M any of the biggest challenges our country faces revolve around the performance of our economy and the equitable distribution of the wealth we produce. It is therefore vitally necessary that we continue to pay the closest uninterrupted attention to these issues.
Among our critical challenges are the reduction and eradication of poverty, unemployment and underdevelopment, addressing race and gender inequality in the distribution of opportunity, income and wealth, and creating the caring and equitable society that will guarantee the dignity of all our people, including children, the youth, women and people with disabilities, within the context of a truly democratic, non-racial, non-sexist and prosperous society.
To achieve these goals requires that we have a strong economy that generates the resources we need. For this reason, throughout our 12 years of democracy, we have paid close attention to the performance of the economy.
In this regard, among other things, we have sought to ensure that:
The 86th Ordinary General Meeting of our Reserve Bank was held on 23 August 2006. Related to this meeting, the Bank, which is independent from government, issued its invaluable 2006 Annual Economic Report. Like its predecessors, this Report provides extensive 'Information About the Performance of our Economy', placing it within the international setting. It therefore helps greatly to assist us to assess whether we are succeeding, or otherwise, to meet the goals we have set ourselves.
The 2006 Report communicates the good news that we are indeed doing very well in this regard. It says that we are making steady progress towards the achievement of our objectives, based on the healthy economic fundamentals that we need to enable us to move forward. At the same time, this indicates that we have established the very firm foundation we need to enable us to perform even better than we have done so far, which we can and must do.
Below, rather than attempt to provide what might prove to be poor summaries, we quote excerpts from the Report. These convey the good news that should bring all of us a great sense of satisfaction, as well as give us the inspiration and energy we need to accelerate our advance towards the achievement of the goals we have set ourselves, revolving around the goal of a better life for all.
The Report says: "South Africa recorded a real growth rate of almost 5 percent in 2005 - the strongest since 1984. However, whereas the growth spurt in 1984 was short lived, being straddled by years of economic contraction, the economic expansion in 2005 formed part of a sustained and robust upswing which to date has been the longest in the South African business cycle history...What is remarkable about the current upward phase...is that growth has been sustained for 27 quarters...
"The South African economy became less dependent on commodities over the past quarter of a century as the services sector expanded in importance. Nevertheless, the recent buoyancy of commodity prices supported income, bolstered share prices and raised business and consumer confidence...
"The real output of the sub-sector that manufactures motor vehicle and transport equipment increased from 2004 to 2005, gaining further momentum from the second half of 2005 to the first half of 2006. Output in this sector benefited not only from the solid demand for new cars in the domestic market but also from rising exports...In addition, domestic demand for steel in the construction industry also strengthened.
"Real value added by the construction sector rose at an average annualised rate of 8 percent during the current upward phase of the business cycle, significantly stronger than the average rate of 2.5 percent recorded in the previous upward phase of 1993-1996. Following brisk growth rates of 10.75.and 10 percent recorded in 2004 and 2005, respectively, growth in the real value added by the construction sector accelerated to an annualised rate of 13.5.percent in the first half of 2006. This was mainly driven by robust activity in the construction of residential and non-residential buildings...
"The expansion of capital formation in the manufacturing sector during the first half of 2006 reflected the high rates of capacity utilisation in the sector and the confidence of manufacturers in the prospects for the industry in the medium term. The planned expansion of capacity in some sub-sectors such as cement manufacturing, aimed to relieve the backlog in construction supplies and prepare capacity ahead of government's infrastructure drive. In the trade sector the expansion in retail space continued as developers, mindful of the continued buoyancy of domestic demand, added to shopping malls...
"A gratifying trend over the past eighteen months was that growth in real fixed capital formation generally outpaced the other final expenditure components. This strong growth was widely dispersed, with both the public corporations and private business enterprises raising their capital expenditure across a range of sectors and activities, from electricity and communication to manufacturing and construction...
"Growth in real gross fixed capitital formation accelerated from an annualised rate of 7.75 percent in the second half of 2005 to 10.25 percent in the first half of 2006. All three institutional sectors, i.e. private business enterprises, public corporations as well as general government, stepped up real outlays on capital goods. On an annual basis, growth in real gross fixed capital formation ranged between 8 and 9.75.percent in each of the past three calendar years.
"This strong performance lifted the ratio of gross fixed capital formation to gross domestic product from 15.75 percent in 2003 to 17.25 percent in 2005...(During 2005), the upward trend in fixed capital formation pushed up the value of imported machinery and electrical equipment by 15 percent. These trends were sustained in the first half of 2006 when the import bill was raised further on account of the higher value of imported crude oil as domestic oil inventories were replenished...
