Download - REPUBLIC OF SOUTH AFRICA

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REPUBLIC OF SOUTH AFRICA

Investor PresentationPresenter: Lungisa Fuzile | Director General, National Treasury | November 2011

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Key highlights

• Economy is recovering from Q2 slowdown, supported by:– Favourable market backdrop for Emerging Markets– Broadening in domestic demand– Steadily improving investment prospects– Accommodative monetary policy and counter-cyclical fiscal policy

• Fiscal finances on a sound footing– Need for employment creation balanced with consolidation in expenditure– Redirecting expenditure from current to infrastructure– Debt and debt service ratios remain relatively low – Debt sustainability a priority– Borrowing requirement geared toward new growth path objectives

• External vulnerability reduced– Current account deficit adequately financed– Sustainable long-term policy solutions to limit current account funding risks– Banking sector systemically sound

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1. South Africa Macro Backdrop

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South Africa impacted by global developments

• Global growth forecasts revised down from 4.4% to 4.0%

• Growth slowing in advanced economies– High debt levels and borrowing

costs – High unemployment and weak

housing markets– Banking sector problems

• Brazil, China and India subject to inflationary and overheating pressures

• Forecast for South Africa growth to remain steady through 2013

IMF growth projections

GDP projections (%)

Region / Country 2011 2012 2013

World 4.0 4.0 4.5

Advanced economies 1.6 1.9 2.4

US 1.5 1.8 2.5

Euro area 1.6 1.1 1.5

UK 1.1 1.6 2.4

Japan -0.5 2.3 2.0

Emerging markets and developing countries

6.4 6.1 6.5

Developing Asia 8.2 8.0 8.4

China 9.5 9.0 9.5

India 7.8 7.5 8.1

Middle East and North Africa 4.0 3.6 4.3

Sub-Saharan Africa 5.2 5.8 5.5

South Africa 3.1 3.4 4.1

Source: SA National Treasury

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Rebalancing of world demand

• Structural shift in world demand underway as economic power shifts to Emerging Market economies

• Emerging Markets share in South Africa’s export basket is rising:– Share of exports to advanced

economies declined to 51% in 2011 (64% in 2007)

– Exports to developing Asia increased to 27% in 2011 (15% in 2007)

– Africa absorbed 17% of SA exports over the past year

• Impact of slower growth in developed world on SA exports partially offset by stronger growth in Emerging Markets

52

54

56

58

60

2000/2005 2006 2007 2008 2009

%

Emerging Markets share of SA exports

Source: World Bank

010203040

China (incl.HongKong)

EM (excl.China)

DevelopedMarkets

(excl. Euroarea)

GIIPS Euro area(Excl.GIIPS)

%

2007 2008 2009 2010 2011

1

1. GIIPS: Greece, Ireland, Italy, Portugal and SpainSource: The Department of Trade and Industry

Emerging market household’s final consumption expenditure as % of world expenditure

6

2. South Africa Economic Performance

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The domestic economic outlook is positive but downside risks remain

• GDP recovery expected over medium term, underpinned by:– Accommodative fiscal and monetary

policies– Public sector capital formation– Improving private sector confidence– Inflation anchored within target band

in the medium and longer term– Emerging Markets trade partner

growth leading exports higher• GDP growth revised down amid

elevated global risks• Slower developed market external

demand growth to be countered by recovering domestic and EM demand momentum

Macroeconomic growth forecasts, 2010 - 2014 2010 2011 2012 2013 2014Calendar year Actual Estimate Forecast

% change unless otherwise indicated

Final household consumption 4.4 4.3 3.7 4.4 4.5

Gross fixed capital formation -3.7 2.9 4.5 5.7 6.3

Real GDP growth 2.8 3.1 3.4 4.1 4.3

GDP at current prices (R bn) 2,664.3 2,931.8 3,208.2 3,555.0 3,930.5

CPI inflation 4.3 5.0 5.4 5.6 5.4

Current account balance (% of GDP) -2.8 -3.4 -3.8 -4.0 -4.2



Strong demand from global trading partners for SA exports

-12-8-4048

12

20002002

20042006

20082010

% y

/y

-24-16-8081624

% y

/y, s

moo

thed

Leading indicator of trading partnersExport volumes incl. gold - lagged 3 quarters (RHS)

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Low debt ratios support demand

