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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