"All the components of domestic final demand recorded vigorous increases over the past year-and-a-half. Real Disposable Income of the household sector maintained a robust rate of increase, buoyed by rising employment and wage levels, higher transfers from government to households in support of the poor, and some tax relief to individuals...
"Real final consumption expenditure by households...accelerated from an annualised rate of growth of 6.5 percent in 2004 to 7 percent in 2005 and 7.25 percent in the first half of 2006. The strong performance in household consumption expenditure can be attributed to real outlays on durable and semi-durable goods, both of which continued to increase at double-digit rates from around 2004.
"The buoyancy in real final consumption expenditure by households was anchored by relatively strong real outlays on durable and semi-durable goods. During the past eighteen months, expenditure benefited from high consumer confidence; a lower interest rate environment; and stable prices of most goods, with price reductions in categories with high import content, which benefited from the strong Rand... Expenditure on new cars accounted for about 43 percent of durable goods purchases over the past eighteen months...(NB: more equitable wealth distribution, a fundamental condition for the creation of a non-racial and non-sexist society, which has benefited Africans in particular, has clearly increased domestic demand for houses, cars and consumer durables).
"Increases in salaries and wages, which exceeded inflation, and the employment of more workers, underpinned growth in real disposable income of households. In addition, personal tax relief measures as well as increases in the threshold for tax exemption were introduced in the 2006/07 Budget. Government transfers to the household sector, such as child grants and pension and disability grants, also continued increasing in real terms...
"The deficit on the current account of the balance payments widened from 4 percent of gross domestic product in the first half of 2005 to more than 6 percent in the first half of 2006...(But) more than a quarter of the advanced economies of the world, and a third of the other emerging-market and developing countries recorded current-account deficits exceeding 6 percent of gross domestic product in 2005, and many of them have been doing so for a number of years. (NB: intermediate and capital goods, which will improve our productive capacity, accounted for the larger part of the import bill.)
(NB: By the middle of 2006, with reference to the emerging markets experiencing current account deficits, the currencies of Turkey, New Zealand, Hungary and South Africa had depreciated to virtually the same position relative to the US$. The Australian Dollar (AUD) was next best, recording less depreciation than these, with the Brazilian Real showing even more resilience compared to the AUD and the rest.)
"(However), in addition, South Africa maintained a low ratio of foreign debts to exports, was in a position to secure long-term foreign finance for much of its capital goods imports, and attracted sufficient foreign investor interest not only to finance the current account deficit in the first half of 2006, but also to add to its reserves of gold and foreign exchange...
"Financing from abroad came in various forms. Foreign direct investment activity continued...In 2005 portfolio capital flowed into South Africa in the form of equity investment...The inflow of share capital gained further momentum in the first 4.5 months of 2006 as the prices of commodities and shares soared. However, in May 2006 international investor sentiment turned away from emerging-market securities and currencies...But by July 2006, when local bond yields had risen significantly, (foreign investors) developed a strong appetite for South African bonds...
"The overall balance of payments remained in surplus during the past year, allowing the South African Reserve Bank (Bank) to raise its gold and foreign exchange reserves from US$18.7 billion in June 2005 to US$24 billion in June 2006. During most of this period the exchange value of the Rand moved broadly sideways but, as already indicated, it then depreciated significantly from the second week in May 2006...
"While employment trended higher during the period under review, average wage settlements remained moderate, amounting to around 6.25 percent in both 2005 and the first half of 2006. This, together with the firm exchange rate during most of this period, contributed to benign inflation...
"Despite extraordinary increases in energy prices and commodity prices in general, inflation in South Africa remained benign over the past year. CPIX inflation...declined from 9.3 percent in 2002 to 3.9 percent in 2005. By June 2006, twelve-month CPIX inflation had been maintained inside the target range of 3 to 6 percent for 34 consecutive months. The consistent application of disciplined monetary and fiscal policies, as well as waning inflation expectations, contributed to the reduction in inflationary pressures...
"Year-on-year growth in compensation of employees remained around 9 percent for most of 2005 and the first half of 2006. On a net basis, a considerable number of JOBS were created in the economy during this period, alongside increases in wage rates and salaries paid to workers...With the exception of 2002, (wage) settlement rates have consistently exceeded overall consumer price inflation during the past decade, contributing to a rise in workers' real take-home pay.
"Overall employment growth gained momentum from 2004...The Labour Force Survey indicates that well over a million additional jobs were created over the four-year period to September 2005, with as many as 660,000 jobs in the year to September 2005 alone... Narrower indicators of employment also point to the creation of more jobs in the recent past...The level of enterprise-surveyed employment in the formal non-agricultural sector rose by 4,5 percent, or approximately 316,000 jobs, over the twelve months to March 2006...
