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REPUBLIC OF SOUTH AFRICA . Investor Presentation. Presenter: Lungisa Fuzile | Director General, National Treasury | November 2011. Key highlights. Economy is recovering from Q2 slowdown, supported by: Favourable market backdrop for Emerging Markets - PowerPoint PPT Presentation




REPUBLIC OF SOUTH AFRICA Investor PresentationPresenter: Lungisa Fuzile | Director General, National Treasury | November 201112Key highlightsEconomy is recovering from Q2 slowdown, supported by:Favourable market backdrop for Emerging MarketsBroadening in domestic demandSteadily improving investment prospectsAccommodative monetary policy and counter-cyclical fiscal policyFiscal finances on a sound footingNeed for employment creation balanced with consolidation in expenditureRedirecting expenditure from current to infrastructureDebt and debt service ratios remain relatively low Debt sustainability a priorityBorrowing requirement geared toward new growth path objectivesExternal vulnerability reducedCurrent account deficit adequately financedSustainable long-term policy solutions to limit current account funding risksBanking sector systemically sound231. South Africa Macro Backdrop4South Africa impacted by global developmentsGlobal growth forecasts revised down from 4.4% to 4.0%Growth slowing in advanced economiesHigh debt levels and borrowing costs High unemployment and weak housing marketsBanking sector problemsBrazil, China and India subject to inflationary and overheating pressuresForecast for South Africa growth to remain steady through 2013IMF growth projections GDP projections (%)Region / Country201120122013World4.04.04.5Advanced economies1.61.92.4US1.51.82.5Euro area1.61.11.5UK1.11.62.4Japan- markets and developing countries6.46.16.5Developing Asia8.28.08.4China9.59.09.5India7.87.58.1Middle East and North Africa4.03.64.3Sub-Saharan Africa5.25.85.5South Africa3.13.44.1Source: SA National Treasury5Rebalancing of world demandStructural shift in world demand underway as economic power shifts to Emerging Market economiesEmerging Markets share in South Africas 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 yearImpact of slower growth in developed world on SA exports partially offset by stronger growth in Emerging Markets

Emerging Markets share of SA exportsSource: World Bank

11. GIIPS: Greece, Ireland, Italy, Portugal and SpainSource: The Department of Trade and IndustryEmerging market households final consumption expenditure as % of world expenditure62. South Africa Economic Performance7The domestic economic outlook is positive but downside risks remain GDP recovery expected over medium term, underpinned by:Accommodative fiscal and monetary policiesPublic sector capital formationImproving private sector confidenceInflation anchored within target band in the medium and longer termEmerging Markets trade partner growth leading exports higherGDP growth revised down amid elevated global risksSlower developed market external demand growth to be countered by recovering domestic and EM demand momentumMacroeconomic growth forecasts, 2010 - 201420102011201220132014Calendar yearActualEstimateForecast% change unless otherwise indicatedFinal household consumption4. fixed capital formation- GDP growth2. at current prices (R bn)2,664.32,931.83,208.23,555.03,930.5CPI inflation4. account balance (% of GDP)-2.8-3.4-3.8-4.0-4.2Source: SA National TreasurySource: SA National TreasuryStrong demand from global trading partners for SA exports

8Low debt ratios support demandHousehold debt service cost is low in comparison to historical levelsStrong real wage gains have assisted households to deleverageConfidence has been supported by the recovery in real disposable income growth

Relatively low debt ratios suggest scope for further growth in domestic demandPrivate sector credit ratio - Emerging Markets comparisonsSource: World BankSource: SARBReal disposable income growth and debt service ratio

% of GDPHong KongChinaMalaysiaLatviaSingaporeIsraelSouth AfricaHungaryUkraineBrazilIndiaRussia77.4%9Healthy corporate profits supportiveCorporate profitability and employment prospects have improved in tandem with the economic recoveryCorporate balance sheets are healthyGrowth in capital imports has picked up Real investment in productive capacity will foster higher economic activityProgress in fixed capital formation underwayCorporate profits1 and employment

Provided by gross operating surplusSource: Stats SANominal imports deflated by trade-weighted exchange rateSource: Department of trade and Industry (DTI), SARB

