Download A SUMMURY OF THE BUGDGET PROCESS.

Republic of South Africa
Investor Presentation
March 2011
Key Highlights
Economic recovery bolstered by:
•
Structural tailwinds from strong regional growth and low domestic debt levels
•
Sustained improvements in external and internal demand supports investment and
employment prospects
•
Accommodative policies afforded by low inflation levels
Public finances on a solid footing:
•
Recovery in revenue and moderate growth in public spending lowers the fiscal deficit
•
Debt ratios remain low
•
Emphasis on fiscal sustainability by setting a target for the structural budget balance
External vulnerability reduced:
•
Sustainable long-term policy solutions to strengthen and diversify current account funding
sources
•
External vulnerability reduced by low external debt
•
Banking sector systemically sound
2
1. South Africa Macro Backdrop
3
Rebalancing of world demand favours South-South Flows
Emerging market households’ final consumption expenditure (FCE)
60
•
Structural shift in world demand
underway as economic power shifts
to emerging market economies
•
Rising EM intensity in South Africa’s
export basket:
%
58
56
54
–
Share of exports to advanced
economies declined to 58% in
3Q10 (73% in 3Q06)
–
Exports to developing Asia
increased to 19% in 3Q10
(6% in 3Q06)
52
2000-2005
2006
2007
2008
2009
Emerging economies FCE % of world FCE
Source: World Bank
Emerging markets claim a greater share of SA exports
60
% of total exports
40
20
0
2006-2007
2008
China
Advanced economies (excl. Euro-area)
Euro area (excl. GIIPS)
*Greece, Ireland, Italy, Portugal and Spain
Source: IMF
2009
2010
Emerging markets (excl China)
GIIPS*
4
South Africa is part of a positive regional growth story
•
World vs. Sub-Saharan Africa real GDP growth
% yoy
9
What explains the SSA surge?
–
Favourable demographic
developments
–
Improvements in the political
environment
–
Pay-offs from better
macroeconomic policies
6
3
0
-3
1980
1985
1990
1995
World
Source: IMF
2000
2005
2010
• Lower inflation and
2015
Sub-Saharan Africa
interest rates
• Smaller budget deficits
FDI flow into sub-Saharan Africa
3
% of world
• Lower levels of
sovereign debt
2
–
1
0
1990
Source: UNCTAD
1995
2000
2005
2010
Benefits directly related to
strong growth in developing
economies
The domestic economic outlook is positive
•
Strong demand from global trading partners for SA exports
12
% yoy
% yoy, smoothed
24
8
16
4
8
0
0
-4
-8
-8
-16
-12
-24
2000
2002
2004
2006
2008
GDP recovery toward potential
expected over medium term,
underpinned by:
–
Accommodative fiscal and
monetary policies
–
Public sector capital
formation supportive of the
broader recovery in private
fixed investment
–
Inflation anchored within
target band
–
Trade partner growth leading
exports higher
2010
Leading indicator of trading partners
Export volumes incl. gold - lagged 3 quarters (RHS)
Source: SARB
Macroeconomic growth forecasts, 2009 - 2013
2009
2010
Actual
Estimate
Final household consumption
-2.0
4.6
4.2
4.3
4.5
Gross fixed capital formation
-2.2
-3.6
3.9
5.5
6.8
Real GDP growth
-1.7
2.7
3.4
4.1
4.4
2 396.0
2 615.7
2 846.5
3 122.0
3 445.9
CPI inflation
7.1
4.3
4.9
5.2
5.5
Current account balance (% of GDP)
-4.1
-3.2
-4.2
-4.9
-5.0
Calendar year
2011
2012
2013
Forecast
Percentage change unless otherwise indicated
GDP at current prices (R billion)
Source: SA National Treasury
6
Low debt ratios support household and public demand
Private sector credit-to-GDP ratio – EM comparisons (2009/10*)
Hong Kong
China
Malaysia
Latvia
Singapore
Israel
South Africa
Hungary
Ukraine
India
Brazil
Russia
0
*Average from 4Q09 – 3Q10
Source: IMF
50
100
Private sector credit % of GDP
150
200
Government debt and funding requirement ratios (2011)
Russia
China
South Africa
Ukraine
Latvia
Malaysia
Brazil
Israel
India
Hungary
Public debt 2011
Gross financing requirement 2011
0
20
40
% of GDP
Source: IMF
60
80
100
•
Household debt service cost is low in
comparison to historical levels
•
The government debt-to-GDP ratio
remains low relative to that of the
developed world and compares
favourably with other EMs
•
The relatively low debt ratios create
room for household and government
expenditure to meaningfully
contribute to domestic demand
growth
Healthy corporate profits potentially supportive of investment
and employment
Corporate profits and employment in trade- and non-trade sectors
25
% yoy
% yoy
20
12
15
6
10
0
5
-6
0
-12
2002
2004
2006
Corporate profitability* (LHS)
Employment: trade sectors
•
18
– Unemployment has fallen from
25.3% in 3Q10 to 24% in 4Q10
– 120,000 formal non-agriculture
jobs have been created between
October and December 2010
2008
2010
Employment: non-trade sectors
* Proxied by gross operating surplus. Source: SARB
•
Growth in capital imports is picking
up
•
Real investment in productive
capacity will foster higher economic
activity.
