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The state of the economy and necessary structural reforms June 2016 Economic landscape We need to re-engineer our economy We have great strengths to draw on… Strong institutions and robust legal framework Well developed and deep capital markets Share of GDP spending on infrastructure exceeds that of most other economies Good environment for business compared to many of our peers Renewed vigor from government, business and civil society for economic reforms … but challenges to address Volatile and uncertain global environment limits external stimulus Domestic business confidence and investor sentiment is low Lower commodity prices undermine performance of the primary sector Room for fiscal and monetary stimulus has narrowed Our immediate focus ▪ Intensifying implementation ▪ Uniting to preserve our sovereign credit rating ▪ Further deepening collaboration between government, labour and ▪ business Converting investment ideas into real deals in the short term ▪ Demonstrating benefits to all social partners from new economic opportunities 3 Global growth slowed to six-year low in 2015 – and outlook in 2016 remains subdued • 2016 and 2017 global growth forecasts revised down in April o -0.2percentage points in 2016 o -0.1 percentage points in 2017 • Downward revisions more pronounced in emerging markets, especially Brazil, Russia, Africa o Slowing China, weak commodity prices, lower and more volatile capital flows, higher interest rates in US, less room for fiscal and monetary policy support • Growth in advanced economies will continue to improve, but at a slower pace o Accommodative financial and fiscal policy, strong domestic demand and rising incomes • Source: IMF Downside risks dominate, in the form of slower Chinese growth, pace of Fed rate 4 hikes, lower commodity prices Growth in SA has been slowing since 2011 Source: Stats SA, National Treasury calculations • Recovery November 2013 officially recognised as upper turning point in the business cycle = economy now in a downward phase of the business cycle • Services sector resilience has supported growth, particularly from the finance and trade sectors • Growth in the primary (extractive) sector has been volatile. A rebound in mining in 2015 following normalisation of strike affected PGM output was offset by a contracting agricultural sector beset by the worst drought in decades • The manufacturing sector has remained flat since 2014, due to infrastructure constraints and dwindling global demand – although some subsectors have been able to do well (e.g. food and bev, autos) 5 SA outlook reflects worsening conditions Calendar year 2013 Percentage change 2014 2015 2016 Actual 2017 • 2018 Forecast Final household consumption 2.9 1.4 1.6 0.7 1.6 2.2 Final government consumption 3.3 1.9 0.3 1.2 -0.2 0.2 Gross fixed capital formation 7.6 -0.4 1.4 0.3 1.4 2.7 Gross domestic expenditure 1.4 0.6 0.3 1.1 1.7 2.2 Exports 4.5 2.7 9.0 3.0 4.6 5.2 Imports 1.9 -0.6 5.7 3.7 4.5 4.9 Real GDP growth 2.2 1.5 1.3 0.9 1.7 2.4 • CPI inflation 5.8 6.1 4.6 6.8 6.3 5.9 Source: Reserve Bank , National Treasury Growth reduced across the forecast period o Investment growth lower due to weaker confidence, rand and commodity prices o Household spending reduced by higher inflation, lower job creation o Drought, weak commodity prices, slower than expected expansion in global growth o Electricity remains a constraint on growth through till 2018 Headline inflation above target band until 2018, eroding spending power – esp. of the poor – Due to weaker rand, electricity price increases, and drought-related food inflation of close to 10 per cent 6 Data so far point to weak 2016 GDP growth • Modest recovery in manufacturing output, could add around 0.1pps to 1Q 2016 GDP (4Q 2015 GDP:-0.3pps): • Sharp decline in mining production in Q1, could subtract around 1.4pps from 1Q 2016 GDP (4Q 2016:+0.1pps) • This could introduce downside risk to Budget forecast for growth in 2016 Source: Stats SA 7 Retail sector likely to support 1Q 2016 GDP Source: SARB, Stats SA • Despite the slowdown in March, retail sales growth held up in 1Q 2016: o Real retail sales up 3.4% YTD (2015: 3.3%), buoyed by non-durable and semi-durable goods expenditure and some recovery in consumer confidence • Credit also supportive of consumption, 1Q 2016 credit growth averaged 8.8% (2015: 8.9%): o Improved household credit growth due to growth in mortgages, unsecured personal loans and overdrafts o Strong corporate credit growth due to REIPP programme and increased use of banks as source of funding 8 Poor employment outcomes in Q1 2016 • Unemployment rate rose to 26.7% in Q1 2016 (Q4 2015: 24.5 %): o Annual labour force growth outpaced employment growth, resulting in a 3.2% y/y rise in the number of unemployed • Typical Q1 season decline in employment after festive season – but in 2016, the decline was larger than usual (-355,000) o Quarterly declines particularly pronounced in manufacturing (-100,000), construction (-77,000) and trade (-119,000) Source: Stats SA Unemployment highest amongst youth • 54.5 per cent for 1524 year olds Unemployment rose the most for youth in Q1 2016 • 63 000 jobs lost • 100 000 youth entered labour force Without faster growth, we cannot create jobs 9 Structural policies