Abstract
This 2003 Article IV Consultation highlights that the South African economy performed well in 2002, notwithstanding difficult global economic conditions. Supported by sound macroeconomic management and a highly competitive exchange rate, real GDP growth rose to 3.0 percent in 2002 from 2.8 percent in 2001. However, growth slowed to 1.5 percent in the first quarter of 2003, largely in response to a strong currency appreciation and tight financial conditions. The sharp currency depreciation that occurred in the second half of 2001 provided a major boost to activity during much of 2002.
This statement provides information that has become available since the staff report was issued. The thrust of the staff appraisal remains unchanged.
1. Latest activity indicators support the view that the current economic slowdown should be limited in scope and duration. Retail trade and vehicle sales have been stronger than market forecasts and mining output has shown robust growth, although manufacturing activity remains weak. Export performance has proven resilient, despite the strength of the rand.
2. Price pressures have continued to subside. CPIX inflation fell to 6.4 percent (12-month basis) in June from 7.7 percent in May in response to relatively tight financial conditions, the strength of the rand, and declines in fuel prices. On August 15 the South African Reserve Bank (SARB) lowered the repo rate from 12.0 to 11.0 percent, noting that, although the pace of recent wage settlements had been higher than prevailing inflation, the outlook for inflation remained promising.
3. Fiscal data through end-June 2003 indicate that the overall deficit is broadly in line with what was envisaged in the budget. However, revenues, particularly from corporate taxes, have been running somewhat below target.
4. Further progress has been made in strengthening South Africa’s international reserves. After having been reduced to just below zero in May, the SARB’s net open forward position reached negative US$ 1.1 billion at the end of June.
5. Additional steps have been taken to replace capital controls with prudential requirements. On July 31, the SARB issued new reporting requirements on the foreign investments of institutional investors; these investors still remain subject to existing ceilings on the total stock of foreign assets (as described in Box 4 in the staff report).
6. On August 8, the government announced an important initiative in the fight against HIV/AIDS. Anti-retroviral drugs are to be provided under a nationwide treatment program that will become fully operational by 2008. Details of the program will be formulated by September 2003.