PORTFOLIO AND SELECT COMMITTEES ON FINANCE September 2006

RECENT INTERNATIONAL ECONOMIC DEVELOPMENTS

Growth in global economic activity was sustained in the first half of 2006...

...notwithstanding the exceptionally high and volatile price of crude oil...

...and the further tightening of monetary policy in major economies … Key central bank interest rates Per cent Countries 1 January 2006 14 September 2006 Latest change (Percentage points) United States 4,25 5,25 29 Jun 2006 (+0,25) Japan 0,00 0,25 14 Jul 2006 (+0,25) Euro area 2,25 3,00 9 Aug 2006 (+0,25) United Kingdom 4,50 4,75 3 Aug 2006 (+0,25) Canada 3,25 4,25 24 May 2006 (+0,25) Denmark 2,25 3,00 4 Aug 2006 (+0,25) Sweden 1,50 2,50 6 Sep 2006 (+0,25) Switzerland 0,50 – 1,50 1,25 – 2,25 14 Sep 2006 (+0,25) Australia 5,50 6,00 2 Aug 2006 (+0,25) New Zealand 7,25 7,25 8 Dec 2005 (+0,25) Israel 4,50 5,50 1 Aug 2006 (+0,25) China 5,58 6,12 19 Aug 2006 (+0,27) Hong Kong 5,75 6,75 30 Jun 2006 (+0,25) India 5,25 6,00 25Jul 2006 (+0,25) Malaysia 3,00 3,50 26 Apr 2006 (+0,25)

...and the further tightening of monetary policy in major economies … (cont’d) Key central bank interest rates Per cent Countries 1 January 2006 14 September 2006 Latest change (Percentage points) South Korea 3,75 4,50 10 Aug 2006 (+0,25) Taiwan 2,25 2,50 29 Jun 2006 (+0,125) Thailand 4,00 5,00 7 Jun 2006 (+0,25) Brazil 18,00 14,25 30 Aug 2006 (-0,50) Chile 4,50 5,25 13 Jul 2006 (+0,25) Mexico* 8,25 7,00 21 Apr 2006 (-0,25) Czech Republic 2,00 2,25 27 Jul 2006 (+0,25) Hungary 6,00 7,25 29 Aug 2006 (+0,50) Poland 4,50 4,00 28 Feb 2006 (-0,25) Russia 12,00 11,50 26 Jun 2006 (-0,50) South Africa 7,00 8,00 3 Aug 2006 (+0,50) *The Bank of Mexico has decided on a gradual transition toward a policy target regime, but will retain the “el corto” until the transition is complete. Source: National central banks

… to contain heightened global inflationary pressures which partly reflected rising energy prices. World economic outlook: Consumer prices Annual percentage change in consumer prices Actual Projections 2005 2006 2007 World 3,7 3,8 3,7 Advanced economies 2,3 2,6 2,3 United States 3,4 3,6 2,9 Japan -0,6 0,3 0,7 Euro area 2,2 2,3 2,4 United Kingdom 2,0 2,3 2,4 Newly industrialised Asian economies* 2,2 2,2 2,2 Emerging-market and developing countries 5,3 5,2 5,0 Africa 8,5 9,9 10,6 South Africa 3,4 4,6 5,7 Central and eastern Europe 4,8 5,3 4,6 Developing Asia 3,5 3,8 3,6 China 1,8 1,5 2,2 India 4,0 5,6 5,3 Western hemisphere 6,3 5,6 5,2 * Include Hong Kong SAR, Korea, Singapore and Taiwan Province of China Source: IMF World Economic Outlook, September 2006

In the United States core inflation levelled off while interest rates most recently remained on hold.

In the euro area inflation moderated while interest rates increased.

In the United Kingdom inflation and interest rates increased.

With inflation edging into positive territory, interest rates increased in Japan.