1103. Public Finance11New growth cycle encourages fiscal consolidationPrimary budget deficit to narrow significantly overthe medium term2010/112011/122012/132013/142014/15R bnActualEstimateMedium-term estimatesRevenue758.4814.2890.0994.51,113.0% of GDP27.627.327.027.327.7Expenditure885.8978.81,062.31,157.41,247.0% of GDP32.232.932.231.831.0Budget balance-127.4-164.6-172.3-162.9-134.1% of GDP-4.6-5.5-5.2-4.5-3.3

Source: SA National TreasurySource: SA National TreasuryFiscal discipline is critical to create scope for counter-cyclical policy Public infrastructure programmes of more than R800bn will maintain economic stimulusA 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 2014/15Supportive fiscal policy matched with debt and spending managementFocus on changing the composition of spending and addressing inefficiency and wasteConsolidated government fiscal framework, 2010/11 2014/1512Sustained infrastructure investment spending iscriticalPublic sector infrastructure expenditure over the MTEFA rebalancing of expenditure towards investment, job creation and socio-economic priorities (education andhealth)Focus on investment spending to increase productive capacity Emphasis on economic infrastructure and network industries to reduce bottlenecks and lower the cost of doing businessInvestment in electricity generation capacity for reliable energy to support faster growthTransport infrastructure accounts for R226bn over the MTEFBreakdown of Economic services expenditure

Source: SA National Treasury

13Public sector borrowing requirement set to moderate over medium termThe public sector borrowing requirement is projected to fall from 8.1% as a percentage of GDP in 2011/12 to 5.1% by2014/15SOEs 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 PathThe main budget balance worsens on account of the automatic adjustment of revenue to the weaker economic environment. This should, however, be temporarySource: SA National Treasury

Public sector borrowing requirementForecast to decrease from 8.1% to 5.1%14Public debt sustainable over medium termThe counter-cyclical fiscal stance led to increased borrowing to meet expenditure commitmentsGovernment 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 countrys asset baseSource: SA National TreasuryAs at 31 March2008/092009/102010/112011/122012/132013/142014/15R billionActualEstimateMedium-term estimatesDomesticGross loan debt1529.7705.5892.71,069.61,249.01,432.61,599.9Cash balances-101.3-106.6-111.4-114.8-107.2-102.2-102.2Net loan debt2428.4598.9781.3954.81,141.81,330.41,497.7Foreign Gross loan debt197.399.597.9101.7105.4104.0104.3Cash balances --25.2-62.1-50.4-35.6-18.3-4.3Net loan debt297.374.335.851.369.885.7100.0Total gross loan debt627.0805.0990.61,171.31,354.41,536.61,704.2Total net loan debt525.7673.2817.11,006.11,211.61,416.11,597.7As percentage of GDP:Total gross loan debt27. net loan debt22.727.629.733.836.738.939.71.Forward estimates are based on National Treasurys projections of exchange and inflation rates2.Net loan debt is calculated with due account of the bank balances of the National Revenue FundNet loan debt stabilises at 40% of GDP15Debt service costs stabiliseDebt service costs as a share of GDP is expected to stabilise by 2014/15 due to:Moderation in spending growthRecovery in tax revenueMajority of debt service costs are denominated in local currency - as such reduced exposure to currency fluctuations

Debt service cost as a % of revenue, expenditureand GDPSource: SA National Treasury16Debt metrics highlight South Africa as relatively low riskThe government debt-to-GDP ratio remains low relative to that of the developed world and compares favourably to Emerging Markets peersThe budget framework endeavours to keep the debt-service ratio low to avoid crowding out other expenditureSouth Africas debt service-to-GDP ratio also compares favourably to Developed Markets and Emerging Markets countriesSource: Global Insight, SA National TreasurySource: IMF World Economic Outlook, September 2011

Gross debt-to-GDP comparison (2010)Debt service ratio comparison (2010)2.43%0369121518JapanChinaIndiaSouth AfricaBrazilMexicoCanadaTurkeyItalyAustraliaUSUKGermanyFrance% of GDP174. Monetary Policy18Monetary policy fairly accommodative South Africas 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 targetDespite 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 necessaryReal rates are not at extremes in a global context, but are accommodative in a local contextReal policy rates (%)Nominal policy rates (%)Source: Bloomberg

Source: Bloomberg, Reuters Ecowin, RMB FICC Research



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