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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