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OUTLOOK FOR THE SA ECONOMY IN THE CURRENT GLOBAL ENVIRONMENT July 2010 SABITA Rob Jeffrey Managing Director ECONOMETRIX OVERVIEW Global economic outlook Domestic economic outlook Significant trends affecting policy China and Africa Economic trends and forecasts Conclusion INTERNATIONAL TRENDS ECONOMETRIX THE GLOBAL ECONOMY Premier of China Unsustainable low savings and consumption Excessive expansion of financial institutions Lack of self discipline Failure of supervision and regulation high PRIVATE EXCESS CREDIT AND BORROWING Household debt as a % of disposable income 140 85 130 80 USA 75 SA 70 110 65 100 60 90 55 80 50 96 97 98 99 00 01 02 03 04 05 06 07 08 09 ECONOMETRIX SA % U S (% ) 120 GLOBAL IMBALANCE Current Account Balances, $bn 800 600 Emerging economies $bn 400 200 0 -200 Developed economies -400 -600 96 Source : IMF 97 98 99 00 01 02 03 04 05 06 07 ECONOMETRIX 08 09 INEQUALITY AND GREED Executive Pay * Relative to Average Wages in the US 320 280 240 200 * Includes salary, bonuses, long-term bonus payments and stock-option grants Based on the three highest-paid officers in the 50 largest firms of the S&P 500 in 1940, 1960 and 1990 160 120 80 40 # 0 36 42 48 54 60 66 72 78 84 90 ECONOMETRIX ECONOMETRIX Source : The Economist 96 02 # estimates LOOSENING MONETARY POLICY LEADS TO ASSET INFLATION Inflation in asset prices, not goods prices Commodity Price Index : $ Terms First equities, then housing, finally commodities 350 In d e x 2 0 0 0 = 1 0 0 300 250 Metals Non food ag Food 200 150 100 50 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 ECONOMETRIX SLUMP AND RECOVERY Industrial Production Growth 10 5 G r o w th % 0 -5 -10 -15 -20 Germany Japan UK US -25 -30 94 95 96 97 98 99 00 01 02 03 04 ECONOMETRIX 05 06 07 08 09 10 REQUIRED DOMESTIC & INTERNATIONAL POLICY SHIFTS Major realignment of exchange rates Cultural changes Lower consumption higher saving in West Higher consumption lower saving in East Curbing profligate politicians dependent on: • Pet projects and populism for power Debt levels need to be reduced • Past excess debt and current stimulatory debt APPREHENSION REGARDING SUSTAINABILITY OF UPSWING Traditionally, rallies following severe bear markets have averaged 70%, S & P up 83% already since March 2009 China tightening up on lending to slow speculation • Could be a precursor to global rise in interest rates? • Could be a precursor to slowdown in Chinese economy Obama acting to prevent banks from speculating with their own money • Interference in market system • Unknown impacts Concerns with Greek debt default possibility • Fear of impact on Euro integrity from contagion • Increased fiscal prudence to slow European recovery SPECTRE OF RISING WORLD DEBT How do governments in advanced economies extricate themselves from rising debt levels? Greece now, who’s next? Hope that sustained growth will eventually generate revenues to rein in government debt Government Gross Debt in Advanced Economies as % of GDP 100 90 % 80 70 60 50 40 Source : Financial Times ECONOMETRIX GLOBAL RECESSION: V-SHAPE OR W-SHAPE? Massive stimulus is having effect Huge build up of cash balances Risk of unsustainable rally in asset prices, commodity prices & economic activity US Monetary Base 2500 Which Scenario for Global Economy ? 2000 or $Bn 1500 1000 W Shape 500 0 V Shape 1396 97 98 99 00 01 02 03 04 05 06 07 08 09 95 Eta Shape ECONOMETRIX SOUTH AFRICAN ECONOMIC TRENDS ECONOMETRIX THE SOUTH AFRICAN ECONOMY Unsustainable low savings and high consumption Excessive imports insufficient exports EXCESSIVE CONSUMPTION Manufacturing Production vs Retail Sales 150 In d e x 2 0 0 4 = 1 0 0 140 130 120 110 Manufacturing 100 Retail New Revised 90 04 05 06 07 ECONOMETRIX 08 09 EXCESSIVE IMPORTS R m ( c u r r e n t p r ic e s ) Current Account vs Capital Inflows 200000 100000 0 -100000 -200000 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 ECONOMETRIX Balance on current account Foreign Investment Net capital inflows Public debt as % of GDP Public Debt as % of GDP 50 P e r c e n ta g e 