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Aug 16, 2012

SA should revisit monetary policy to address economic imbalances

Johannesburg|Africa|Export|India|Mining|Pan African Investment|Research Services|Africa|China|South Africa|Electricity Costs|Manufacturing|Manufacturing Sector|Media Conference|Policy Tools|Products|Services|Infrastructure|Iraj Abedian
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Policymakers in South Africa should use a set of policy tools such as macro-prudential regulation, capital controls and exchange rate bands to create macro-financial stability, the Manufacturing Circle stated in its second-quarter bulletin, published on Thursday.

Iraj Abedian, the CEO of Pan-African Investment and Research Services, which compiled the document, told a media conference, in Johannesburg, that the bulletin indicated that the global economy would remain on a trajectory of considerable structural adjustment during the foreseeable future. Subsequently, the volatility of emerging market currencies was likely to continue if, and for as long as, these currencies remained within a freely floating regime.

“Therefore, the structural nature of the change in the economy implies that economic policy in general, and monetary policy in particular, should be revisited accordingly to address imbalances,” the document read.

South Africa’s volatile exchange rate and the increased threat of a global recession had led to a debate regarding an additional mandate for monetary policy.

“Its being argued that monetary authorities in advanced economies should also target asset prices in addition to consumer prices, while in emerging economies the exchange rate has been cited as an additional target for monetary policy, besides price stability,” the document said.

It suggested that the South African Reserve Bank (SARB) should consider adding to its mandate of maintaining low inflation an implicit intervention in the foreign exchange market to minimise the volatility of the rand exchange rate.

Additional to the 3% to 6% inflation target range, a “currency band” of between R8.20 and R8.60 per dollar is proposed as a “working guide” for the SARB in its conduct of monetary and exchange rate policies.

Abedian said the survey results also revealed that business confidence in the manufacturing sector was fragile during the second quarter, weighed down by input costs that remained elevated.

During the second quarter an increase to 43% was recorded in the perception of business conditions, varying from ‘poor’ to ‘fragile’, up form 33% in the first quarter.

In line with this trend, the proportion of surveyed firms considering business conditions to be ‘stable’ reached 33%, down from 45% in the first quarter.

Many respondents advanced that high labour, fuel and electricity costs negated the manufacturing sector’s endeavours to bolster its competitiveness.

However, Abedian said domestic sales outperformed export sales during the quarter, with the share of respondents that recorded positive growth in the value of domestic sales climbing to 70%, up from 66% during the first quarter.

On the contrary, surveyed firms which posted positive growth in export sales value declined from 71% in the first quarter, to 70% in the second half.

Meanwhile, the manufacturing sector shed 44 000 jobs during the quarter, an improvement from the 67 000 recorded in the previous quarter. Abedian said losses were spurred by, among others, increasing volumes of cheap imports, automation and the reduction in the number of contract staff, as new orders from export markets plummet.


Survey participants put forward that, in addition to high input costs, the continued influx of cheap imports from China and India, muted domestic and international demand conditions and the poor performance of the mining sector, among others, would be determining factors in the sector’s outlook.

Abedian added that the report had identified the potential for the government’s preferential procurement programme to stimulate the manufacturing sector’s performance, and the implementation of the government’s infrastructure investment expenditure drive, as key factors that could stimulate the South African manufacturing sector going forward.

The report contains responses from a total of 67 CEOs from small to large-sized manufacturing companies in South Africa, covering a revenue base of between R300-million and R10-billion and representing a wide range of sectors from basic metals and fabricated metal products, to textiles and clothing.

Edited by: Mariaan Webb
Creamer Media Senior Researcher and Deputy Editor Online
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