T Mboweni: Professional Society for Supply Chain Management
Conference

5 June 2006

1. Introduction

Ladies and gentlemen, thank you for inviting me to address this conference.
I am certain that the efforts of your members in ensuring successful supply
chain logistics in many sectors have played a very important supportive role in
South Africa’s impressive economic achievements in recent years. Your successes
are also evidenced by the moon rock you have secured so successfully for this
event!

No doubt you will continue to contribute meaningfully to making 2006 yet
another year of significant positive growth in our economy. Customers worldwide
are demanding ever higher levels of service and efficiency. And your society is
to be commended for its sterling work in ensuring that South Africa’s growth
potential is enhanced as companies adopt improved supply chain logistics in
order to compete more effectively in a global environment that is characterised
by increasing competitiveness and just in time processing and delivery. Of
course the economic context within which you operate is crucial to your
success, too.

2. Recent domestic economic developments

The South African economy has been in an upswing since September 1999,
making the current business cycle expansion phase the longest on record. The
upswing continues apace with strong growth in the South African economy during
the first quarter of 2006 as global growth provided a solid tailwind, inflation
pressures were relatively calm and interest rates were steady. This is quite a
remarkable achievement, given the domestic, regional and international
challenges that have confronted South Africa during the course of this
upswing.

Real gross domestic product recorded an average annual growth rate of almost
5 per cent for the year 2005, which constitutes the highest annual growth rate
since 1984. Although there was a deceleration from 4,1 percent in the third
quarter to 3,2 percent in the fourth quarter of 2005, growth accelerated once
again in the first quarter of 2006 to 4,2 percent. Despite negative growth
being recorded in the primary sector, the acceleration in growth was achieved
due to the recovery in manufacturing output and continued buoyancy in other
secondary and tertiary sectors. The seasonally adjusted real value added by the
agriculture, forestry and fishing industry decreased by an annualised rate of
6,9 percent during the first quarter of 2006 mainly due to the poor performance
in the production of field crops. Following the decrease of 5,4 percent in the
fourth quarter of 2005, real value added by the mining and quarrying industry
decreased at an annualised rate of 2,9 percent during the first quarter of 2006
due mainly to declining gold production. However, growth in the real value
added in manufacturing recovered significantly in the first quarter as other
sectors such as construction, trade and other services remained extremely
buoyant in the first quarter of 2006. The real value added by the
non-agricultural industries (excluding the impact of the volatile agriculture
industry) for the first quarter of 2006 increased by 4,7 percent compared with
the fourth quarter of 2005.

Importantly for our members, the manufacturing sector is in an expansionary
phase. The seasonally adjusted Project Management Institute (PMI) for May,
released this past week, showed the manufacturing sector expanded for the third
consecutive month from a level of 54,3 in April to 57,6 in May. Some of the
components that strengthened include the business activity component, new sales
orders and suppliers’ performance. However, the PMI indicates that inventories
fell from April’s level. And indications are that inventory investments in the
manufacturing sector slowed in the fourth quarter of last year partly because
of low crude oil imports and problems with the change to unleaded petrol. Many
of these areas affect the members of your association but I am sure you are
generally satisfied with the economy’s performance, thus far.

Growth in real gross domestic product in South Africa is expected to remain
above the four percent level for this year as a whole driven primarily by the
robust trend in domestic expenditure. According to the April 2006 Reuters
consensus forecasts, the South African economy is expected to grow at 4,5
percent in 2006 and 2007 and by 5,0 percent in 2008. In its budget review the
National Treasury expects economic growth of 4,9 and 4,7 percent for 2006 and
2007 respectively. The strong growth momentum in household consumption
expenditure and gross fixed capital formation is expected to continue to be the
prime driver of growth over the medium term.

Despite the recent increases in the fuel price which may somewhat dampen
household spending on other items, growth in consumption expenditure is
expected to remain robust as a result of sustained real disposable income
growth due to expected continued generation of employment and real salary and
wage increases. This together with the favourable wealth effects of higher
asset prices the lower interest rate environment and the up to now contained
inflationary pressures as well as the government’s personal income tax relief
package announced in the February 2006 budget should continue to sustain the
expected growth momentum in real household spending. Government also remains
committed to its objective of generating long term sustainable economic growth
through its planned spending on public sector infrastructure and deeper micro
economic interventions (structural reforms).

Government’s continued commitment to improve key infrastructure and social
development programmes was highlighted emphatically in the President’s State of
the nation address to parliament earlier this year, when he announced that the
Accelerated and Shared Growth Initiative for South Africa (AsgiSA) would serve
as catalyst to efforts to halve unemployment by 2014. Under AsgiSA large
investments will be made in various sectors to improve infrastructure. The
President announced a massive investment initiative and promised that
government would tackle the skills shortages and speed up the process of
achieving even higher levels of real economic growth. Government intends
investing R372 billion within three years in order to push economic growth to
higher levels.