can boost demand and employment Fiscal policy Industrial and labour policy Geo-spatial policy Financial sector policy • Shift the composition of public spending to investment • Encourage firm entry and investment in service sectors • Package simultaneous labour and product market reforms • Reduce red tape • Reduce barriers to geographic and jobs mobility • Improve function of financial system and access to credit SA is not alone in implementing reforms – but it is hard The pace of structural reform has slowed Note: EMEs include Brazil, Chile, China, Colombia, India, Indonesia, Mexico, Russia, Turkey and South Africa; Mexico and Turkey only prior to 2011. Advanced includes the rest of the OECD. Source: OECD Going for Growth 2016. Our reform agenda correctly prioritises jobs and growth The National Development Plan: the long-term framework ▪ Sets out structural reforms to create an enabling environment for job creation and ▪ ▪ inclusive growth Focused on addressing the triple challenges of poverty, inequality and unemployment Aligned with many reform programmes being implemented elsewhere, and leverages South Africa’s comparative advantages The 9-Point Plan: immediate priorities for jobs and growth 1. 2. 3. 4. 5. 6. 7. 8. Resolving the energy challenge Revitalising agriculture and the agro-processing value chain Advancing beneficiation of SA’s mineral wealth Implementing a high-impact Industrial Policy Action Plan Encouraging private sector investment Moderating workplace conflict Unlocking the potential of SMMEs, township and rural enterprises State reform, boosting the role of state-owned companies and strengthening ICT, water, sanitation and transport infrastructure 12 9. Operation Phakisa: growing the ocean economy and other sectors Reforms requiring urgent action in the next 6 months Labour environment KEY ISSUES • • • Correct negative perceptions of SA labour relations Demonstrate commitment of all social partners Demonstrate commitment to workplace democracy and repudiation of violence • • • • BENEFITS & OPPORTUNITIES Increase willingness to create jobs Improved safety and working conditions for workers Improved confidence and investment Potentially add 0.5 percentage points to growth OUTCOME OBJECTIVE UPDATE ACTION REQUIRED • • • • • Announce minimum wages and secret ballots, reinvigorated workplace fora, good faith negotiating principles and training by Dec 2016 • Negotiations continue at Nedlac. Unions object to DoL proposal to end long strikes through compulsory advisory arbitration and providing guidelines on dangerous weapons. Some federations are opposed to secret balloting Restraint and peaceful Platinum wage negotiations have begun protest if any in current wage negotiations in 2016 Engage union leaders. Any announcement must be unequivocal in condemning violence and supporting secret balloting if it is to have high impact. Government to urge parties to conduct themselves in good faith Resolve outstanding policy issues • • KEY ISSUES Policy certainty critical to determine viability of long term business projects Show govt can work in partnership OUTCOME OBJECTIVE BENEFITS & OPPORTUNITIES • • Increased investment, lower borrowing costs Opportunity to leverage private sector funds to achieve more social development goals UPDATE Finalise MPRDA amendment Bill considered by National House of bill Traditional Leaders, with comments. Mineral Resources Portfolio Committee to address substantive issues raised by President. ACTION REQUIRED Prioritise finalisation through the Mineral Resources Portfolio Committee. The bill can be amended in 2 – 3 years, when commodity prices have recovered Finalise Mining Charter; Mining Charter published and gazetted for comments. Negotiated outcome of Charter likely to yield results. Land reform policy changes The Regulation of Land Holdings Bill (RLHB) discussed at Cluster, and is likely to generate significant debate when published for public comment Separate establishing land commission, which is critical for functioning of DRDLR, and the development of land ceilings, which needs work to avoid problems for medium black farmers and family farms Resolve outstanding policy issues • KEY ISSUES Show government serious about network industry reform to leverage private sector growth and improve rural areas OUTCOME OBJECTIVE • • BENEFITS & OPPORTUNITIES Better connectivity, lower costs of living, jobs search, doing business Increased unskilled jobs in services sector; take advantage of low rand UPDATE Ease unabridged birth The General Laws Amendment Bill can only certificates requirements go to Parliament if approved by a committee Broadband tenders The process of tenders has been delayed as announced to help improve DTPS are requesting a waiver of the PFMA delivery of ICT to rural areas before releasing the broadband tenders. ACTION REQUIRED DHA to appoint committee to approve the legislative amendments asap. DTPS to drop request for PFMA waiver for broadband tenders and proceed with tenders. Telkom will likely win the majority of tenders in an open competition. Waivers might be challenged in court. Spectrum allocated The court ruling could allow roll out of set DTC should not contest the court ruling. equitably, effectively and top boxes efficiently The current spectrum model proposed by Hire