The outlook of global growth remains strong… World economic outlook: Real gross domestic product Annual percentage change in real GDP Actual Projections 2005 2006 2007 World 4,9 5,1 4,9 Advanced economies 2,6 3,1 2,7 United States 3,2 3,4 2,9 Japan 2,6 2,7 2,1 Euro area 1,3 2,4 2,0 United Kingdom 1,9 2,7 2,7 Newly industrialised Asian economies* 4,5 4,9 4,4 Emerging-market and developing countries 7,4 7,3 7,2 Africa 5,4 5,4 5,9 South Africa 4,9 4,2 4,0 Central and eastern Europe 5,4 5,3 5,0 Developing Asia 9,0 8,7 8,6 China 10,2 10,0 10,0 India 8,5 8,3 7,3 Western hemisphere 4,3 4,8 4,2 * Include Hong Kong SAR, Korea, Singapore and Taiwan Province of China Source: IMF World Economic Outlook, September 2006

…despite the moderation in growth in the United States…

… and Japan …

… as growth in the euro area continued to rebound …

… and growth in the United Kingdom continued to gain momentum.

Closer to home, inflation trends in the various SADC countries are diverging. SADC inflation Annual percentage change in consumer prices 2004 2005 Jun 2006 Jul 2006 Aug 2006 Africa 8,0 8,5 * * * Angola 43,6 23,0 12,9 * * Botswana 6,9 8,6 12,5 11,9 * Lesotho 4,4 4,0 6,6 * * Madagascar 14,0 18,4 13,6 11,6 * Malawi 11,4 15,5 15,3 14,9 * Mauritius 3,9 5,6 7,6 10,1 * Mozambique 6,4 10,1 14,7 11,1 10,6 Namibia 4,1 2,4 5,3 5,1 * South Africa 1,4 3,4 4,9 5,0 * Swaziland 3,4 4,8 5,3 * * Tanzania 4,1 4,4 6,8 5,4 * Zambia 18,0 18,3 8,5 8,7 8,0 Zimbabwe 350,0 237,8 1 184,6 993,6 * * Not available Source: National central banks, unpublished Standard Bank data and IMF World Economic Outlook, September 2006

RECENT DOMESTIC ECONOMIC DEVELOPMENTS

The growth rate of the South African economy accelerated in the second quarter of 2006 …

… as strong momentum in the secondary and tertiary sectors countered a decline in the primary sector.

Domestic expenditure continued to expand, across all the components of domestic final demand …

… as reflected by the strong increase in household consumption expenditure...

… supported by the improvement in the real disposable income of households.

However, household debt levels increased to a new record high.

Growth in money supply was exceptionally strong in the second quarter of 2006 …

… and banks’ total loans and advances also recorded vigorous increases.

Real final consumption expenditure by general government rose strongly …

… as did real gross fixed capital formation by all institutional sectors.

On balance, the national savings ratio increased moderately.

Employment increased in both the private and public sectors …

… while the rate of increase in nominal wages per worker in the private sector outpaced that in the public sector.

Consistent with the increase in overall employment, labour productivity declined marginally.

The combination of an acceleration in remuneration and deceleration in productivity led to a significant increase in nominal unit labour cost in the formal non-agricultural sector.

In the manufacturing sector unit labour cost remained well contained.

South Africa’s trade deficit widened as the brisk increase in gross domestic expenditure contributed to vibrant merchandise imports.

Notwithstanding a slightly smaller surplus on the financial account, capital inflows continued to finance the deficit on the current account.

Sizeable portfolio inflows more than offset direct and other investment outflows.

The Bank’s gross gold and foreign reserves continued to improve as did the international liquidity position …

... which contributed to a further increase in the level of import cover.

The depreciation in the exchange rate of the rand mainly took place in May and June 2006.

Reflecting mounting price pressures, CPIX inflation increased significantly in recent months while remaining within the inflation target range.

CPIX inflation increased largely on account of an increase in the price of petrol and food.

CPIX goods inflation increased sharply while services inflation levelled off.

Production price inflation accelerated strongly from the second quarter of 2006.

Money-market interest rates trended higher in anticipation of and partly in response to monetary policy tightening.

From early May to mid-June 2006, yields on long-term bonds increased significantly alongside the depreciation in the exchange value of the rand...

… and the yield curve moved upwards and steepened at the short end.

Trading activity in the secondary share market reached new highs ….

… as the all-share price index increased to a new record level in September.

In the real-estate market the pace of increase in house prices decelerated.

Government finances continued to be supportive of a disciplined monetary policy environment.