• Household debt service cost is low in comparison to historical levels

• Strong real wage gains have assisted households to deleverage

• Confidence has been supported by the recovery in real disposable income growth

• Relatively low debt ratios suggest scope for further growth in domestic demand

Private sector credit ratio - Emerging Markets comparisons

Source: World Bank

Source: SARB

Real disposable income growth and debt service ratio

0 50 100 150 200

0

4

8

12

16

1998 2000 2002 2004 2006 2008 2010Real disposable income (% y/y) Debt service ratio

% o

f GD

P

Hong KongChina

MalaysiaLatvia

SingaporeIsrael

South AfricaHungaryUkraine

BrazilIndia

Russia

77.4%

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Healthy corporate profits supportive

• Corporate profitability and employment prospects have improved in tandem with the economic recovery

• Corporate balance sheets are healthy

• Growth in capital imports has picked up

• Real investment in productive capacity will foster higher economic activity

Progress in fixed capital formation underway

Corporate profits1 and employment

05

10152025

20022004

20062008

2010

% y

/y

(6)(4)(2)-246

% y

/y

Gross operating surplus (LHS)Non-farm formal sector employment (RHS)

1.Provided by gross operating surplusSource: Stats SA

1.Nominal imports deflated by trade-weighted exchange rateSource: Department of trade and Industry (DTI), SARB

(50)(30)(10)103050

20002002

20042006

20082010

% y

/y (3

mm

a)

(20)(15)(10)(5)-5101520

% y

/y (3

mm

a)

Real capital goods imports (LHS)Real fixed capital formation (RHS)

1

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3. Public Finance

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New growth cycle encourages fiscal consolidation

Primary budget deficit to narrow significantly overthe medium term

2010/11 2011/12 2012/13 2013/14 2014/15R bn Actual Estimate Medium-term estimates

Revenue 758.4 814.2 890.0 994.5 1,113.0

% of GDP 27.6 27.3 27.0 27.3 27.7

Expenditure 885.8 978.8 1,062.3 1,157.4 1,247.0

% of GDP 32.2 32.9 32.2 31.8 31.0

Budget balance -127.4 -164.6 -172.3 -162.9 -134.1

% of GDP -4.6 -5.5 -5.2 -4.5 -3.3

0200400600800

1,0001,2001,400

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

R b

n

-5-3-1135

% o

f GD

P

Revenue Expenditure Primary budget balance (RHS)Source: SA National Treasury


• Fiscal discipline is critical to create scope for counter-cyclical policy

• Public infrastructure programmes of more than R800bn will maintain economic stimulus

• A stabilisation of non-interest spending and higher revenue reduces the primary budget deficit from -4.3% in 2009/10 to -0.5% of GDP in 2014/15

• Supportive fiscal policy matched with debt and spending management

• Focus on changing the composition of spending and addressing inefficiency and waste

Consolidated government fiscal framework, 2010/11 – 2014/15

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Sustained infrastructure investment spending is critical

Public sector infrastructure expenditure over the MTEF • A rebalancing of expenditure towards investment, job creation and socio-economic priorities (education and health)

• Focus on investment spending to increase productive capacity

• Emphasis on economic infrastructure and network industries to reduce bottlenecks and lower the cost of doing business– Investment in electricity generation

capacity for reliable energy to support faster growth

– Transport infrastructure accounts for R226bn over the MTEF

Breakdown of Economic services expenditure

Economic Services

84%

Justice and protection services

2%

Other 2%

Social services

12%


Energy 44%

Other economic services

14%

Transport and logistics

33%

Water and sanitation

9%

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Public sector borrowing requirement set to moderate over medium term

• The public sector borrowing requirement is projected to fall from 8.1% as a percentage of GDP in 2011/12 to 5.1% by 2014/15– SOEs ability to collect internally

generated funds has improved, putting less pressure on debt finance

• The rising borrowing requirement of non-financial public enterprises is in line with the requirements of the New Growth Path

• The main budget balance worsens on account of the automatic adjustment of revenue to the weaker economic environment. This should, however, be temporary


1.6

7.0

4.75.6 5.4

4.73.5

1.7

1.9

1.8

2.5 2.42.1

1.6

-1.5

2.7

-2

0

2

4

6

8

10

2007/08

2008/09

2009/10

2010/11

2011/12 f

2012/13 f

2013/14 f

2014/15 f

% o

f GD

P

General government Non-financial public enterprises

Public sector borrowing requirement

Forecast to decrease from 8.1% to 5.1%

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Public debt sustainable over medium term

