Composite business cycle indicators for South Africa.

The composite leading business cycle indicator increased by 0,1 per cent in March 2012 compared with the preceding month. Five of the ten component time series that were available for March 2012 increased, while five decreased. The major positive contributions to the movement in the leading indicator in March came from an acceleration in the twelve-month percentage change in job advertisement space, followed by an acceleration in the twelve-month percentage change in the composite leading business cycle indicator of South Africa’s major trading-partner countries. The largest negative contributions in March came from a decrease in the export commodity price index, as well as a decline in the average hours worked in the manufacturing sector.

The composite coincident business cycle indicator increased by 0,5 per cent on a month-to-month basis in February 2012.

The composite lagging business cycle indicator decreased by 0,5 per cent in February 2012.

Business cycle indicators data

This Press release

Nedbank Weekly Economic Monitor: Review of 7 to 11 May and preview of 21 to 25 May 2012.

• The rand weakened further last week on continued risk aversion.
• Retail sales were slightly better than expected at 6,8% y-o-y in March, but total sales declined by 1,2% in the first quarter of the year.
• Global equity markets plummeted last week on concerns about the Eurozone debt crisis.
• The focus at the G8 meeting was on the Eurozone debt crisis.
• Both the US Federal Reserve and the Bank of England’s have indicated that they are ready to offer more liquidity should the need arise.
• The Eurozone economy stagnated in the first quarter.
• The Japanese economy recovered further in the first quarter.

Domestic

The rand lost further ground last week as continued worries about political problems in Europe and concerns about the health of Spanish banks, following news that Moody’s downgraded the ratings of 16 Spanish banks, heightened risk aversion. The local unit closed the week at R8,34 against the stronger US dollar, which benefited from its safehaven status, down by just under about 3% from the previous week’s close of R8,10, and fell to R10,66 and R13,18 against the euro and the British pound respectively from R10,45 and R13,01.

Bonds strengthened despite the weaker rand. Yields on the benchmark R186 2025 and the R157 2015 fell to 6,38% and 8,29% respectively on Friday from 6,44% and 8,31% at the previous week’s close, while those on the 3-, 5- and 12-year BESA actuaries eased to 6,06%, 6,85% and 7,84% from 6,08%, 6,90% and 7,88%.

In the money market, the 3-month JIBAR was unchanged at 5,53%, while the 6-, 9- and 12-month JIBAR fell to 5,80%, 5,93% and 6,12% from 5,81%, 5,96% and 6,17% respectively.

Local equities were dragged down by lower global markets, which were hurt by worries about global growth. The FTSE-JSE all-share index closed at 33 148,4 on Friday, down by 2,6%, with financials, industrials and basic materials falling by 3,4%, 1,1% and 4,3% respectively to end at 24 611,5, 37 850,9 and 25 822,3.

Retail sales were slightly better than expected in March, increasing by seasonally adjusted 2,1% m-o-m. However, the decline in January and February caused sales for the first quarter to drop by 1,2%, the first quarterly contraction since the first quarter of 2009. During the quarter, growth in total sales slowed to 5,9% y-o-y from 7,9% in the last quarter of 2011. Over the period, all the major categories recorded expansion, with stronger rises coming from general dealers (up by 5,9%), household furniture and appliances (up by 8,6%) and other (up by 8,3%). Retail sales increased by 6,8% y-o-y in March, with the growth rate almost unchanged from a downwardly revised 6,7% in February.

Consumer inflation for April will be released this week. Food and fuel prices are likely to have continued to be the main driver of price increases over the month. We forecast prices to have increased by 0,4% m-o-m, with the growth rate slowing from 1,1% in March and 0,6% in both January and February. On an annual basis, however, inflation is expected to have increased to 6,2% from 6,0% in March, mainly due to the base effect. The South African Reserve Bank’s Monetary Policy Committee (MPC) will start its three-day meeting on Tuesday, which will be closed by an interest rate decision announcement on Thursday.