Business confidence levels generally remain upbeat and private sector
investment sentiment remains strong. This has probably been meaningfully
supported by the announced increases in parastatals capital expenditure. The
surge in business investment is also expected to translate into higher export
volumes. A number of new projects in the mining of iron ore and gold have been
identified and should commence in the medium term. Vehicle manufacturers are in
the process of expanding capacity and cement companies have also been expanding
their capacity in order to meet the construction sector’s demand for cement.
Capital formation in the construction and commerce sectors should continue to
benefit from robust domestic demand. In the 2006/07 budget several projects
were announced which should boost real fixed investment by the general
government in the medium to long term. These include: Infrastructural
development to improve the provision of water and sanitation; construction of
schools, clinics and provincial roads; the upgrading of informal settlements;
the expansion of economic and transport infrastructure and capital expenditure
in preparation for the 2010 FIFA World Cup. The work that is underway at
Transnet is absolutely central to the micro economic story going forward.

The comprehensive preparations for the World Cup Soccer tournament in South
Africa in 2010 should help to stimulate construction activity significantly,
i.e. via the anticipated investment in soccer stadiums and the expansion and
upgrading of accommodation facilities. Eskom, Transnet and Telkom also have
exceptionally large capital projects in the pipeline and state owned
enterprises are projected to invest about R123 billion in capital expenditure
over the next three years (with R32 billion of this amount being spent on rail
and port infrastructure).

As could be expected, the lengthy upswing in economic activity and
expenditure has been accompanied by a strong increase in import volumes. Import
volumes primarily reflect the strong growth in consumption and investment
expenditure and are consequently expected to track the pace of growth in
domestic demand closely. Accordingly, the current account of the balance of
payments moved into deficit from 2003 and the deficit amounted to approximately
4½ percent of gross domestic product (GDP) in 2005. However, relatively
favourable prices for most of South Africa’s export commodities have been
helping to contain the trade and current account deficits. At the same time,
significant inflows of financial capital have been recorded over the past three
years, exceeding the current account deficits and enabling the South African
Reserve Bank to increase the gold and other foreign exchange reserves. Export
volumes are also expected to continue benefiting from the projected global
growth, the African Growth and Opportunity Act and Government’s Motor Industry
Development Programme.

3. International economic developments

The international economic environment has also supported domestic economic
developments. Although there was a slight slow down in the latter part of 2005,
global economic activity managed to maintain a solid pace of growth throughout
the year. This lent further support to the rising trend in the international
commodity prices which accelerated strongly in the fourth quarter of 2005 and
first quarter of 2006. More recently commodity prices have retraced somewhat,
but this may prove to be a temporary correction given consensus forecasts for
global demand.

Ministers from Organisation for Economic Corporation and Development (OECD)
countries last week expressed optimism about prospects for the world economy,
with continued strong growth and moderate inflation but warned that further
rises in energy prices could pose a significant risk. OECD Ministers expect the
buoyant pace of world growth witnessed in the past few years to be sustained in
the near future. Their comments echoed the OECD's twice yearly economic outlook
released last week, which painted a broadly positive picture of growth
prospects while sounding a warning over future energy price rises and current
account imbalances. OECD Ministers observed that inflation was likely to remain
under control, despite shrinking spare capacity and higher commodity prices
this being so because heightened international competition would help contain
prices.

A Wall Street Journal report which was also published last week nevertheless
sounded a warning and suggested that if the story of today's international
economy were handed down as a fable, recent developments might result in it
being called "Global Goldilocks Meets the Three Bears." The reasoning behind
this is that “Goldilocks also known as the world economy, has been enjoying a
not too hot, not too cold four percent plus growth rate over the past four
years thanks to steady prices,” robust United States (US) growth and the new
wealth experienced by emerging markets countries. However the journal goes on
to identify the three growling bears that are threatening to spoil the fairy
tale.

