TradeWeighted Rand vs G7 Leading Indicator

1
RDM Number p1.ppt 06/11/2009 358 AM (1)
Budget 2002/03 Growth Inflation - Monetary vs
Fiscal Policy
by Nazmeera Moola
February 2002
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

3
Yield Curve Leads GDP (1 year ahead)
Real GDP Growth y/y (with and without Agriculture)

• 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 Treasurys
  expectation of 2.3 and 3.3 respectively.

• 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.

4
What is currently driving growth?
2001 Growth - 2.2

• Q4 GDP growth surprised on the upside growing
  2.5q/q (annualised) well above the Bloomberg
  consensus of 1.9. This was due to
• financial sector - 0.7
• manufacturing - 1.0
• wholesale, retail and leisure - 0.5
• and transport and communication - 0.5

5
Composition of Growth - Expenditure Side
Increasing Export Dependence
6
Where is inflation headed
7
Trade-weighted Rand G7 Leading Indicator
Both y/y change (G7 on RHS)
8
Deviation of ZAR AUD from PP
Assumption Deviation from PPP 0 in October
1990 benchmarked against USD

• Until Sept the rands 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 rands plunge since Sept, however, depicts
  itself as a glaring aberration that is unlikely
  to hold indefinitely

9
Food Prices PPI (Agriculture) vs CPI
Year-on-year percentage change
10
Crude Oil Prices in Rand and USD
Index Jan 2000 100
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.

12
Interest rate policy has changed
3-month Bankers Acceptances (BA) Rate inverted on
left scale
steadier

• 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.

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)

14
Forecast Summary