professionals to design a competitive DTPS could raise concerns about auction for the non-set aside portion of the Lower cost of doing business = size of transparency. spectrum, that takes into account concerns economy up 0.6% regarding competition, managing dominance of Increase private sector in large players, roll out to rural areas, design of network industries size of regulator, maximising revenue streams economy up 0.3% Source: OECD. Over 5 years. SOC reforms KEY ISSUES • • • SOC impact on govt cash flows and guarantees SOC delivery of key mandates for development, infrastructure and supporting growth Role for private sector engagement BENEFITS & OPPORTUNITIES • • • • Reduced fiscal risks lowers borrowing costs Improved service delivery – increases public satisfaction and investor confidence Increased confidence in state’s oversight of SOC functions Clear understanding of role of private sector OUTCOME OBJECTIVE UPDATE ACTION REQUIRED Determine optimal structure for Government’s airline assets By December 2016, publish guidelines for private sector participation in SOCs Develop regulators to help monitor the impact of SOCs on the country, by ensuring that pricing is fair and transparent DPE and NT developed tender for study to On track determine structure, to be completed by end of October 2016. Presented to IMC, NT working on By December 2016, publish guidelines for incorporating comments from IMC private sector participation in SOCs to manage private sector expectations and provide clear framework for govt decision making STER Bill was withdrawn from being Differences between DOT and DPE. Reconsider presented to cabinet in April. The DPE had opposition to STER in light of costs and benefits to indicated that their inputs were not factored country - SA’s port charges are uncompetitive into the Bill. Better SOC decision making = size of economy up 0.2% Source: OECD. Over 5 years. SA ports 10x more expensive than China Source: WEF We can grow beyond current rates by implementing NDP and 9 Point Plan reforms Impact on potential growth Electricity constraint lowers growth by 1%pt Path dependency disadvantaged productive & labour absorbing sectors Inadequate transport and telecomms infrastructure raise cost of doing business • Port charges for containers are 190% higher in SA than the global average in 2014/15 • Broadband in SA 6x more expensive than Brazil Perceptions of difficult labour relations contribute to investor uncertainty, reduce willingness to hire • SA ranked last (144) in 2014 for cooperation in labour relations • #136 for link between pay and productivity Global Competitiveness Rating (WEF) Challenges in SOC management reduce confidence and raises infrastructure financing • Cost of raising finance for Eskom risen by 0.6 percentage points in last two years; for SAA risen by 2.7 percentage points • Major source of concern for ratings agencies Fitch and S&P Inequality and lack of access to high quality education compounds poverty & unemployment • Participation rates in higher education (post-school) for African students averaged 12% between 2004 and 2008, while it averaged 60% for white students (Taylor 2011). • SETA learnerships limited impact, smaller firms may subsidise larger firms. Rankin (2010) Areas of progress What we are doing: Removing constraints to growth High cross border costs • Process is underway to improve port tariffs • • New pricing structure expected to be implemented soon Container export tariffs have already declined by 43% Slow regulatory processes • CIPC working with banks and other agencies to fast track setting up shop locally • Government streamlining licensing processes for mining, environmental authorisations and water use o Mineral and Petroleum Resources Development Act receiving urgent attention • Concessions made on new visa regulations Electricity supply issues • Unit 6 of Medupi connected to the grid, Kusile synchronisation to begin 1H 2017 • REIPP added 2045MW since 2011, around 6377MW already contracted • Gas-to-power programme - information memorandum by June 2016 • Coal IPP preferred bidders for 1st 900MW tranche to be announced in July 2016 Labour market constraints • Task team looking into practical ways of addressing production disruptions due to large scale strikes • Amended Labour relations acts seeks to streamline the processes of the Commission for Conciliation, Mediation and Arbitration (CCMA)to help serve business and labour better and faster 20 What we are doing: Encouraging investment Invest SA (One-Stop Shop) • Aims to coordinate investment promotion, facilitation and after-care at the national level • Seeks to unblock regulatory bottlenecks affecting investment • Ease delays for investors in obtaining visas, licences, permits, registration and approvals Immigration regulation Inter-ministerial Committee has identified the following for possible implementation: • Implementation of biometrics at all ports of entry • Long-term Multiple Entry Visa for frequent travellers • Business visa-waiver for India, China, Brazil, Russia and other countries Socio-Economic Impact Assessment System (SEIAS) • Seeks to improve the quality of legislation • Reduce the unintended consequences of new laws and regulations before they come to effect • Better align regulations with government’s