep
Jan-2002
May
Sep
Jan
May
Sep
RDM Number p1.ppt 5/23/2017 4:19 AM (7)
Trade-weighted Rand & G7 Leading Indicator
Both y/y% change (G7 on RHS)
7
5
Trade-Weighted
ZAR
5
0
-5
3
-10
1
-15
-1
-20
-3
-25
G7 Leading
Indicator
-5
-30
-35
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
Jan-98
Sep-97
May-97
Jan-97
Sep-96
May-96
Jan-96
Sep-95
May-95
Jan-95
-7
RDM Number p1.ppt 5/23/2017 4:19 AM (8)
Deviation of ZAR & AUD from PP
Assumption: Deviation from PPP = 0 in October 1990 benchmarked against USD
0 .4 0
0 .2 0
A U D /U S $
0 .0 0
-0 .2 0
-0 .4 0
-0 .6 0
Z A R /U S $
-0 .8 0
-1 .0 0
-1 .2 0
-1 .4 0
-1 .6 0
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
• Until Sept the rand’s 20-year real correlation with the Aussie $ was intact
• Periods of great weakness (1985 & 2001) coincided with a strong US dollar
and low industrial commodity prices
• The rand’s plunge since Sept, however, depicts itself as a glaring
aberration that is unlikely to hold indefinitely
RDM Number p1.ppt 5/23/2017 4:19 AM (9)
Food Prices: PPI (Agriculture) vs CPI
Year-on-year percentage change
4 /2 /0 2
4 0
3 5
3 0
2 5
2 0
1 5
1 0
5
0
-5
1 Y
1 Y
8 0 8 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 0
% C h a n g e - S A C P I: F O O D N A D J
% C h a n g e - S A P P I: A G R IC U L T U R E
9 1
9 2
9 3
9 4
- D O M E S T IC
9 5
9 6
9 7
9 8
9 9
0 0
0 1
E X C L . E X P O R T S N A
S o u rc e : D A T A S T R E A M
RDM Number p1.ppt 5/23/2017 4:19 AM (10)
Crude Oil Prices in Rand and USD
Index: Jan 2000 = 100
ML Oil Price Forecasts
Oil Prices (US$/bbl)
WTI Cushing Spot
Dated Brent spot
2002 2003 2004
19
24
23
17.5 22.5 21.5
RDM Number p1.ppt 5/23/2017 4:19 AM (11)
More on Food Prices

Rod Salmon and Ryan Hill (our consumer and food analysts respectively)
have noted that the raw maize price has risen by 75% y/y.

However, the mills have already absorbed the bulk of the increase and have
passed only 40% of the 75% (i.e. 30%) on to the retailers.

The retailers in turn can be expected to raise the prices of maize-related
products by about 15-20% and will absorb some of the increase in costs. (The
margins of food retailers have hitherto held up well, unlike those of retailers
in other sectors.)

Meat prices will rise by much less even in respect of the secondary effects of
higher cattle and chicken feed costs because the demand for meat is more
‘elastic’ (that is to say, it is not a basic necessity).

Food retailers estimate that their output prices are rising by about 8.2%
currently. Retail food prices (overall) are likely to rise by between 12% and
15% this year.
RDM Number p1.ppt 5/23/2017 4:19 AM (12)
Interest rate policy has changed
3-month Bankers Acceptances (BA) Rate inverted on left scale
0
steadier
Inverted scale
12
G7 leading
indicator (rhs)
10
8
5
6
4
10
2
0
15
-2
-4
20
BA rate (lhs)
-6
-8
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Jan-87
Jan-86
Jan-85
Jan-84
Jan-83
Jan-82
Jan-81
25
• Interest rate policy under the previous SARB governor was pro-cyclical in
terms of the global cycle. This reinforced the same cycle in South Africa.
• Despite the recent rate hike - a shade of the old approach - policy has been
steadier since Tito Mboweni took over and the business cycle far tamer. Yet, at
the margin interest rate changes have become less predictable.
RDM Number p1.ppt 5/23/2017 4:19 AM (13)
‘Escape Clause’ for Inflation Target
“It is recognised that there may be some economic supply shocks or
extraordinary events impacting on CPIX inflation that are unforeseen and
beyond the control or influence of monetary policy. Most of these factors
reverse over time. It is not possible to specify in advance all the economic
shocks that could affect CPIX inflation, but such factors include a sharp rise
in international oil prices, drought, changes in indirect taxes, and
international financial contagion which causes major changes in the
exchange rate which are unrelated to domestic economic fundamentals
and domestic monetary policy. Reacting to such events could result in
costly losses in terms of output and jobs. In such circumstances where it
is expected that the target for CPIX inflation will not be met, it will be
indicated in a monetary policy statement and the Monetary Policy Committee
will set out the path and time horizon over which the inflation rate will be
brought back in line with the target.” (Our emphasis)
RDM Number p1.ppt 5/23/2017 4:19 AM (14)
Forecast Summary
INFLATION
CPI headline (ave)
CPI headline (end)
CPIX (ave)
CPIX (end)
Core CPI (ave)
Core CPI (end)
PPI (ave)
PPI (end)
INTEREST RATES
Bank/Repo Rate (end) *
BA 3-Month (end)
Prime Rate (end)
Bonds R150 (end)
Bonds R153 (end)
EXCHANGE RATES
ZAR/USD (ave)
ZAR/USD (end)
ZAR/EUR (ave)
ZAR/EUR (end)
NATIONAL ACCOUNTS
GDP
GDE Growth
PCE Growth
GDFI Growth
TRADE
Current Account (ZAR mill)
Current Account % GDP
Trade Balance (ZAR mill)
1999
2000
2001
2002F
2003F
5.3
2.2
6.9
6.8
7.9
7.9
5.8
7.0
5.3
7.0
7.7
7.7
8.3
8.5
9.1
10.0
5.7
4.6
6.6
6.5
7.2
5.8
8.5
8.3
5.9
6.9
6.7
6.6
5.9
6.9
9.5
9.2
6.2
6.0
6.0
6.0
6.2
6.0
8.2
7.4
12.0
10.6
15.5
13.2
13.7
11.3
12.0
14.5
12.0
12.7
9.50
9.5
13.0
10.9
11.3
10.5
10.0
14.0
10.5
11.0
10.5
10.0
14.0
9.5
10.1
6.16
6.05
6.20
6.45
7.58
6.89
7.14
6.32
9.00
12.35
8.06
11.04
10.97
10.30
9.55
9.06
10.55
10.82
9.83
10.28
2.1
0.0
1.4
-7.8
3.4
3.0
3.3
0.3
2.2
2.0
3.2
3.9
2.3
1.3
1.9
2.1
2.9
3.1
2.6
4.1
-2851
-0.4
22900
-2621
-0.3
22093
-1888
-0.2
25407
5154
0.5
29980
-2246
-0.2
35377