"According to the Investec Purchasing Managers Index (PMI) employment sub-index in July 2006, accelerating new sales orders and strong growth in output in the manufacturing sector had also translated into expectations of employment gains going forward. The strength and duration of the expansion in economic activity were reflected in the development of capacity constraints in various sectors of the economy, accentuating the deficiency of appropriate skills in the economy...
"In an environment of positive economic sentiment characterised by robust real economic activity, lower inflation, a relativity low level of interest rates and soaring prices of financial assets and real estate, growth in the broadly defined money supply (M3) strengthened substantially during 2005 and in the first half of 2006.
Positive wealth effects and buoyant transactions needs bolstered growth in money supply, and were reinforced by increased monetisation as employment rose and access to banking services improved...Over the twelve months to June 2006, household M3 deposits expanded by a solid 12.1 percent, reflecting factors such as rising real disposable income, in turn influenced by rising employment levels and sizeable increases in salaries and wages...
"Government finances continued to be characterised by strong growth in tax revenue, consistent with the robust performance of the economy and the continuous pursuit of greater efficiency in the collection of taxes. In fiscal 2005/06 the national government deficit amounted to less than 0.5 percent of gross domestic product, while for the public sector as a whole a financial surplus was registered for the first time on record. The budgeted projections provide for an easier fiscal stance in 2006/07 as expenditure on infrastructure and service delivery is raised, while remaining within the boundaries of sustainability...
"In real terms, the increase in national government expenditure in fiscal 2005/06 amounted to 8,9 percent, demonstrating government's commitment to higher economic growth through increased public spending on economic infrastructure as well as social and economic services. Real growth in targeted areas of expenditure, together with declining interest costs, contributed strongly towards improved growth in fiscal 2005/06. Government's non-interest spending during the same period was also closely aligned with original budget expectations.
"The marginally lower-than-budgeted expenditure in fiscal 2005/06 can partly be attributed to lower interest payments on national government debt. Prudent debt management, lower borrowing requirements, lower global interest rates and the appreciation of the Rand, all contributed towards the lower payments. Interest payments increased by 4.5 percent in fiscal 2005/06, just over half of the originally budgeted increase of 8.9 percent. This released additional resources for further economic development and poverty relief initiatives...
"Spending on community and social services remains the most important and largest functional category of government spending and is projected to amount to 53.2 percent of the projected expenditure by consolidated national and provincial governments and social security funds in fiscal 2008/09.
"Spending on these services is the foundation for future growth through human capital development, alongside the provision of direct support to the poor. This type of spending is expected to increase at an average annual rate of 11.6 percent over the medium term, with housing and community services clearly deemed to be a priority area...
"Over the medium term - i.e. 2006/07 to 2008/09 - spending on infrastructure by the public sector is expected to accelerate strongly to a cumulative amount of R372 billion. Several investment programmes, industrial policy initiatives and regulatory reforms aim to ensure that both infrastructure capacity and improved economic performance support accelerated economic growth and higher living standards. The accelerated spending on infrastructure and other capital goods by the public sector will be partly financed through greater recourse to the capital market...
"During the past year, the improvement in the performance and resilience of the South African economy was recognised by two credit-rating agencies, that upgraded the country's sovereign debt rating from BBB to BBB+..."
In his Address to the 86th Ordinary General Meeting of shareholders of our Reserve Bank, on 23 August 2006, Bank Governor Tito Mboweni said: "We live in an ever-changing global environment, an environment that is characterised by opportunities and hope, but also fraught with risks. In this environment the South African Reserve Bank must implement its mandate and manage the associated risks to ensure that South Africans benefit from opportunities emanating from a changing world. Today, I am pleased to report on another successful year in the eighty-five-year history of the Bank."
The 2006 Annual Economic Report of the Reserve Bank tells an inspiring story of yet another successful year in the twelve-year history of democratic South Africa, which continues to advance towards the realisation of the goal of a better life for all, within a global environment that is characterised by opportunities and hope, but also fraught with risks.
This Report must give us the energy and impetus to accelerate our reconstruction and development process - achieving higher and sustained investment-driven economic growth rates, restructuring and modernising our economy, especially manufacturing, increasing the skills and incomes of our working people, and sharing our national wealth equitably, and thus further expand our domestic market.
What is contained in the 2006 Annual Economic Report of the Reserve Bank says that what we have accomplished in the last 12 years confirms that we can achieve these objectives, giving real meaning to the conviction among our people that we have entered our Age of Hope.