priorities Enable expansion of SA to the rest of the continent • Removal of exchange controls over nonresidents and proceeds from sale of assets can be freely remitted • Cross-border transaction thresholds have been amended to reduce red tape and reduce the bias between resident and nonresident individuals 21 What we are doing: Accelerating fiscal reform Tax increases • R48 billion over next three years Expenditure reduction • R25 billion over next three years • • Block on administrative and managerial vacancies (excl. front line staff) starting in April 2016 • Cost containment critical, allows us to do more with less Focused on higher income earners Reprioritisation • R32 billion over next three years • Funding reprioritised away from o non-essential goods and services in national departments o compensation budgets of departments with high vacancy rates, o Under-spending infrastructure programmes Stamping out waste and improving efficiencies • New mandatory e-tender portal to enforce procurement transparency and accessible reference prices • New mandatory centrally negotiated contracts for banking services, ICT infrastructure, school building and learner support materials • CPO to monitor procurement plans and supply chain processes of SOE’s and review contracts above R10mn to ensure value for money 22 What we are doing: Catalysing growth & jobs Driving employment-intensive growth Scaling up SMEs • Revitalising agriculture – R2bn Agriparks initiative; reopening of the Land Restitution process • SME fund launched – R1bn commitment private sector • • Gazelles programme to support 200 SMEs Tourism – joint task team to present plans to Cabinet • • Oceans economy – Phakisa generated R17bn in investments and 4,500 jobs SIMODISA and SAVCA collaboration to create SME public-private Venture Capital fund Alleviating infrastructure bottle necks • • R865 billion infrastructure over constraints MTEF to and Improving the ease of doing business • Project in 9 municipalities to improve regulatory processes to best practice • Targeted small business support with municipalities improve PIC to inject R70bn into agriculture, mining, manufacturing, infrastructure (incl. social infrastructure), and energy 23 Business interactions have yielded common purpose Intensified implementation drive with social partners In the first 4 months of 2016, meaningful progress has been made in building a strong social compact between leaders in government, business and labour for accelerated investment and joint effort in fostering inclusive growth in South Africa. • Government, business and labour undertaking joint roadshows have presented a united front to rating agencies and international community • Intense joint effort between government and business, led by the Minister of Finance and Mr Jabu Mabuza. Focus on sovereign credit rating, SME Fund and accelerated investment. – SME fund been set up – A work stream for youth unemployment set up (1st meeting held) – Funding for education under consideration – Tourism and agriculture consultations continuing • On Monday 9th May, in conjunction with President, Labour has been integrated into processes • Nedlac finalising a framework to reduce economic disruption from protracted strikes; social partners agreed on principle of national minimum wage • Inter-Ministerial Committee on Investment working to accelerate implementation of private sector efforts, with inputs from key stakeholders • National Planning Commissioners supporting implementation of the NDP through regular engagements with society to strengthen the social compact and improve delivery of the Plan 25 Assessment by credit ratings Summary of the ratings outcomes from Moody’s and S&P: What has South Africa done right? o o o Resolved the energy constraints Maintaining broad political institutional stability and macroeconomic policy continuity The adoption of more aggressive fiscal consolidation measures expected to stabilise government debt faster What government still needs to do in the next 6 months to avoid a downgrade? o Faster implementation of structural reforms aimed at boosting economic growth o Finalise labour reforms and negotiations and ensure that implementation of the resolutions does not become nettlesome o Ensure that investor confidence does not become weighed by rising political tension o Ensure that SOCs requiring support are financed in a budget deficit neutral manner as stated in many government public documents What can put South Africa in “Junk” by the end of the year (risks)? o No improvements on growth and wealth levels o Institutions becoming weaker due to political interference affecting the policy framework o Rising government debt due to: o Weaker macroeconomic environment o SOCs support not budget neutral 27 Summary • South Africa is facing a difficult domestic and global environment • We have the ability to turn around this situation domestically – labour, business, government and community want and need this country to succeed • Many of the solutions lie within our own control – Working together with all stakeholders, appreciating the strengths and perspectives of each – Renewed vigour in implementing reforms • So that we can move South Africa forward – to deliver a truly inclusive, jobs rich and more equal society Thank you