Recent indicators suggest that household demand lost some momentum during the first quarter of this year, while production numbers for the same period were even weaker. With economic activity expected to remain subdued for the remainder of the year and global conditions also a concern, we expect the committee to leave interest rates unchanged at 5,5%. …

See the full Economic Monitor

Banks that expect to use newly announced committed liquidity facility to meet Basel 3 requirements will need to pay a commitment fee, even if they do not draw from it

The Reserve Bank has approved the provision of a committed liquidity facility from which lenders in the country can draw to meet Basel 3 liquidity requirements, it said on Tuesday.

Tests on seven banks had exposed shortfalls in meeting liquidity buffer rules because of South Africa’s dependence on wholesale, short-term funding, the Bank said in a statement.

In a confidential report commissioned by the banking industry, South Africa’s banks have warned of a funding shortfall of more than R900bn if they are forced to adopt the Basel 3 liquidity rules in their existing form.

The report, titled Macroeconomic Consequences of the Implementation of Basel 3, prepared by the Bureau for Economic Research on behalf of the Banking Association of South Africa, says a hypothetical, immediate implementation of the rules in their current form could result in an increase of 75 basis points in lending rates and slash economic output by 1,1%.

Implementing the rules over five years could result in a loss of 0,1%-0,7% of baseline gross domestic product. The report says there would be cost implications even if Basel rules were phased in as planned, and these would have to be carefully considered for their effect on access to credit.

The new banking rules devised in response to the 2009 financial crisis by the Basel Committee on Banking Supervision require banks to hold higher capital buffers to withstand unexpected financial shocks or losses.

Banks also must hold sufficient liquid assets to cover all net cash outflows under a stress scenario for 30 days in terms of the liquidity coverage ratio, and to fund assets maturing after a year with stable funding sources in terms of the net stable funding ratio. The changes come into effect next year.

“While this is positive in terms of the fact that South African banks will now be able to meet the requirements of the (liquidity coverage ratio), it will be negative on margins as this will push funding cost upwards,” said Charles Russell, analyst at Macquarie First South Securities.

“The logical outflow of this is that lending rates to customers will increase as banks seek to protect current margins,” he said.

Banks that expect to use the Reserve Bank’s liquidity facility, which will be in place at the start of 2013, will need to pay a commitment fee, even if they do not draw from it, the Bank said.

See E-learning interactive graphic: Basel III

Also see the SARB Guidance Note

Source: Business Day

Absa Housing Review summary

• The fourth quarter of 2011 saw the South African economy growing at a real seasonally adjusted annualised rate of 3,2%, which was a marked improvement on real growth of only 1% and 1,7% recorded in the second and third quarters respectively. The improved economic growth in the final quarter of last year came on the back of higher levels of activity in the mining and manufacturing sectors. Economic growth, as measured by growth in the real gross domestic product (GDP), was 3,1% in 2011 and is forecast at 2,7% for 2012.

• Growth in real household disposable income and final consumption expenditure improved further in the fourth quarter of 2011. The ratio of household debt to disposable income declined further towards the end of last year. The cost of servicing debt remained under control on the back of continued low interest rates and a lower debt ratio. A relatively large percentage of credit-active consumers continued to be plagued by impaired credit records up to the end of 2011, affecting consumers’ risk profile and the accessibility of credit.

• In the first quarter of 2012 house price deflation occurred in both nominal and real terms in the middle segment of the market, i.e. with regard to homes of 80m²-400m² and priced up to R3,6 million in 2012. In the affordable and luxury segments of the market year-on-year price growth improved in the first quarter of the year compared with the preceding quarter. The latest trends in house prices occurred against the background of macroeconomic developments and property market-related factors impacting household finances. These factors may affect the demand for housing and cause changes in property buying trends, which will impact market activity, transaction volumes and price trends in the various segments and regions of the market.

• The affordability of housing, as reflected by the ratios of house prices and mortgage repayments to household disposable income, improved further up to the end of 2011. This was the net result of trends in house price and income growth in the quarter, while interest rates were still unchanged at year-end. Despite the affordability of housing improving further up to end-2011, many households’ ability to take advantage of these affordability trends continued to be impacted by factors such as an average debt-to-income ratio of well above 70%; a significant percentage of credit-active consumers having impaired credit records; the impact of the National Credit Act; and banks’ lending criteria.

