South Africa


  • Service: Advisory, Risk & Compliance, Financial Risk Management
  • Type: Business and industry issue
  • Date: 2011/05/17

Monthly Economic Overview - May 2011 

This month we will be looking at: the MPC decision, the latest unemployment figures, PPI, movements in the Rand, movements in the oil price and the World Economic Forum on Africa.

Rates remain unchanged for now

The outcome of the latest Monetary Policy Committee (MPC) meeting on 12 May was to leave the repo rate unchanged at 5.5%, leaving the prime lending rate at 9%. Governor Gill Marcus highlighted that the inflation outlook has deteriorated further due to external cost-push factors, such as increasing fuel costs and higher food prices. The domestic recovery has been sustained at relatively moderate rates with no signs of significant increases in employment. The Rand/Dollar exchange rate has been volatile and has fluctuated in a range of R6.95 and R6.54.

In weighing up the arguments for and against a rate increase, the MPC chose to leave the repo rate unchanged for the time being, but has indicated that they will not hesitate to respond timeously to any signs that threaten to move inflation out of the target range on a sustained basis.


Unemployment increases

The unemployment rate in South Africa for the first quarter of 2011 increased to 25% from 24% previously. This means that the number of unemployed persons increased by 227 000 between the fourth quarter of 2010 and the first quarter of 2011. Most of the job losses occurred in the transport sector

(34 000 jobs), followed by construction (25 000 jobs), agriculture (24 000 jobs) and the trade sector

(13 000 jobs). Industries which were able to create jobs in quarter one include finance (37 000 jobs), manufacturing (20 000 jobs) and mining (15 000 jobs). Issues such as constrained electricity provision and high infrastructure costs (in the form of toll fees) may hamper job creation even further (Stats SA). This data seems to indicate that South Africa’s economic recovery is fragile and uneven.


Sharp increase in PPI

Producer prices increased sharply in March to reach 7.3% year-on-year, from a corresponding rate of 6.7% in February. This increase of 0.6% was mainly driven by upward pressure in commodity prices and administered prices, which are highly weighted in the PPI basket. Significant price increases were experienced in sectors such as mining and quarrying (with a year-on-year increase of 8.1% in March from 7.5% in February 2011), products from petroleum and coal (with a year-on-year increase of 17.1% in March from 10.9% in February 2011), basic metals products (with a year-on-year increase of 10.2% in March from 9.6% in February 2011) as well as chemicals and chemical products (with a year-on-year increase of 7.8% in March from 6.0% in February 2011).

PPI is likely to accelerate sharply in coming months, due to expected continuous upward pressure on commodity prices.


Tracking the Rand

The Rand continued on its volatile path for much of April, starting the month at around the R6.75 mark and strengthening to around R6.60 by the end of the month. Surging commodity prices, predominantly gold and platinum, which comprise approximately a fifth of South Africa’s total exports, had a positive impact on the trade balance. This had an impact on the local currency.

In terms of policy, the South African Reserve Bank reiterated that it would not actively pursue a weaker Rand, with Finance Minister Pravin Gordhan stating that the strength of the currency mitigated much of the inflationary impact of rising oil and food prices.

Internationally, the Rand tracked the strength of the Euro as the European common currency gained ground against the Dollar amid signs of economic recovery and a 25 basis-points increase in the interest rate by the European Central Bank (ECB). As the currency of South Africa’s largest trading partner, the Euro has a significant impact on the direction of the local currency.

We expect the Rand to remain buoyant for much of May with some depreciation expected as the Euro comes under pressure with debt issues and the downgrading of Greece’s credit rating. With the ECB refusing to commit to future interest rate hikes and slightly more positive economic data emerging from the US, the Dollar is likely to make small gains against the South African Rand.


Oil price slide

The past two weeks have seen oil prices drop by $16.76 per barrel to reach a low of around $109.13 per barrel with several factors increasing the selling pressure on oil. These factors include United States Federal Reserve economic growth data indicating that economic growth in the US slowed from 3.1% in the final quarter of 2010 to 1.8% in the first quarter of 2011; the death of Osama bin Laden; and the impact of higher fuel prices on consumer nation economies.

The weakening of the Dollar earlier this month saw oil prices rise, breaching the $110 per barrel mark, after its record decline, due to factors such as positive employment figures and concerns over the flooding of the Mississippi river that forced refineries in the area to reduce refining capacity, resulting in oil prices reaching $117 per barrel.


World Economic Forum on Africa

900 representatives of the world’s leading corporations, governments and civil society organisations gathered in Cape Town in the first week of May for the 21st World Economic Forum on Africa, with the theme: 'From Vision to Action: Africa’s Next Chapter'. KPMG’s presence was strong, with our international chairman, Timothy Flynn, serving as co-chair to the meeting.  


Africa is experiencing a period of great potential, having weathered the recession better than most regions and sub-Saharan Africa forecast to grow at 5.5% this year, one of the strongest growth rates in the world. The continent has also seen improved political stability, a stronger political commitment to private sector investment and improved access to social services and basic education. Plenary sessions focused on how to realise this potential.

A major sub-theme was the need to strengthen Africa’s interactions with the rest of the world and the way in which African countries interact among themselves. Africa needs to mitigate its exposure to commodity price volatility, increase its participation in multilateral forums, take advantage of global financial markets and improve regional integration, including developing a common approach to problems across countries. There was also a focus on achieving inclusive growth, spreading benefits to vulnerable groups such as women, the youth, civil society and the physically challenged. The continent is also one of the worst affected by climate change, and the importance of ensuring that growth is sustainable was highlighted.

Overall, a key message was that strong African leadership will be necessary to take advantage of these bountiful opportunities. Responsibility also needs to be shared between government and private sector institutions. Innovative public-private partnerships are a key enabler of growth and must be fostered in order to create trusting, sustainable working relationships.




Lullu Krugel
Senior Economist: KPMG
Tele: +27 (0)11 647 8516


Frank Blackmore
Senior Manager
Tel: +27 (0)11 647 5791