afrol News, 22 October - International Monetary Fund (IMF) has announced that South Africa's economic performance has strengthened in last several years, with real GDP growing by 5-5.5 percent in 2005-07, inflation declining to mid-single digits until recently and employment growing steadily.

A report issued by monetary body today shows that growth last year was driven by strong domestic demand, with private consumption and investment spending supported by robust consumer and business sentiment.

"Household consumption was also boosted by growing disposable income, rising employment, and wealth effects from rising asset prices until late in year. Total employment grew by 3.4 percent in year to September 2007 and unemployment rate declined to 23 percent," it says.

However IMF notes that 2008 saw a slowdown in activity reflecting increasing impact of electricity power shortages, global slowdown, and past monetary tightening.

It added that real GDP growth also slowed to 4.2 percent (year-on-year) in first half of 2008, and subsequent high-frequency indicators point to further moderation.

"Inflation pressures have intensified further. Twelve-month CPIX inflation has been rising since early 2007 - reaching 13 percent in July 2008, well above South African Reserve Bank's (SARB) 3-6 percent target range, mainly reflecting rising global food and fuel prices and, until recently, demand pressures. Inflation expectations for year ahead have picked up markedly. In response to the deteriorating inflation outlook, the SARB has raised its policy interest rate by 300 basis points since June 2007, to 12 percent by June 2008, but decided to keep it on hold in August in light of falling commodity prices and some moderation in inflation expectations," it stated.

It further shows that credit to private sector has begun to become moderate but still remains resilient, expanding by 20.3 percent in year ending in June 2008.

Report adds that household debt rose slightly to a record level of 78.25 percent of disposable income by first quarter of 2008.

"Pushed mainly by rising interest rates, household debt service has risen to about 11.25 percent of disposable income, but remains below historic highs. Asset prices continued to rise rapidly in 2007 but have moderated significantly since then. Strong commodity prices drove JSE all-share index up by 16 percent in 2007," observed IMF report, adding that In 2008, index fell by 4 percent through July, reflecting weakness in financial and manufacturing share prices, which were only partially offset by the strong performance of resource equities.

It goes on to show that South Africa's current account deficit expanded sharply to 7.25 percent of GDP in 2007 and almost 9 percent in the first quarter of 2008, driven by strong public and private investment and rising international oil prices.

"Deficit was financed by a mixture of equity and debt-creating inflows, bringing external debt to 26.5 percent of GDP by end-2007. Net portfolio flows were negative in the first quarter of 2008 and the current account deficit was covered by the proceeds from a large foreign direct investment (FDI) deal and an increase in nonresident bank deposits; net portfolio inflows turned positive again in second quarter. Risk premia on South African debt in international markets rose steeply in first quarter of 2008, reflecting turmoil in global financial markets, before moderating somewhat by mid-year," it concludes.

Meanwhile, Executive Board of Directors welcomed significant economic strides made by South Africa over the past several years, reflected in high economic growth, low inflation, and rising employment.

Board showed that these achievements have been based on sound macroeconomic policies and a transparent policy framework. South Africa's economic fundamentals remain strong, external debt is low, and financial system is resilient, IMF board said.

Directors accordingly underlined importance of continuing to address constraints to economic growth and job creation, while taking steps to preserve macroeconomic stability and strengthen economic resilience.

They further hailed authorities' pursuit of a careful fiscal policy, and their intention to maintain a broadly neutral fiscal stance in 2008, while strengthening social safety net in response to the increase in food prices.

They also acknowledged South Africa's pressing infrastructure and social spending needs, and noted authorities' plan to raise public investment significantly.

Given importance of sustaining investor confidence and limited scope for rising private saving, most Directors called for an increase in public saving so as to bring structural public sector borrowing requirement to zero over next few years.

By staff writer

© afrol News

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