• The affordability of property and accessibility of mortgage finance will remain key to the housing market, driven by factors such as property prices, property running costs, financing and transaction costs, households’ financial position, the state of consumer credit records and banks’ lending criteria. In view of these factors the housing market is forecast to continue showing a subdued performance in respect of price growth in 2012. In real terms, i.e. after adjustment for the effect of inflation, house prices are set to deflate further in 2012 and 2013, which will be affected by trends in nominal prices and headline consumer price inflation. …

Read more at Absa Property Research

Nedbank Weekly Economic Monitor: Review of 7 to 11 May and preview of 14 to 18 May 2012.

• The rand was hurt by heightened risk aversion, falling to its weakest level since mid-January against the US dollar.
• Manufacturing production disappointed in March, with the annual growth rate falling to 2,7% from 4% in February.
• Mining production also remained weak in March, with total output dropping by 9,8% y-o-y following a 13,4% decline in February.
• The euro was under pressure last week following the triumph of the anti-austerity lobby in France and Greece last week.
• US producer inflation fell on lower energy prices and base effects.
• Eurozone industrial production remained weak in April, • Germany’s industrial output rose in March, while it fell in the UK.
• The Bank of England left its key interest rate unchanged.

Domestic

Continued political turmoil in Europe and concerns about the Eurozone debt crisis heightened risk aversion last week. This, together with the release of weaker-than-expected local production data, which increased expectations that the South African Reserve Bank will keep interest rates lower for longer, hurt the rand. The local unit breached the critical R8 level against the US dollar on Wednesday and closed the week at its lowest level since mid-January, falling to R8,10 against the US dollar from R7,80 at the previous week’s close. It also weakened to R10,45 and R13,01 against the euro and the British pound respectively from R10,20 and R12,59.

Bonds weakened in line with the rand. Yields on the R186 2025 and the R157 2015 rose to 6,44% and 8,31% respectively on Friday from 6,37% and 8,08% a week earlier, while those on the 3-, 5- and 12-year BESA actuaries increased to 6,08%, 6,90% and 7,88% from 6,03%, 6,80% and 7,69%.

In the money market, the 3-month JIBAR was steady at 5,53%, the 6-month JIBAR edged up to 5,81% from 5,80%, while the 9- and 12-month JIBAR rose to 5,96% and 6,17% respectively from 5,94% and 6,15%.

Local equities were dragged down by international markets. The FTSE-JSE all-share index lost 0,3% over the week, closing at 34 038,5 on Friday, with financials and industrials down by 0,1% and 0,9% respectively to end at 25 469,7 and 38 272,0.

However, basic materials gained a marginal 0,2% to close at 26 971,5.

Manufacturing production disappointed in March, coming out much weaker than the consensus forecast of a 3,3% y-o-y increase. Instead production fell by a seasonally adjusted 4,3% over the month and a sharp 2,7% over the year, down from 4% y-o-y growth in February. In March, output in all almost all major industries either slowed sharply or declined compared with the same period a year ago. The sharpest contractions were recorded in ‘other manufacturing’, ‘motor vehicles, parts and accessories’, ‘glass and other non-metallic mineral products’ as well as ‘food and beverages’. q-o-q), ‘furniture and other manufacturing’ (up by 6,1% q-o-q) as well as ‘basic iron and steel, non-ferrous metal products, metal products and machinery’ (up by 1,6% q-o-q).

In the first quarter of 2012 manufacturing output rose by a seasonally adjusted 1,9% q-o-q, supported mainly by stronger performance from ‘petroleum, chemical products, rubber and plastic products’ (up by a seasonally adjusted 3,8% q-o-q), ‘motor vehicles, parts and accessories and other transport equipment’ (up by 6,2% q-o-q).

Mining production also remained weak in March as output of key minerals fell further on an annual basis on the back of maintenance shutdowns at key producers. …

See the full Economic Monitor

Absa: SA Morning Sheet.