• The counter-cyclical fiscal stance led to increased borrowing to meet expenditure commitments

• Government Guarantees for SOEs have increased since 2008/09 to provide access to cost-effective borrowing

• Net loan debt forecasted to peak at around 40% of GDP in 2014/15

• From 2013/14 onward, new government borrowing will finance investment spending to strengthen the country’s asset base


As at 31 March 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

R billion Actual Estimate Medium-term estimates

Domestic

Gross loan debt1529.7 705.5 892.7 1,069.6 1,249.0 1,432.6 1,599.9

Cash balances -101.3 -106.6 -111.4 -114.8 -107.2 -102.2 -102.2

Net loan debt2428.4 598.9 781.3 954.8 1,141.8 1,330.4 1,497.7

Foreign

Gross loan debt197.3 99.5 97.9 101.7 105.4 104.0 104.3

Cash balances - -25.2 -62.1 -50.4 -35.6 -18.3 -4.3

Net loan debt297.3 74.3 35.8 51.3 69.8 85.7 100.0

Total gross loan debt 627.0 805.0 990.6 1,171.3 1,354.4 1,536.6 1,704.2

Total net loan debt 525.7 673.2 817.1 1,006.1 1,211.6 1,416.1 1,597.7

As percentage of GDP:

Total gross loan debt 27.1 33.0 36.0 39.3 41.1 42.2 42.4

Total net loan debt 22.7 27.6 29.7 33.8 36.7 38.9 39.7

1. Forward estimates are based on National Treasury’s projections of exchange and inflation rates

2. Net loan debt is calculated with due account of the bank balances of the National Revenue Fund

Net loan debt stabilises at 40% of GDP

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Debt service costs stabilise

• Debt service costs as a share of GDP is expected to stabilise by 2014/15 due to:– Moderation in spending growth– Recovery in tax revenue– Majority of debt service costs are

denominated in local currency - as such reduced exposure to currency fluctuations

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8

10

12

14

16

18

20

22

24

26

1998/99

2000/01

2002/03

2004/05

2006/07

2008/09

2010/11

2012/13

2014/15

% o

f rev

enue

and

exp

endi

ture

1

2

3

4

5

6

% o

f GD

P

% of revenue % of expenditure % of GDP

Debt service cost as a % of revenue, expenditure and GDP


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Debt metrics highlight South Africa as relatively low risk

• The government debt-to-GDP ratio remains low relative to that of the developed world and compares favourably to Emerging Markets peers

• The budget framework endeavours to keep the debt-service ratio low to avoid crowding out other expenditure

• South Africa’s debt service-to-GDP ratio also compares favourably to Developed Markets and Emerging Markets countries

Source: Global Insight, SA National Treasury

Source: IMF World Economic Outlook, September 2011

34%

0

80

160

240

AustraliaChina

South Africa

Turkey

Mexico

ArgentinaIndia

Brazil UKFrance

Canada

Germany US Ita

lyJapan

% o

f GD

P

Gross debt-to-GDP comparison (2010)

Debt service ratio comparison (2010)

2.43%

0369

121518

JapanChina

India

South AfricaBrazil

Mexico

CanadaTurke

yItaly

Australia US UK

Germany

France

% o

f GD

P

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4. Monetary Policy

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Monetary policy fairly accommodative

• South Africa’s repo rate, at 5.5% is at a 30-year low. These rates are seen to be appropriate to support the recovery and consistent with the inflation target

• Despite the low policy rate, nominal rates are still well above the zero bound. As a result, policy makers have scope to provide further stimulus if necessary

• Real rates are not at extremes in a global context, but are accommodative in a local context

Real policy rates (%)

Nominal policy rates (%)

Source: Bloomberg

-5 -3 -1 1 3 5

BrazilRussia

AustraliaChina

South AfricaTurkey

IndiaEuro Area

New ZealandCanada

USUK

Source: Bloomberg, Reuters Ecowin, RMB FICC Research

0 2 4 6 8 10 12

BrazilRussia

IndiaChina

Turkey

Australia

Euro AreaCanada

UKUS

New Zealand

South Africa 5.50%

-0.20%

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0369

1215

20032004

20052006

20072008

20092010

2011

% y

/y

Core inflation (excl. food, NAB, petrol and energy)Target inflation

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Muted core inflation affords accommodative policy