Progress in fixed capital formation underway
50
% yoy 24
% yoy, smoothed
16
25
8
0
Corporate profitability improved in
2010 and employment prospects are
firming
0
-8
-25
-16
-50
1999
-24
2001
2003
Real capital goods imports*
2005
2007
2009
Real gross fixed capital formation (RHS)
*Nominal imports deflated by trade-weighted exchange rate.
Source: Department of trade and Industry (DTI), SARB
8
2. Monetary Policy and Prices
9
Monetary policy by no means excessively loose
Nominal policy rates
US
UK
Euro Area
Canada
New Zealand
Australia
South Africa
India
China
Russia
Brazil
0
Source: Reuters Ecowin
2
4
6
8
10
•
South Africa’s policy rate is at a 30year low. Low rates are stimulating
consumer spending growth
•
Real rates are positive, though still
accommodative
12
%
Real policy rates
India
UK
New Zealand
Russia
US
Canada
Euro Area
South Africa
China
Brazil
-4
-2
0
2
4
%
Source: Reuters Ecowin
10
Source: Reuters Ecowin, RMB FICC Research
Muted inflation affords accommodative policy response
Inflation well-below target
•
Currency appreciation and a
deceleration in global price
pressures dragged targeted inflation
below the mid-point of the 3-6%
target band
•
Services inflation (45.8% of CPI)
lags disinflation in goods prices,
supportive of accommodative policy
•
Administered price (14.8% of CPI)
inflation has trended lower too
•
Policy tightening occurs with
second-round inflation pressures,
which remain absent in non-food and
energy inflation
% yoy
18
12
6
0
2003
2004
2005
Goods inflation
2006
2007
Services inflation
2008
2009
2010
Headline inflation
Source: Stats SA
Low core inflation justifies low policy rate
6
Percentage points
%
19
4
17
2
15
0
13
-2
11
-4
9
-6
7
2000
2002
2004
2006
2008
2010
Core inflation (CPI excl. food & energy) - current versus previous year
Prime rate (RHS)
Source: SARB, StatsSA
11
Room to absorb upside risk from food and fuel prices
The Economist Food Index vs. brent crude oil
Index
250
USD/bl
Rising international food and energy
prices pose upside risk to global
inflation
•
South Africa is in a better position
relative to EM peers to weather the
inflation storm
160
200
120
150
80
100
40
50
•
–
0
2003
2005
2007
2009
The Economist Food Price Index
2011
Brent crude (RHS)
Source: Bloomberg
Core vs food and fuel inflation
24
% yoy
•
21
18
15
Weight of food in CPI in SA is
currently 14.3% vs EM peer
group of between 15% and
35%
Core inflation is very low at 3.5%
and historically shown much lower
volatility than headline inflation
12
9
6
3
0
-3
1998
2000
2002
Core inflation
2004
2006
2008
2010
Food and fuel inflation
Source: Stats SA
12
3. Public Finance
13
New growth cycle encourages fiscal consolidation
Consolidated government fiscal framework, 2009/10 – 2013/14
2009/10
2010/11
Rbn
Outcome
Estimate
Revenue
664.84
755
2011/12
2012/13
824.5
908.7
1017.2
27.2
28.3
28.3
28.4
28.8
825.9
897.4
979.3
1061.6
1151.8
% of GDP
33.8
33.6
33.6
33.2
32.6
-161.076
-142.4
-154.8
-152.9
-134.6
-6.6
-5.3
-5.3
-4.8
-3.8
2442.6
2666.894
2914.9
3201.3
3536
Nominal GDP
Source: SA National Treasury
Primary budget deficit projected to narrow significantly over the medium term
6
•
Public infrastructure programmes of
more than R800bn will maintain a
fair degree of stimulus
•
A stabilisation of non-interest
spending and higher revenue
reduces the primary budget deficit
from of -4.3% in 2009/10 to -0.9% of
GDP in 2013/14
Medium-term estimates
Expenditure
% of GDP
Fiscal discipline is critical to create
scope for future countercyclical
policy when the need arises
2013/14
% of GDP
Budget balance
•
% of GDP
% of GDP
33
4
30
2
0
27
-2
24
-4
-6
21
2002/03
2004/05
2006/07
Primary fiscal balance (LHS)
2008/09
Budget revenue
2010/11
2012/13f
Non-interest expenditure
Source: SA National Treasury
14
Borrowing requirement reined in over medium term
Public sector borrowing requirement
12
•
% of GDP
10
8
1.9
5.0
3.9
The public sector borrowing
requirement is projected to fall from
10.5% of GDP in 2010/11 to 6.3%
by 2013/14
–
Lower consolidated
government deficit
–
Lower borrowing by nonfinancial public enterprises as
own revenue streams come on
line once capital projects are
completed and become
operational
3.1
6
2.2
4
7
2.7
2
1.7
5.5
5.6
5
4.1
1.6
0
-1.5
-2
-4
2007/08 2008/09 2009/10 2010/11f 2011/12f 2012/13f 2013/14f
General government
Non-f inancial public enterprises
Source: SA National Treasury
15
Fiscal debt sustainable over medium term
Net loan debt expected to stabilise at 40% of GDP