This is a daily economic comment …

The sheets can be downloaded daily from Absa Economic Research

An extract from today’s sheet is provided as an example:

It is a much quieter week on the South African data calendar, with the release of Stats SA’s retail trade sales likely to generate the most amount of attention. We lie on the lower end of Bloomberg consensus forecasts (cf. 6.6%) in looking for retail sales growth to have moderated to 6.4% y/y in March from 7.2% in February.

In much the same manner as last week’s mining and manufacturing production figures, this week’s retail sales numbers will prove particularly important as they will provide us with the final piece of the puzzle in helping to determine how Q1 2012 GDP growth fared. Our “tracking estimate” of how the retail sector is likely to have contributed to Q1 12 GDP growth (scheduled for release in late May) took a turn for the worse in February, falling 0.3% on a 3m/3m seasonally adjusted and annualised basis. The last time this measure was in negative territory was in July last year. Understandably this is coming off an already high base from Q4′s robust sales performance, but we point out that in order for this sector to contribute positively to the Q1 2012 GDP print later next month, we would have to see m/m retail sales growth tick up over 5.0% in this week’s print (or alternatively see some very large upward revisions to the historical sales figures) – this is not what our forecast for March sales suggests and thus looks unlikely to materialise, in our view.

Together with last week’s extremely poor mining activity figures (mining production contracted over 20% on a q/q saar basis in Q1 owing largely to strikes and maintenance-induced production declines), this leaves us expecting a lower Q1 GDP growth trajectory after the economy grew a more robust 3.2% q/q saar in Q4 11. As we obtain more colour on how the retail sector fared in Q1 we will get a better idea of how significant this deterioration is likely to be.

Markets: The ZAR tumbled to a fresh 4-month low of 8.12 against the USD and a onemonth low of 10.50 in relation to the EUR on Friday, on the back of intensifying anxieties surrounding the EU debt crises. These anxieties revolve around whether or not the countries within the region will be able to implement the austerity measures that are needed to reduce exorbitant debt levels, especially after last week’s recent elections in Greece and France and yesterday’s state elections in Germany, which all went against pro-austerity parties.

The USD, US Treasuries and the yen remain the biggest beneficiaries of the risk-off trading environment. This morning saw the PboC announcing that as of 18^th May, banks’ cash reserve requirements will be reduced by a further 50bps. This is the third time in six months that these ratios have declined and should ensure that more money is injected into the country’s financial system to help counteract the country’s slowing economic growth. Although these measures have given a boost to Asian stocks this morning, global risk appetite remains tentative so long as long as the aforementioned EU anxieties persist, and underlying global risk aversion is likely to remain elevated, which in turn suggests that high beta currencies such as the ZAR are likely to remain on the back foot, while the SA yields curve is likely to keep steepening in a bearish fashion. …

The sheets can be downloaded daily from Absa Economic Research

Nedbank Economic Commentary: Manufacturing production.

Manufacturing output slumped unexpectedly in March.

• Manufacturing output fell by a seasonally adjusted 4,3% m-o-m and 2,7% y-o-y in March, sharply down from 4% annual growth in February and market expectations of a mild slowdown in output growth to 3,3% y-o-y.
• Output in all almost all major industries either slowed sharply or declined compared with the same period a year ago. The sharpest contractions were recorded in ‘other manufacturing’, ‘motor vehicles, parts and accessories’, ‘glass and other non-metallic mineral products’ as well as ‘food and beverages’.
• The latest forward-looking indicators suggest that the softer environment continued into April. Trading conditions are likely to remain relatively tough for much of 2012. Weak demand in Europe and slower growth in key emerging markets will hurt export sales, containing growth in output and earnings. Conditions for manufacturers supplying the local consumer market are also likely to be tempered by softer growth in consumer demand and cheap imports. In contrast, conditions for manufacturers providing inputs into expansionary projects should improve slightly as the gradual recovery in capital expenditure continues, helped by some improvement in infrastructure spending by the public sector.
• Today’s mining and manufacturing production figures are disappointing, reflecting a much weaker underlying trend than was generally expected. Mining production declined sharply in the first quarter, while manufacturing production improved by much less than expected off a low base. Together the disappointing outcomes for mining and manufacturing will probably contain gdp growth in the first quarter to an annual rate of around 2,5% q-o-q, significantly slower than the 3,2% growth recorded at the end of last year and much weaker than market expectations. If this weakness persists or worsens, the Reserve Bank’s Monetary Policy Committee is likely to keep interest rates on hold for longer than initially anticipated.

