Abstract
South Africa’s 2005 Article IV Consultation reports that the short-term outlook is broadly favorable, with the main risks arising from a possible worsening of the external environment. The authorities plan to maintain a flexible exchange rate, and to intervene in the foreign exchange market only to accumulate international reserves when market conditions are favorable. The banking system is sound, and short-term vulnerabilities appear limited. Some pressures could arise from banks’ large mortgage portfolio carrying variable interest rates.
This statement provides information that has become available since the staff report was issued. The thrust of the staff appraisal remains unchanged.
1. Data released last week reveal continued robust growth of economic activity. Supply-side GDP data published by Statistics South Africa on August 23 show real GDP growth of 4.8 percent in the second quarter of 2005, stronger than anticipated and up from 3.5 percent in the first quarter. The rebound in growth partly reflects strong performance of the manufacturing sector, which grew by 7.3 percent in the second quarter after contracting in the first quarter. Demand-side GDP data for the first half of 2005 published by the South African Reserve Bank (SARB) on August 24 show continued strong final domestic demand—including both consumption and fixed capital formation—but subdued inventory investment. In the first half of 2005 import growth slowed markedly while export growth remained steady, and as a result the current account deficit declined to 3.3 percent of GDP, from 3.6 percent of GDP in the second half of 2004. Twelve-month CPIX inflation rose to 4.2 percent in July, from 3.5 percent in June, mainly reflecting higher fuel and food prices.
2. This information points to strengthened near-term economic prospects. Staff has raised moderately its projection for real GDP growth, to 4.3 percent in 2005 and 3.9 percent in 2006. Projected fiscal deficits have been lowered slightly, to 1.9 percent of GDP in 2005 (calendar year) and 2.1 percent of GDP in 2006, reflecting stronger expected fiscal revenues. The forecast for the external current account deficit remains essentially unchanged, as the effect of a lower than anticipated deficit in the first half of 2005 is broadly offset by a weaker outlook for the country’s terms of trade, owing to higher world oil prices.
3. At its Monetary Policy Committee (MPC) meeting on August 10-11, the SARB decided to keep the repo rate unchanged at 7 percent. The MPC saw the inflation outlook as generally favorable, but mentioned several risks, including higher oil prices and continued strong domestic expenditure. The MPC will also watch closely the trends of wage settlements and unit labor costs. The SARB’s central forecast envisages CPIX inflation rising moderately in the period ahead, and peaking at about 5.5 percent in the first quarter of 2006.
4. Last week Fitch upgraded South Africa’s sovereign credit rating one notch to BBB+. The move brings Fitch rating in line with those of Moody’s and S&P. Fitch cited an improvement in the country’s growth performance and further strengthening of its international reserves.