Mama Bear is the “increasing energy insecurity, a beast spawned by rising
oil prices but made more dangerous by escalating political risk afflicting
almost all the major producers; Iran, Iraq, Nigeria, Venezuela, Russia and
Saudi Arabia. Papa Bear comes in the form of deflating housing prices in
several countries. The lost wealth effect of inflated property values, whether
gradual or sudden, could unsettle not only.” American consumers but also hit
other countries with similar problems of high debt ratios and low savings.
“Baby Bear is inflation whose sudden growth in some countries” has spooked the
global market and sparked the recent sell off on the expectation that higher
interest rates could slow corporate growth and consumer spending. The important
question is whether recent significant market corrections were short term in
nature or whether they were the “sort of overdue awakening to risk” that many
economists have been predicting. Some are even convinced that markets are
finally responding to "unsustainable global imbalances," symbolised by record
US deficits and Asian surpluses. But as we are all, too aware, markets do
overreact from time to time. We hope that calm will soon return for there is a
lot of value out there.

Oil prices, property prices and inflation do not only pose dangers to the US
economy but certainly pose significant dangers to many other countries
including our own. Although economic doomsayers often have been proven wrong in
the past few years by the remarkable resilience and flexibility of the US and
other leading economies, the threatening nature of these bears is something to
keep a close eye on.

Consumers are more likely to reduce their spending the longer energy prices
stay high and the more they worry about asset values. Although some may argue
that this is not much of a threat given that oil prices have risen to $70 a
barrel without slowing global growth or igniting second round inflation,
geopolitical risks unabated and could interrupt oil supplies from a number of
important oil producers. Political risks could escalate even as oil supplies
remain tight. We can only hope that the collective global political leadership
will exercise wisdom in dealing with these geopolitical issues.

This time the real estate bubble threat is more global than is often
realised. It has become the symptom in many countries across the world that,
during this long period of low interest rates, they have developed similar
problems in real estate. As market pressures on such nations increase,
investors begin to worry more about risk exposure. Currencies are trading down
in the US and several other such economies including our own followed by
withdrawals from equity and bond markets.

The release of US consumer price data for April triggered global shock waves
as it was the strongest indication yet that prices were rising in a more
sustained manner particularly for services a large part of the US economy in
which higher costs are not quickly reversed. The underlying concern therefore
revolves around the sustainability of the US’s five year expansion if the three
bears bring a triple setback for US consumers. Global Goldilocks' safe escape
depends on the wisdom and political determination to simultaneously ensure that
benign energy demand and supply equilibrium is restored, that global imbalances
unwind in an orderly fashion and that inflation is successfully contained.
Global leaders' ability to tame these bears will be severely tested in the
months ahead. In the meantime, the South African Reserve Bank will continue to
monitor important indicators to ensure that the monetary policy stance remains
appropriate.

5. The outlook for inflation

The primary role of the South African Reserve Bank in the domestic economy
is to target inflation for the benefit of all economic players. Customer Price
Index (CPIX) inflation has remained within the target range for the past 32
months and the Monetary Policy Committee has been greatly encouraged by the
evolution of some of the components of CPIX. It has become clear that there has
been a steady convergence of the inflation rates of many of the categories of
goods and services which make up the index to within the target range of three
to six percent. In the meantime, domestic monetary policy has continued to
emphasise price stability and has succeeded admirably in reducing inflation
expectations. According to the Bureau for Economic Research inflation
expectations survey inflation expectations for 2006, 2007 and 2008 of all the
categories of respondents (business executives, trade union officials and
financial analysts) are below five percent which is nicely within the inflation
target range.

However there are a number of unfavourable trends and risk factors. These
include rising crude oil prices and their impact on global growth and inflation
including the possibility that secondary inflationary pressures may be
stimulated; the recent acceleration in domestic producer price inflation; the
recent movements in the rand exchange rate and the possibility of rising
domestic capacity constraints.

Favourable factors contributing to downside inflation risks include
increased competition from Asia that can potentially lower price pressure on a
range of internationally traded goods; moderate unit labour costs; encouraging
administrative prices trends and a continued benign global inflationary
environment.

5. Conclusion

In conclusion, the macroeconomic environment remains extremely favourable
for sustained growth. The South African Reserve Bank will continue to play its
part in strengthening South Africa’s economic growth potential. This we will do
by striving for the appropriate policy setting in containing inflation. This we
are convinced will provide the supporting factor for enhanced growth,
development and employment creation. The significant long term decline in the
inventory to GDP ratio that we have witnessed over the years is testimony to
SAPICS’ important role. I wish you every success with this year’s conference
and trust that your deliberations and networking during the next few days will
lead to your members embracing the latest technologies and supply chain methods
to contribute towards higher levels of productivity outcomes in the years
ahead. Conferences of this nature are extremely important vehicles for
enhancing knowledge transfer and ensuring a greater infusion of expertise in
the economy. This is very important for boosting economic performance,
competitiveness and employment creation. Let us all do our bit.

Thank you!

Issued by: South African Reserve Bank
5 June 2006
Source: South African Reserve Bank (http://www.reservebank.co.za/)