Comment

Manufacturing production disappointed in March, coming out much weaker than the consensus forecast of a 3,3% y-o-y increase. Instead production fell by a seasonally adjusted 4,3% over the month and a sharp 2,7% over the year, down from 4% y-o-y growth in February.

In March, output in all almost all major industries either slowed sharply or declined compared with the same period a year ago. The sharpest contractions were recorded in ‘other manufacturing’, ‘motor vehicles, parts and accessories’, ‘glass and other non-metallic mineral products’ as well as ‘food and beverages’.

In the first quarter of 2012 manufacturing output rose by a seasonally adjusted 1,9% q-o-q, supported mainly by stronger performance from the following industries:

• Petroleum, chemical products, rubber and plastic products’, where output rose by a seasonally adjusted 3,8% q-o-q, accounting for 0,9 percentage points of the quarterly increase.
• ‘Motor vehicles, parts and accessories and other transport equipment’, where production rose by 6,2% and accounted for 0,6 percentage points of the quarterly increase.
• ‘Furniture and other manufacturing’, where output increased by 6,1% q-o-q.
• ‘Basic iron and steel, non-ferrous metal products, metal products and machinery’, which increased by a modest 1,6% and contributed 0,3 percentage points to the quarterly increase. …

Download the full Commentary

Nedbank Economic Commentary: Mining production.

Production recovers marginally in March but remains weak compared to a year ago.

• Total mining production remained weak in March, dropping by 9,8% y-o-y from the revised 13,4% drop (previously -14,5%) in February.
• Total output was up by a seasonally adjusted 5,3% m-o-m after contracting by a revised 9,0% (from 9,8%) in February.
• Non-gold output was down by 9,6% y-o-y after contracting by 13,6% in February, with platinum group metals production 25,2% lower from -47,5% in the previous month. Gold production fell by 11,6% from -12,0% in February.
• For the first quarter mining production was down by a seasonally adjusted 5,5% q-oq and by 10,2% y-o-y, after the marginal 0,2% q-o-q rise (-6,2% y-o-y) in the previous quarter.
• Mining production is likely to remain weak in the coming months, constrained by poor growth prospects globally and difficult operating conditions in the sector.
• These numbers confirm that mining made a negative contribution to gdp for the first quarter. However, these figures are volatile and are unlikely to have much direct impact on the outlook for interest rates. The MPC’s focus will remain on the outlook for inflation and domestic demand. Inflation will remain elevated, but economic activity is expected to remain subdued. As a result, we expect the SARB’s MPC to leave interest rates unchanged at current levels.

Comment

Total mining production remained weak in March as output of key minerals fell further on an annual basis on the back of maintenance shutdowns at key producers. Total output dropped by 9,8% y-o-y from the revised 13,4% drop (previously -14,5%) in February.

Total output was up by a seasonally adjusted 5,3% m-o-m after contracting by a revised 9,0% (from 9,8%) in February. This was due to the end of strikes in the platinum sector, with output of platinum group metals jumping by 33,3% m-o-m after slumping by 32,3% and 17,5% in February and January, respectively. Gold output rose by a marginal 0,4% following three months of contraction.

Non-gold output was down by 9,6% y-o-y after contracting by 13,6% in February, with platinum group metals production 25,2% lower from -47,5% in the previous month. Gold production fell by 11,6% from -12,0% in February.

For the first quarter mining production was down by a seasonally adjusted 5,5% q-o-q and by 10,2% y-o-y, after the marginal 0,2% q-o-q rise (-6,2% y-o-y) in the previous quarter. On an annualised basis, mining output plunged by 20,3% q-o-q. …

Download the full Commentary

The Ernst & Young Financial services index survey measures the performance of the banking, investment management and life assurance sectors on a quarterly and consistent basis

Financial services index Q1 2012.