45 40 35 30 25 20 91 93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 08/09 ECONOMETRIX Actual 2010 Budget 10/11 12/13 Gross general government debt as % of GDP Gross General Government Debt as % of GDP Japan Italy Greece France Portugal Germany US Spain 1999-2008 2011-Forecast UK Ireland South Africa Source : Financial Times 0 50 100 ECONOMETRIX 150 200 250 BALANCED SECTORAL GROWTH IN SA POLICY REQUIREMENTS Create environment to increase domestic and foreign investment in manufacturing & mining sectors Increase investment in export orientated mining, processing & manufacturing industries Increase industries investment in import replacement CRITICAL FACTORS AFFECTING FUTURE SOUTH AFRICAN ECONOMIC GROWTH ECONOMETRIX The age of globalisation y e a r -o n -y e a r G r o w th (% ) The Age of Globalisation World GDP vs SA GDP 8 6 4 2 0 -2 -4 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 World GDP (%) (forecast) ECONOMETRIX South Africa GDP (%) (forecast) GLOBALISATION & GROWTH Irreversible trend Prices will be influenced by world pricing trends Long term costs follow international costs Environmental issues will grow Domestic & foreign investment are essential Technological trends will influence development Intervention and protectionism are dangers ECONOMETRIX GLOBAL SUCCESS REQUIREMENTS Growing influence of market forces and capital movements • • • • Critical size often means • • Efficiency must be measured in global terms. Critical mass is important in the global market High quality required to be competitive Important to offer new technologies A dominant local player Producing for export Government should foster an environment for global success ECONOMETRIX FORECASTS OF SA ELECTRICITY GENERATING CAPACITY REQUIREMENTS ECONOMETRIX SOURCES OF ELECTRICITY ECONOMETRIX ENVIRONMENTAL & OTHER TRENDS Market share of fossil fuels will decline & the share supplied by sustainable clean electricity will grow • Share of oil from traditional sources will decline but oil from alternative sources such as tar sands & coal will increase • The cost of electricity will increase as the true environmental costs are factored in to cost structures • The cost of alternative sources of electricity will reduce & they will become more competitive • Alternative electricity sources (such as solar, wind & wave) will continue to have limited large-scale viability • Coal and nuclear power currently only technologies available to offer large-scale electricity source for global economy. • ENERGY CONSUMPTION AND INCOME ECONOMETRIX SECTORAL ELECTRICITY INTENSITY Electricity intensity 0.6 0.5 Mining Manufac Agric Resid Transp Comm kWh / Rand 0.4 0.3 0.2 0.1 0.0 1980 ECONOMETRIX 1984 1988 1992 1996 2000 2004 2008 SECTORAL ELECTRICITY INTENSITY SA electricity intensity 0.24 0.22 kWh / rand 0.20 0.18 0.16 0.14 0.12 0.10 1973 ECONOMETRIX 1978 1983 1988 1993 1998 2003 2008 LONG TERM ECONOMIC GROWTH OBJECTIVES Assumed Compound Growth Of Electricity Sales Electricity Growth For Agriculture (%Pa) Electricity Growth For Mining (%Pa) Electricity Growth For Industry (%Pa) Electricity Growth For Services (%Pa) Electricity Growth For Residential(%Pa) Total Associated GDP Growth % per annum 1.5 2.1 3.2 3.0 4.1 3.0 % per annum Agriculture 0.9 Mining 0.3 Industry 3.1 Services 4.4 Total 3.9 Balance of payments Associated Real Exports 3.1 Associated Real Imports 6.1 Employment *Associated Employment Index * = Non Agricultural Sector ECONOMETRIX 4.4 ESKOM FORECAST CAPACITY ECONOMETRIX Electricity Units Consumed 10 G ro w th % 5 0 -5 -10 -15 97 98 99 00 01 02 03 04 05 06 07 08 09 10 ECONOMETRIX THE CHINDIA FACTOR SUBSTANTIAL IMPACT ON AFRICA AND SA ECONOMETRIX CHINA FUTURE GIANT ECONOMETRIX THE CHINA FACTOR The long term objective Plays a long game (Hong Kong) Has 1,3 billion people Requires commodities & markets Unorthodox business practice ECONOMETRIX ECONOMETRIX LONG TERM DEMAND TREND World crude steel production 2250 2007-2030 2000 1900-2006 1750 Total = 38 Bt* Total = 39 Bt 1500 1250 1000 750 500 250 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 ECONOMETRIX •At