republic of south africa
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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 PresentationTRANSCRIPT
1
REPUBLIC OF SOUTH AFRICA
Investor PresentationPresenter: Lungisa Fuzile | Director General, National Treasury | November 2011
2
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
3
1. South Africa Macro Backdrop
4
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
5
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
7
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
Source: SA National Treasury
Source: SA National Treasury
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)
8
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%
9
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
10
3. Public Finance
11
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
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
12
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%
Source: SA National Treasury
Energy 44%
Other economic services
14%
Transport and logistics
33%
Water and sanitation
9%
13
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
Source: SA National Treasury
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%
14
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
Source: SA National Treasury
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
15
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
6
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
Source: SA National Treasury
16
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
17
4. Monetary Policy
18
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%
19
0369
1215
20032004
20052006
20072008
20092010
2011
% y
/y
Core inflation (excl. food, NAB, petrol and energy)Target inflation
19
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
20
5. External Vulnerability
21
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
22
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
23
6. Banking System Stability
24
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%
25
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
26
7. Conclusion
27
• 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