1800
R billion
% of GDP
1600
•
The countercyclical fiscal stance led
to increased borrowing to meet
expenditure commitments
•
Fiscal sustainability will be guided
by:
70
60
1400
50
1200
1000
40
800
30
•
The adoption of an annual target
for the structural budget balance
consistent with long-term growth,
the desired level of public debt
and inter-generational
considerations
•
Communicating the costs of
existing and new programmes
that require a long-term
expenditure commitment
•
Setting a time-line to bring the
budget back on target following
large fiscal shocks
600
20
400
10
200
0
0
Gross loan debt
Source: SA National Treasury
Net loan debt
Total net loan debt as % of GDP (RHS)
16
4. External Vulnerability
17
External vulnerability reduced by a positive balance of
payments position
Net capital and FDI inflows reduces balance of payments risks
9
R
% of GDP
6
Rand apprecation
7.5
0
8.5
-3
9.5
Rand depreciation
2000
2002
2004
2006
•
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
•
Relaxation of exchange control a
sustainable long-term solution to
balancing financial market flows
10.5
Threshold levels
-9
Portfolio inflows continue to fund the
current account deficit. Recent FDI
deals to improve balance of
payments funding mix
6.5
3
-6
•
5.5
2008
11.5
2010
Current account balance less capital account (excluding unrecorded transactions)
USDZAR (RHS-scale reversed)
Source: SARB, Bloomberg
Structure of current account deficit
6
% of GDP
3
0
-3
-6
-9
2003
2004
2005
2006
2007
2008
2009
2010
Trade balance
Net service, income and transfers balance
Current account deficit
Current account deficit excl. SACU* transfers
* Southern African Customs Union, comprising Botswana, Lesotho, Namibia and Swaziland
Source: SARB
18
South Africa benefiting handsomely from rising interest in
EM assets
Cumulative inflows into bond and equity markets support rand
12
U
USD bn, cumulative from 2008
Index
82
4
74
0
66
-4
58
50
2007
2008
2009
Net foreign purchases: bonds
2010
Net capital inflows increased
strongly over the past two years,
reaching 3.7% of GDP in the first
three quarters of 2010, versus 3.4%
of GDP over the corresponding
period in 2009
•
The recent shift in portfolio inflows
from bonds to equities reflect
confidence in South Africa’s growth
prospects and business-friendly
policy choices
•
The recent revisions in South
Africa’s credit rating outlook to stable
confirm that external balance sheet
dynamics remain manageable
90
8
-8
•
Net foreign purchases: equities
Nominal effective exchange rate (RHS)
Source: Bloomberg
South African equity market outperforms the EM asset class
160
Index (Jan 2008 = 100)
120
80
40
0
2000
2002
MSCI World
2004
2006
MSCI EM
2008
2010
MSCI South Africa
Source: Bloomberg
19
Reserves accumulation assist in reducing rand volatility
Reserves accumulation assist in limiting rand volatility
1.2
Cents
Months
Coordinated fiscal and monetary
policy response to building reserves
have contributed to lowering rand
volatility
•
Rising import cover assist in
reducing external vulnerability
6
1
5
0.8
4
0.6
3
0.4
2
0.2
1
0
•
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Standard deviation of the rand exchange rate
Imports covered by reserves (months - RHS)
Source: Bloomberg, SARB
External Vulnerability Index
250
Index
200
150
100
50
0
2002
2003
2004
2005
2006
2007
2008
2009
2010F 2011F
External Vulnerability Indicator*
* (Short-term external debt + currently maturing long-term external debt+ total non-resident deposits over one year)/
Official foreign exchange reserves
Source: Moody’s Ratings Agency
20
5. Banking System Stability
21
Ample banking liquidity
Capital adequacy
•
The South African banking system is
highly concentrated with the top four
banks holding a 85% 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
•
Global perceptions of South African
Banks consistently among best in
the world. South Africa ranked 6th
out of 139 countries in terms of
soundness of banks (World
Economic Forum Executive
Opinion Survey)
15%
12%
9%
6%
3%
0%
Dec-08
ABSA
Dec-09
FirstRand
Nedbank
Jun-10
Standard Bank
Source: Company data
Funding structure of SA banks
Professional/wholesale deposits
30.5%
Household deposits
20.5%
Corporate sector deposits
19.7%
Government, local government and public enterprises deposits
8.6%
Interbank & intragroup deposits
6.6%
Non-resident deposits
2.7%
Other borrowed funds
4.9%
Foreign currency funding
