Positive signs
The Nedcor Economic Unit provides a review of 13 December 2004 to 7 January 2005 and preview of 10 to 14 January.
Local financial markets were mostly strong in quiet trade up to the New Year, but during the past week the rand started to come under pressure as the US dollar staged a comeback.
The local unit depreciated to a low of R6,14 against the US dollar on Thursday last week before settling at R6,09 on Friday.
This weakness came after a period of renewed rand strength, which saw the currency reach a high of R5,59 on 29/12 from R5,74 on 13/12. The rand followed a similar pattern against the euro and the UK pound, depreciating to R7,95 and R11,39 respectively on Friday after reaching highs of R7,59 and R10,75 on 3/1 and 4/1 respectively from R7,63 and R11,03 at the time of the last report.
Bond yields tracked the rand’s movement, with the R194 2008 and R153 2010 initially strengthening to 7,42% and 7,75% respectively on 29/12 from 7,84% and 8,11% on 13/12, before losing ground and closing at 7,58% and 7,88% on Friday last week.
Money markets rates were mostly marginally lower with the exception of the 3-month Jibar rate, which increased to 7,49% from 7,45% on 13/12. The yield on the 3-month NCD eased to 7,60% from 7,65% on 13/12, while the yields on 6-, 9-, and 12-month NCDs all eased to 7,45% from 7,65%, 7,55% and 7,50% respectively on 13/12.
Money market rates continue to reflect a positive inflation outlook and hopes of another interest rate cut.
The local equity market also remained strong, with FTSE/JSE all share index gaining 4,7% over the review period. The rally was initially driven by strong growth in financials and industrials, reflecting expectations of strong domestic spending over the festive season, before resources took over with some help from the weaker rand.
Financials and industrials gained 2,9% and 4,3% respectively over the review period, while resources shot up over 6,6% off a low base.
Most of the economic data released since the last Weekly Economic Monitor on 13 December 2004 painted a relatively favourable picture of the state of the local economy.
December’s new vehicle sales figures gave some indication of the strength of domestic spending, with total sales rising by an impressive 37,9% y-o-y as passenger and commercial vehicle sales increased by 38,5% and 36,3% respectively.
The broader motor vehicle industry recorded an impressive performance in 2004, with passenger and commercial vehicle sales rising by 21,8% and 22,5% respectively over the year.
November’s monetary aggregates also showed that consumers aggressively took advantage of the low interest rate levels to accelerate spending.
While growth in broad money supply (M3) eased slightly over the month to 14,23% from 14,92% in October, growth in private sector credit extension excluding the volatile investments and bills discounted categories accelerated sharply to 15,16% from 13,19% in October.
Demand for instalment sales and mortgages finance continued to race ahead, rising by a further by 21,9% y-o-y and 22,7% respectively in November.
However, leasing finance eased sharply to 18,8% y-o-y from 22,9% in October, but this appeared to be mainly on account of base considerations rather than any underlying slowdown in fixed investment activity.
Despite the surge in domestic spending and credit demand, inflationary pressures remained subdued, helped by the strong rand.
While both consumer and producer inflation rose in November, the increases were modest and mainly reflected the impact of high international oil prices at that time, which translated into a 17c/l hike in the local petrol price.
Overall consumer inflation rose to 3,7% from 2,4% in October, while CPIX (which excludes mortgage costs) rose to 4,6% from 4,2% previously. CPIX was slightly above market expectations but remained well within the Reserve Bank’s target range of 3% to 6%.
Producer inflation followed a similar trend, rising slightly above market expectations to 2,5% from 1,9% in October.
There was some good news on the trade balance, with the deficit narrowing to R479,7 million in November from the large R5,8 billion deficit recorded in October.
Exports rose by 17,9% over the month, while imports contracted by 3,9%, accounting for the smaller deficit. The main drivers of the jump in exports were jewellery, base metals, machinery and equipment as well as vehicles, while the fall in imports were mainly the result of the extraordinarily high base established in October.
For the eleven months to November 2004, the trade balance recorded a deficit of R14,6 billion compared with a surplus of R10,9 billion over the same period in 2003.
The overall rosy picture was then completed with news of a further rise in reserves in December.
Strong foreign interest in South African equities pushed foreign exchange reserves up to $14,9billion from $14,4billion in November, while a lower gold price pushed the value of gold reserves down to $1,7billion from $1,8billion.
The combined effect was that gross reserves rose marginally to $14,9billion from $14,4billion at the end of November, while the international liquidity position or net reserves rose to $11,4billion from around $11billion.
