WORLD ECONOMIC PROSPECTS REPORT

A. WORLD ECONOMIC PROSPECTS 1. WORLD GROWTH TRENDS

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World economic growth declined from nearly 5% in 2000 to 2,4% in 2001 and is moving sideways to 2,4% in 2002. The US economy (about 30% of world economy) slowed down substantially with growth coming down from 4,1% in 2000 to 1,0% in 2001. In 2002 growth may pickup to 1,2%. Economic growth in the European Union registered half the rate in 2001(1,7%) than that achieved in 2000 (3,4%). Growth is expected to slide further to 1,1% in 2002. The European Union accounts for about 22% of world output. The Japanese output declined by about 0,5% in 2001 and will slow further by 1,3% in 2002. Japanese output represents about 14% of world production. As the USA, European Union and Japan represent some 66% of world GDP, developments in these economies can have a severe impact on the prospects of the world economy and other countries. The main growth in the world in 2002 will come from developing Asia - 5,6% and some EU candidates - 3,4%. The major economies is only expected to take off in the second half of 2002 It seems as if high inflation as a chronic worldwide problem has been finally arrested. Inflation in all the major economies will remain under control and in single digits. In 2002 world inflation is to come in below the higher rate experienced in 2000. Inflation at 2% now seems to be the upper benchmark for successful globalising economies. Sub-Sahara Africa and South Africa have not yet reached that benchmark. Expectations of levels above 8% seem to be the going rate in Africa. After substantial increases in 1999 and 2000, the US$ crude oil price declined by about 14% in 2001 followed by an expected 23% decrease in 2002.

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2. WORLD INFLATION

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3. INTEREST RATES AND CURRENCIES

The Federal Reserve Bank lowered interest rate levels to record lows from 6,5% for short-term rates in 2000 to 2% at the end of last year in order to counter the September 11th effect. It is expected that interest rates will start rising again soon. The European Central Bank, much more cautious of inflationary pressures, only lowered interest rates slightly from 4,5% to about 3,5%. The UK also followed a more conservative approach by easing monetary policy but not to the same extent as the US. Rates are not expected to increase at the same margin than in the US Japan has now reached the position where monetary easing cannot cope with the prevailing deflationary environment. The Japanese economy remains a cause for concern given the prevailing recessionary conditions from where it finds it difficult to escape.

The US $ is expected to depreciate against the over the next two years which could lead to an improvement in the record US current account deficit at present. The British pound will more or less maintain its position against the US $. The Yen is expected to depreciate against the US $ over the next two years.

4. WORLD TRADE

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Trade volumes of goods and services increased at a substantial lower rate of 1% in 2001 than the 12,4% in 2000 - which was exceptional. The expected growth for 2002 is forecast at 2,1%. Real imports of goods and services by advanced economies slowed by 0,3% in 2001 but will grow at about 1,4% in 2002. The US$ world prices of manufactured goods declined up to 2001 and is expected to rise moderately by 1,9% in 2002. US$ crude oil prices rose markedly in 1999 and 2000. This trend was reversed in 2001 and will continue to decline in 2002 as fuel prices stand to decline by some 37% over the two years; bringing down cost push pressures if local currencies can maintain their exchange rate against the US$. US$ non-fuel primary commodity prices, after declining in 2001 by 5,5%, are expected to increase by 1,7% in 2002.

5. SUMMARY - WORLD ECONOMIC OUTLOOK

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World growth to remain at 2001 level in 2002 i.e. about 2,5%. USA to enjoy higher growth but the UK will remain subdued while Japan will keep on struggling in 2002. Sub-Sahara Africa growth at 3,5% but from a low base China growing at some 7%. World inflation still under control (below 3% benchmark) Africa struggling to bring down inflation from double digits. Lesser currencies remain vulnerable to the effect of portfolio capital flows and emerging market financial instability. Interest rates to increase on 2001 levels but remain below levels of 2000. World trade slowed substantially and will only recover slowly in 2002. Exports by non-fuel developing countries to increase by only 3,5% in 2002. US$ crude oil price to decline further in 2002. US$ food prices on the increase in 2002.

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B. SOUTH AFRICAN ECONOMIC PROSPECTS Prospects for the South African economy have important implications for the agricultural sector given that a major part of the market for agricultural products is of a domestic nature. Although exports are playing a more important role where world economic prospects and international commodity prices are becoming critical, domestic macro-economic developments can have a decisive impact on the performance and price levels in the agricultural sector.