• Currency appreciation and a deceleration in global price pressures dragged targeted inflation below the mid-point of the 3-6% target band during 2010/11

• Rising global commodity price inflation during 1H11 now evident in rising food and petrol inflation

• Monetary policy reacts to the second-round effects on inflation of supply side shocks

• Marginal temporary breach of the target expected between 4Q11 to 3Q12

• Core inflation is still well-contained and is forecast to remain relatively benign

• Medium and longer term inflation still seen within the target range

Core inflation is well-contained

Source: SARB, Stats SA

Monetary policy responsive to core inflation

Source: Stats SA. Note: NAB = non-alcoholic beverages

-10-8-6-4-20246

20002001

20022003

20042005

20062007

20082009

20102011

%

Change in core inflation Change in repo rate

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5. External Vulnerability

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External vulnerability reduced by positive balance of payments position

• Structural deficit remains the key contributor to the current account deficit

• Net services and income payments to the world account for 90% of the current account deficit

• Portfolio inflows continue to be the primary funding source of the current account deficit

1. Including unrecorded transactions

Source: SARB

-9

-6

-3

0

3

1Q063Q06

1Q073Q07

1Q083Q08

1Q093Q09

1Q103Q10

1Q11% o

f GD

P (s

aa)

Trade Services IncomesNet transfers Current account

-4048

12

20002001

20022003

20042005

20062007

20082009

20102011

% o

f GD

P

Current account deficit Financial account surplusBalance of payments surplus

Source: I-Net Bridge

1

Structural account deficit

Net capital inflows reduces balance of payments risks

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South Africa is affected both directly and indirectly by the global turmoil

• Uncertainty around the European sovereign debt crisis causes volatility in financial markets

• Failure to resolve the debt crisis will result in global contagion • Direct impact on South Africa economy:

– Downturn and weak revenue performance from global recession– Volatility of the exchange rate – Weaker global demand for South African exports– Global investment uncertainty– Volatility in commodity prices, including food and oil

• Indirect impact of turmoil on South Africa economy:– Impact on equity-linked pensions funds– Turmoil and sovereign debt downgrades could impact international funding

conditions for South Africa and SOEs

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6. Banking System Stability

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Ample banking system liquidity

• South African banking system has weathered the financial crisis well

• Top four South African banks represent 85% of market share

• Banks are comfortably exceeding the minimum capital adequacy requirements of 9.75%

• The current banking sector Tier 1 capital to risk-weighted assets ratio is over 11%, exceeding the target Basel III requirements for 2018

• South Africa ranked 6th out of 139 countries in terms of soundness of banks (World Economic Forum Executive Opinion Survey)

02468

1012141618

Dec-08 Dec-09 Jun-10 Dec-10 Jun-11

%

Absa FirstRand Limited Nedbank Standard Bank

Professional/wholesale deposits 30.5%Household deposits 20.5%Corporate sector deposits 19.7%Government, local government & public enterprises deposits 8.6%Interbank and intragroup deposits 6.6%Other borrowed funds 4.9%Subordinated debt 4.0%Non-resident deposits 2.7%Foreign currency funding 2.3%

Source: SARB, June 2010

Source: company data

Capital adequacy

Funding structure of SA banks

Minimum capital adequacy requirements of 9.75%

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Banking system remains systemically sound

• Banks account for 33% of the total local primary market issuance over the last five years

• Cost of bank funding in the local market increased during the crisis, but spreads have contracted significantly

• Asset quality has seen significant improvements since 2010

Source: JSE

Robust primary issuance volumes in the local capital markets

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011

R b

n

Banks / Financials Corporates Municipal SOEs Securitisations

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7. Conclusion

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• The macroeconomic landscape has moderated, requiring continued policy accommodation

• Continued focus on economic transformation through: job creation, economic support package and expansion in infrastructure investment and spending on social developments

• Stimulatory fiscal and monetary policy are cushioning South Africa from the global slowdown, and employment should continue to expand

• Prudent fiscal management and automatic stabilisers ensure that the fiscal position should return to pre-crisis levels without requiring meaningful fiscal austerity

• Low debt to GDP levels are structural tailwinds and total external debt remains low and manageable

• The banking system remains on a sound footing

Concluding thoughts

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