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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 Republic in any jurisdiction or an inducement to enter into investment activity in any jurisdiction. Neither this presentation nor any part thereof, nor the fact of its distribution, shall form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. Any 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 invest, you should read the prospectus supplement and related prospectus in that registration statement and other documents the Republic has filed with 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