SA fundamentals support growth

JOHANNESBURG – South Africa’s solid fundamentals support economic growth, but the country remains vulnerable to changes in international sentiment, central bank governor Tito Mboweni said on Thursday.

“I believe the structural and fundamental factors providing strength to the domestic bond market should continue to support economic growth and weather the storms of financial market volatility globally,” he said in a speech to the Bond Exchange of South Africa. South Africa’s Treasury this week cut its forecast for 2006 economic growth to 4,4 per cent from 4,9 per cent achieved in 2005 – its highest level in more than two decades.Rising inflationary pressures, partly fuelled by robust consumer demand and record household debt, have prompted the central bank to raise rates by 150 basis points in three stages to 8,5 per cent since June – crimping growth – and most analysts see more hikes ahead.Mboweni said the economic expansion should continue “despite the shorter-term noise on interest rate cycles” and changes in investor sentiment and risk appetite.A Reuters poll of 17 strategists, surveyed on Wednesday, expect interest rates to rise again by half a percentage point in December as the central bank tries to ward off a breach of its three-six per cent inflation target.Mboweni said monetary policy had to take note of the global risks and developments in global bond and equity markets that would weigh on the country’s balance of payments.These could potentially lower the demand for South African financial assets and impact the exchange rate and, ultimately, inflation.”However, as an open emerging-market economy we are always vulnerable to changes in international sentiment and cannot afford to be too complacent,” Mboweni said.A yawning current account deficit of more than six per cent of gross domestic product has weighed on the rand currency this year.The shortfall has so far been financed by foreign inflows, but South Africa’s open capital markets expose it to risks should sentiment change.Mboweni said the country’s inflation-targeting system had succeeded in anchoring expectations and should, as a result, help to keep long-term bond yields at moderate levels.South Africa’s targeting inflation measure, CPIX, ticked up to its highest in three years at 5,1 per cent in the 12 months to September.The Treasury has warned that inflation could bust the three-six per cent band – that it has remained solidly inside for three years – in early 2007.Despite a recent retracement, bonds had entered a period of structurally lower yields, supported by fiscal discipline and better credit ratings, he said.Benchmark government bond yields had been holding steady below eight per cent until earlier this year when a weakening rand and interest hikes pushed them higher.The Treasury on Wednesday forecast South Africa’s first ever budget surplus for the 2007/08 fiscal year and slashed other estimates for budget shortfalls.That supported bond prices on Thursday as the market bet that supply would remain contained and that policymakers were serious in their attempts to address the financing of the current account deficit.Nampa-ReutersSouth Africa’s Treasury this week cut its forecast for 2006 economic growth to 4,4 per cent from 4,9 per cent achieved in 2005 – its highest level in more than two decades.Rising inflationary pressures, partly fuelled by robust consumer demand and record household debt, have prompted the central bank to raise rates by 150 basis points in three stages to 8,5 per cent since June – crimping growth – and most analysts see more hikes ahead.Mboweni said the economic expansion should continue “despite the shorter-term noise on interest rate cycles” and changes in investor sentiment and risk appetite.A Reuters poll of 17 strategists, surveyed on Wednesday, expect interest rates to rise again by half a percentage point in December as the central bank tries to ward off a breach of its three-six per cent inflation target.Mboweni said monetary policy had to take note of the global risks and developments in global bond and equity markets that would weigh on the country’s balance of payments.These could potentially lower the demand for South African financial assets and impact the exchange rate and, ultimately, inflation.”However, as an open emerging-market economy we are always vulnerable to changes in international sentiment and cannot afford to be too complacent,” Mboweni said.A yawning current account deficit of more than six per cent of gross domestic product has weighed on the rand currency this year.The shortfall has so far been financed by foreign inflows, but South Africa’s open capital markets expose it to risks should sentiment change.Mboweni said the country’s inflation-targeting system had succeeded in anchoring expectations and should, as a result, help to keep long-term bond yields at moderate levels.South Africa’s targeting inflation measure, CPIX, ticked up to its highest in three years at 5,1 per cent in the 12 months to September.The Treasury has warned that inflation could bust the three-six per cent band – that it has remained solidly inside for three years – in early 2007.Despite a recent retracement, bonds had entered a period of structurally lower yields, supported by fiscal discipline and better credit ratings, he said.Benchmark government bond yields had been holding steady below eight per cent until earlier this year when a weakening rand and interest hikes pushed them higher.The Treasury on Wednesday forecast South Africa’s first ever budget surplus for the 2007/08 fiscal year and slashed other estimates for budget shortfalls.That supported bond prices on Thursday as the market bet that supply would remain contained and that policymakers were serious in their attempts to address the financing of the current account deficit.Nampa-Reuters