2.3%
Subordinated debt
4.0%
Source: SARB, June 2010
22
Banking system remains systemically sound
Robust primary issuance volumes in the local capital markets
•
Banks account for 33% of the total
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
Rbn
120
80
40
0
2006
Banks / Financials
2007
Securitisations
2008
2009
Corporates
Public Sector
2010
Municipal
Source: JSE
Credit spread of bank vs. public sector entities
bp
400
300
200
100
2003
2004
Bank Senior
2005
2006
2007
Bank Subordinated
2008
2009
2010
2011
Public Sector Entities
Source: JSE
23
6. Conclusion
24
Concluding thoughts
•
The macroeconomic landscape reflects sustained improvements in both internal and global demand
•
The positive regional backdrop and low domestic debt levels are structural tailwinds
•
Stimulatory fiscal and monetary policy have lessened the impact on South Africa from the global
slowdown.
•
Prudent fiscal management and automatic stabilisers have ensured that the fiscal position should return
to pre-crisis levels without requiring extraordinary fiscal austerity
•
External debt remains low and manageable
•
The banking system remains on a solid footing
25
7. Appendix
26
Public-sector infrastructure spending
Major state-owned entities’ capital expenditure programmes, 2009/10 – 2014/15
2009/10
R billion
Total public sector capital
expenditure
SOE capital expenditure
2010/11
Outcome Budget
235.2
261.9
2011/12
Revised
2012/13
2013/14
•
2014/15
Medium-term estimate
260.1
252.9
269.3
286.4
252.9
88.6
149.5
136.2
136.5
122.7
104.3
123.9
Eskom
48.4
96.3
86.8
93.7
85.2
67.0
88.9
Transnet
18.4
19.4
22.8
21.9
17.1
16.2
15.2
1.4
5.8
6.8
4.3
8.2
10.1
5.5
11.6
13.5
8.4
2.6
2.0
1.5
1.5
Trans-Caledon Tunnel Authority
0.4
7.1
5.0
9.0
4.8
4.8
2.9
Airports Company of South Africa
Limited
5.2
1.6
1.3
0.8
1.1
–
–
•
Of which:
Central Energy Fund
South African National Roads
Agency Limited
R392.6bn (49%) of spending by nonfinancial public enterprises
•
Guarantees for SOEs
increase from R63bn in
2008/09 to R194bn in 2013/14
to reduce their cost of
borrowing
Provinces and municipalities remain
significant drivers of infrastructure
spending, despite the completion of
many large projects related to the
2010 FIFA World Cup
Source: SA National Treasury
27
Disclaimer
The Republic has filed a registration statement (including a prospectus) with the SEC for the offering to which this presentation relates. This presentation
does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of the
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decision to purchase any securities in any offering should be made solely on the basis of the information to be contained in the prospectus. Before you
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the SEC for more complete information about the Republic and the offering. You may get these documents for free by visiting EDGAR on the SEC Web
site at www.sec.gov. Alternatively, the Republic or any underwriter participating in the offering will arrange to send you the prospectus if you request it by
calling:
Deutsche Bank Securities Inc.: +1-800-503-4611
This presentation contains certain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933. Statements that are
not historical facts, including statements with respect to certain of the expectations, plans and objectives of South Africa and the economic, monetary
and financial conditions of the Republic, are forward-looking in nature. These statements are based on current plans, estimates and projections, and
therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date that they are made, and South Africa
undertakes no obligation to publicly update any of them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. South Africa cautions you that a number of important factors could cause actual
results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to (i) external factors, such as
interest rates in financial markets outside South Africa and social and economic conditions in South Africa’s neighbors and major export markets; and (ii)
internal factors, such as general economic and business conditions in South Africa, present and future exchange rates of the rand, foreign currency
reserves, the ability of the South African government to enact key reforms, the level of domestic debt, domestic inflation, the level of foreign direct and
portfolio investment and the level of South African domestic interest rates.
28