1. MACRO-ECONOMIC POLICY TRENDS

A more stringent monetary policy is followed with the goal of containing inflationary pressures. After raising interest rates by 2 percentage points this year, there is a strong possibility that rates could rise by another 2 percentage points before year-end. The Reserve Bank will not achieve the inflation targets set at 3 to 6% for this year. The rand took a serious knock in 2001 and depreciated by 30% from February 2001 to February 2002 against the US$, British pound and euro. Capital outflows did not provide comfort to the current account of the Balance of Payments in 2001. Financial instability in Argentina and Turkey added to the risk of the rand's exchange rate. Since December 2001 when the rand hit a record low of US$13.85, it recovered and is fairly stable around US$11.50. The latest developments in Zimbabwe also add to the rand's risk profile. Fiscal policy is doing well - borrowing less from the capital markets and thus providing room for the private sector. Public consumption expenditure is under control but delivery of services is poor. Some personal tax relief will result in more spending by the middle and higher income groups. Higher inflation and interest rates will probably nullify this fiscal effect. Poor delivery on law and order functions is reaching critical proportions especially with regard to white farm murders and its implications for agriculture. The experiments that are regarded as "successful" in Zimbabwe might spill over into South Africa. Trade and Industry policy is trying to find direction. Trade agreements with Europe and the USA are in place but still are not really delivering the desired results. Export markets remain an important prospect for agriculture and could serve as a replacement for slackening domestic demand given international prices and the weak rand. With the lapse of GEAR (Growth, Employment and Redistribution) Strategy, South Africa needs a new economic policy directive in order to lift economic growth to the 5 to 6% level. The envisaged growth rate of 6% in 2000 was not achieved as all the necessary conditions of the GEAR policy strategy was not met.

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2. SUMMARY OF DOMESTIC ECONOMIC CONDITIONS

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Economic growth will remain slow in 2002. Domestic demand remained subdued in 2001 and increased at a slower pace

(2,2%) than the 3,4% in 2000. Domestic demand to increase at about the same rate of 2,3% 2002.

Pace of export volumes growth slowed down from 8,3% in 2000 to 2,4% in 2001 despite the so-called "competitive depreciation". Export volumes are expected to slow further in 2002, as world growth will only pick up towards the end of 2002. Inflation targets of 3% to 6% will not be reached in 2002 and interest rates to increase further. Rand will remain sensitive to exogenous factors in Africa and domestically.

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a. Household consumption

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Real consumption expenditure by households remained under pressure by increasing at 2,8% in 2001 and only expected to increase by 1,5% in 2002. Expenditure on non-durable goods, which include food, is forecast to grow at about 1,5% in 2002 by switching to more basic foodstuffs. Domestic demand might exert further pressure on food prices in 2002 as demand from Southern Africa increases while supply from Zimbabwe and Zambia falter.

b. Balance of Payments

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Surplus of 0,6% of GDP on the current account expected for 2001. Export volumes growth will slow down further in 2002. Imports volumes to slow substantially by 4% in 2002. Capital outflows will become a critical issue in 2002 with not much interest expected from the rest of the world. The rand will remain vulnerable. The AGOA and EU Trade Agreements provide scope for further penetrating foreign markets and should be exploited to the fullest extent. Agri-products, especially prepared foodstuffs, animal and animal products stand to benefit further as this product export category expanded by 32% in rand terms in 2001. The rand's woes were exacerbated in 2001 and have hit several record lows against the currencies of South Africa's major trading partners. Although this benefited exporters in rand terms, it will have a severe impact on imports and input costs. It is hitting the diesel price directly in rand terms as well as the cost of machinery. Capital movements can be seen as a major cause for the depreciation of the rand as it is very sensitive to adverse political developments and the attack on free-market value systems in the whole of Southern Africa. The rand will continue to depreciate against worthwhile foreign currencies over the forecast period and will not benefit from a weaker US dollar. The Zimbabwe dollar is fixed to the US dollar but its exchange value on the open market is about an eighth of its official exchange rate. It is advisable to conduct transactions with Zimbabwe in US dollar terms.

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The Reserve Bank has set inflation targets, excluding bond rates, at an average of 3% to 6% for 2002. Because of the demise of the rand resulting

in markedly higher import prices, the targets will not be reached in 2002.

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This will result in a very conservative interest rate policy with real interest rates remaining relative high. It is expected that interest rates could increase by another 1,5 to 2-percentage point towards the end of the year. Money supply is not under control and increased by 17% December 2001 to December 2002 - too much money chasing to few goods. Pre-emptive buying fuelled by the weak rand contributed to this monetary overhang. The private sector indulged in credit and if not curtailed can contribute to the inflationary climate currently experienced.

d. Inflation (consumer, food & input prices) * Since 1992, the prices of farming requisites increased at 13,3% on average per year compared to overall consumer prices at 5,4% and food prices at 6,3% per year. * The prices of agricultural, forestry and fishing produce at output level increased by 22% in last year's fourth quarter. * This indicates that agriculture was absorbing a large part of the price squeeze between input and output prices. * The present higher food prices will allow agriculture to cover cost increases and lower outstanding debt built up over the years. Cost-push pressures as well as supply shortages in the Southern African region will cause prices to remain relatively high. Demand pressure will also play a significant role in pushing food prices.