Banking confidence was sharply higher in the first quarter of 2012, with both retail and investment banks reporting stronger profits, This is an indication that the banking sector has finally recovered from the Global Financial Crisis. Life Insurance confidence remained strong in the first quarter of 2012, in line with sustained equity markets, and improvements in premium retention rates.

Banking confidence was sharply higher in the first quarter of 2012.

The survey indicates that banking confidence rose in the first quarter of 2012, following gains in the last quarter of last year. The survey found that confidence rose in both the retail and corporate segments of the market. Banking confidence rebounded significantly from 50 index points in the fourth quarter of 2011 to 89 in the first quarter.

Comments Emilio Pera, lead Financial Services Director at Ernst & Young, ‘Confidence levels have rebounded from much lower levels recorded through 2009 and 2010, and it appears as if banks have finally shrugged off the global financial crisis. Profits growth has returned to pre-crisis levels, although lending growth remains weak by historical standards. It is thus no surprise that confidence levels have risen as sharply as they did in the first quarter.’

He continues, ‘not only is confidence stronger than it has been for the past two years, but we also see the signs of sustainability in their earnings growth, supported by positive quarter-on-quarter growth in income streams (both interest and non-interest revenue), and this is supporting bottom-line profits accordingly.

‘In addition’, he adds, ‘for the first time in over three years, banking confidence has returned to being above its long-term average levels. The last three years has been a story of confidence levels trailing not only their long-term average levels, but trailing other financial services segments too. This quarter saw banking confidence more in line with other financial services segments. ’

Until the beginning of 2012, Investment banking profits were erratic. And despite not all business lines firing on all cylinders, there is a trend evident in profit growth, which is looking positive,’ explains Pera. ‘Over and above more upbeat revenue trends, investment banks have focused strongly on cost control, and as a result, the operating jaws were positive for the first time in over two years.

Other survey findings include:

• A strong turnaround in both interest and non-interest revenue;
• Sustained fee income growth for both retail and investment banks;
• An improvement in the operating jaws, particularly for investment banks; and
• Continued easing in credit impairments and losses.

Emilio Pera comments; ‘Banks have struggled to contain costs in the aftermath of the GFC, given the regulatory pressures, IT systems enhancements, and general inflationary pressures they faced. It took a strong degree of focus to align the cost base with a slower revenue growth environment. The recent reporting season indicated that banks are now managing their costs carefully, and as a result overall 2011 operating costs across the banking sector were only marginally ahead of 2010 levels.’

‘Even so, he points out, ‘ banks nevertheless have certain unavoidable costs they have to endure, and we can see that in the first quarter’s survey results,  with all banks in the retail segment experiencing upward cost pressure.’

Another positive indicator of banking prospects is the continued growth in headcount. Despite recent media headlines, the banking sector is growing net employee numbers, rather than cutting back. Both retail and investment banking segments continued to add to their headcounts in the first quarter.

Pera comments, ‘Some of the headcount growth is undoubtedly coming from growth in the second tier banking segment. But in addition to that, many banks are also placing more emphasis on increasing their client accessibility. This does not necessarily mean an increased branch network, rather a more focused need for ‘walk-in’ centres, which nevertheless results in the need for increased staff numbers. This has undoubtedly been a driver behind some of the headcount growth we have seen in the past few quarters.’

Lastly, Pera comments on the credit impairment trends, by pointing out that there are continued quarter-on-quarter improvements in credit impairments. He says, ‘although the rate of improvement in the current quarter is slightly off the previous quarter, the uplift for bottom-line profits continues to be overwhelmingly positive.’

Pera concludes, ‘The outlook for banks is looking more upbeat than it has for a while, and this is confirmed by the recent financial reporting by the large banks, who are all far more bullish about prospects than they have been for a while. Credit growth continues to strengthen, and is moving gradually upwards from low single-digit figures to high single digit figures. Banks are particularly excited about prospects in select key segments, and are focusing their efforts to support those product markets.’

Life Insurance confidence levels remain solid in 2012.

The survey reports that life insurance confidence remained robust in the first quarter of 2012, at 93 index points. This follows a strong 2011, when confidence of life insurers remained at or above the 90 mark. This indicates that nine out of ten life insurers were satisfied with business conditions through 2011, and into the first quarter of 2012.

Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurance confidence levels continue to be the strongest in the financial services sector, despite a strong revival in banking confidence in the first quarter. He points out that bank confidence is now much closer to life insurance confidence than it has been for a while.

This is the 35th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Tim Rutherford continues; ‘the strong confidence is in line with the largely impressive financial reporting season, where all the major insurers reported generally strong financials. An analysis of the results indicates that it was a combination of strong equity markets, supporting investment gains, coupled with stable investment income, on the one hand, and reasonably solid growth in premium income on the other.’

He adds, ‘this has largely carried over into 2012, with life insurers indicating that premium income growth remains solid, and with particularly strong investment income growth. Investment income is largely correlated with strong equity markets, which have also seen considerable gains into the first quarter.’

‘In addition,’ he notes, ‘a lot of emphasis has been placed on retaining premiums that might otherwise be paid out. Life insurers have not only been more selective in the new business that they write (which helps reduce lapse rates), but are also keeping a tight lid on surrenders. There has long been a focus on minimising policy surrenders, since this has historically been a considerable drain on company assets. The last few quarters have seen a noticeable slowdown in the rate of growth in policy surrenders, and this is no doubt as a result of strong client retention efforts, which most of the major life offices are focusing on.’

Other survey findings include:

• A slowdown in investment product growth, albeit after a very strong fourth quarter.
• Sustained profitability of risk-based products, which improved through 2011.
• A sharp slowdown in administration expenses growth, after strong growth in 2011.
• A reduction in headcount for the second consecutive quarter.
• Considerably slower profits growth in the first quarter, despite sharply lower administration cost growth.

Rutherford comments, ‘Through the recent reporting season, all life offices focused on the need to improve efficiencies, in line with improving their new business margins. The last two quarters have seen reductions in the headcount to support this need. Most life companies reported an improvement in their margins through 2011, and continued efficiency improvement drives have resulted in an improved administration ratio in the first quarter of 2012 too.’

Rutherford concludes; ‘the fundamentals for life insurers remain solid. Although profit growth slowed in the first quarter, investment income remains strongly positive, and continues to compliment premium income growth. With life insurers focused on extracting earnings from improved efficiencies, they expect to see continued profits growth into the next quarter, with sustained strong growth in all categories of income.’

Download the full Financial services index survey

Nedbank Economic Commentary: Reserves.

International liquidity position declined slightly in April.

• The international liquidity position eased to $48,8 billion in April from $48,9 billion in March, mainly due to a decline in both gross reserves and the forward position.
• Gross reserves dropped to $49,9 billion from $50,7 billion, largely reflecting the repayment of government’s international debt obligations.
• The forward position fell by $628 million to $6,4 billion.
• Uncertainty in financial markets and growth prospects is likely to continue in the short term, which will contain the Reserve Bank’s ability to accumulate reserves aggressively in the months ahead.
• Foreign exchange reserves figures have little direct implications for monetary policy. The MPC will focus on trends in growth and inflation. General economic conditions remain fragile, while the Reserve Bank expects a moderately slower inflation trajectory in the coming months. We therefore still expect that the MPC will keep interest rates steady and start tightening gradually only in the fourth quarter of 2012.

Comment

The international liquidity position declined by $89 million to $48,8 billion in April, dragged down by a drop in both gross reserves and the forward position, which offset an increase in foreign currency deposits received.

Gross reserves dropped by $738 million or 1,5% m-o-m to $49,9 billion in April. The Reserve Bank attributed this mainly to the payment of government’s international debt obligations.

Gold reserves and foreign exchange reserves were down by $33 million and $706 million respectively, with the decline in gold reserves reflecting a lower gold price, which fell slightly by 0,5% to $1 658,8 per ounce.

The forward position fell by $628 million to $6,4 million, suggesting that the Reserve Bank was not very active in accumulation of foreign currency, probably due to a weaker currency, as the rand softened to R7,7447 against the US dollar in April from R7,6733 in March. …

See the full Commentary

Also see the SA Reserve Bank Information Notice