1996 - National Treasury

-1.5-
1.1.9 Financial markets
The growth rate in the M3 money supply exceeded the
money supply guideline range of 6 to 10 per cent during
1995. The growth rate over twelve months in M3 increased
during the first half of 1995 from 15,7 per cent in December
1994 to 16,8 per cent in June 1995, but receded slightly to
15,1 per cent in December. The sharp increase in M3
during 1995 could be attributed to the higher levels of
domestic output and expenditure, whilst liquidity preference
also rose in anticipation of a strengthening of the bond and
share markets.
M3 GROWTH AND CREDIT EXTENSION
TO PRIVATE SECTOR
Percentage change
Percentage change
15 I 86 I »7 I 88 I 89 I 90 I 91 I 92 I 93 I 94 I 951 98
Source: South African Reserve Bank
The changes in the accounting counterparts of the M3
money supply were dominated by the increase in the net
claims of the monetary sector on the private sector. The
growth over twelve months in credit extension to the private
sector increased from 17,0 per cent in December 1994 to
19,5 per cent in June 1995, but receded to 17,5 per cent in
December 1995. These growth rates exceeded the growth
in aggregate nominal income, thereby indicating a rising debt
to gross domestic product ratio for private sector entities.
The strong growth in instalment sales credit and leasing
finance was reflected in the sharp increase in sales of new
and used motor vehicles, while mortgage advances also
exhibited strong growth.
The rapid growth in money supply and the escalation in the
extension of credit by banks to the private sector, coupled
with a quickening of the pace of economic activity, prompted
an increase in Bank rate by one percentage point to 14 per
cent on 21 February 1995 and a further increase to 15 per
cent with effect from 30 June. This signalled a tightening of
monetary policy which later resulted in a rise in the inflationadjusted
prime lending rates of banks from 5,8 per cent in
December 1994 to 10,9 per cent in December 1995.
The longer-term interest rate structure changed considerably
during the course of 1995. The yield curve flattened and at
the end of December 1995 was markedly lower for all
maturities than in June 1995. The decline in the capital
market yields across the maturity spectrum during the
second half of 1995 was a clear indication of the downward
adjustment of long-term inflation expectations. The monthly
average yield on long-term government stock declined from
a high of 17,0 per cent in January 1995 to 14,6 per cent in
December 1995 and then receded further to 13,8 per cent
in January 1996. In February the yield returned to levels
above 14 per cent.
The money market shortage fluctuated considerably during
1995. After relatively easy money market conditions had
prevailed in the first quarter, the market became much
tighter during the third and fourth quarters of 1995. The
amount of accommodation provided by the Reserve Bank
rose from R3,2 billion at the end of July 1995 to R7,4 billion
at the end of October. It then subsided somewhat in
November and December before rising sharply to R8,0 billion
at the end of January 1996. The Reserve Bank's
operations in the money market during the fourth quarter of
1995 were mainly directed towards draining liquidity and
maintaining relatively tight money market conditions.
Although the value of shares traded on the Johannesburg
Stock Exchange declined by 11,6 per cent in 1995 as a
whole, there was a marked improvement during the course
of the year from R13.3 billion in the first quarter to R19.4
billion in the fourth quarter. The price level of all classes of
shares increased significantly in January 1996. The prices
of gold-mining shares advanced in early 1996 in response
to the gold price breaking through US$400 per fine ounce
for the first time since August 1993.
1.2 ECONOMIC OUTLOOK
1.2.1 The international economy
Growth and inflation forecasts in the major countries
comprising the Organisation for Economic Cooperation and
Development (OECD) have been steadily revised downwards
over the past year. Inflation is low and fundamental
macroeconomic conditions are stable in almost all the OECD
countries. Provided this favourable environment remains,
output growth should show a slight acceleration from 2,4 per
cent in 1995 to 2,6 per cent in 1996, while inflation is set to
remain on the same level of 1,8 per cent in both 1995 and
1996. The growth in world trade is projected to fall back
somewhat in 1996.