a hypothetical world average growth rate of 2% p.a . Source of data: IISI Slide 13 2020 2030 AFRICA AND CHINA Africa produces more than 60 minerals Africa hosts 30% world’s mineral resources Africa’s market share of world mineral production <10% ECONOMETRIX ECONOMIC TRENDS AND FORECASTS ECONOMETRIX Forecasts for World Growth Revised Upwards • Assume economic recovery will be sustained Revisions of IMF Forecasts for 2010 World Output Sub-Saharan Africa South Africa Sep 08 4.2 6.5 4.2 Feb 09 3.0 5.0 3.0 Apr 09 1.9 3.8 1.9 Jul 09 2.5 4.1 2.3 Oct 09 3.1 4.1 1.7 Latest IMF Forecast Growth in GDP (%) 2009 2010 World -0.6 4.2 Advanced economies -3.2 2.3 China 8.7 10.0 Sub-Saharan Africa 2.1 4.7 South Africa -1.8 2.6 IMF, World Economic Outlook Database, April 2010 ECONOMETRIX Jan 10 3.9 4.3 na 2011 4.3 2.4 9.9 5.9 3.6 Apr 10 4.2 4.7 2.6 IMF Forecasts for Growth of Sub-Saharan Countries 2010 2011 Angola Nigeria Mozambique Botswana Tanzania Malawi Zambia Uganda 7.1 7.0 6.5 6.3 6.2 6.0 5.8 5.6 8.3 7.3 7.5 5.1 6.7 6.3 6.0 6.4 Democratic Republic of Congo 5.4 7.0 Ghana Kenya Mauritius Senegal Côte d'Ivoire Lesotho South Africa Zimbabwe Namibia Swaziland 4.5 4.1 4.1 3.4 3.0 3.0 2.6 2.2 1.7 1.1 Source: IMF WEO, Apr 10 20.1 5.8 4.7 4.1 4.0 2.8 3.6 0.0 2.2 ECONOMETRIX 2.5 Rand Remains Vulnerable Still benefiting from carry trade & low money supply growth However, weakening relative to other emerging markets Fears of left-wing shift (bluster meant to mask lack of service delivery) Concerns with lack of leadership (presidency) of country & of economy (who is in charge of economic policy?) Growing underperformance of SA Economy ECONOMETRIX Net Foreign Reserves ($bn) * Emerging Markets 07 June 2010 China Russia Taiwan South Korea Hong Kong India Brazil Singapore Thailand Mexico Malaysia Poland Indonesia Turkey Israel Argentina Hungary Philippines Czech Republic South Africa ** Egypt Chile Colombia Venezuela * Excluding gold, except Singapore and China Source : The Economist **Source: SARB 2447.1 435.6 357.6 278.9 259.2 256.4 242.6 203.4 141.1 101.3 94.0 84.7 75.8 69.5 62.1 45.5 45.5 40.7 38.8 36.7 32.5 25.5 24.9 17.3 ECONOMETRIX Forecast : Rand Exchange Rate 14 12 Rand 10 R/Euro 8 6 R/$ 4 99 00 01 02 03 04 05 06 07 ECONOMETRIX 08 09 10 11 Estimated Principal Areas of Government Expenditure (% Growth) 2009/10-2012/13 General Public Services 2.4 Defence 6.3 Public Order & Safety 8.2 Economic affairs -2.1 Housing & Community Amenities 11.6 Health 7.1 Education 8.4 Social protection (Welfare) 9.5 Interest 21.8 Total ECONOMETRIX 8.2 Forecast :Private Consumption Expenditure 10 8 G ro w th % 6 4 2 0 -2 -4 -6 00 01 02 03 04 05 06 07 08 ECONOMETRIX 09 10 11 C o n s t a n t '2 0 0 5 P r ic e s ( R 'm ) Building Plans Passed : Non-Residential vs Residential 3500 3000 2500 2000 1500 Residential 1000 Non-Residential 500 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 ECONOMETRIX Growth in Fixed Investment vs Investment in Machinery 30 G ro w th % 20 Fixed Investment 10 0 -10 Machinery & Other Equipment -20 -30 94 95 96 97 98 99 00 01 02 03 04 ECONOMETRIX 05 06 07 08 09 Gross Domestic Fixed Investment vs Investment in Construction Works In d e x 1 9 9 5 = 1 0 0 600 500 Construction Works 400 300 200 Fixed Investment 100 0 95 96 97 98 99 00 01 02 03 04 ECONOMETRIX 05 06 07 08 09 Gross Domestic Fixed Investment vs Investment by Electricty, Gas & Water In d e x 1 9 9 5 = 1 0 0 500 400 Electricity, Gas & Water 300 200 Fixed Investment 100 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 ECONOMETRIX Forecast: CPI vs CPIX 14 12 10 CPIX 8 % 6 4 2 Inflation Target 0 -2 -4 CPI 00 01 02 03 04 05 06 07 08 09 10 11 12 ECONOMETRIX Forecast: Prime Overdraft Rate 25 23 21 % 19 17 15 13 11 9 97 98 99 00 01 02 03 04 05 06ECONOMETRIX 07 08 09 10 11 The Decline in Interest Rates Has Run its Course Forecast: Prime Overdraft Rate 26 24 22 % 20 18 16 14 12 10 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 ECONOMETRIX SA Economic Growth Forecasts (Growth %) Gross Domestic Product Year End (Q4) 2009 -1.8 -1.6 2010 3.1 3.7 2011 3.5 3.7 2012 2.6 2.9 2013 4.5 4.8 Gross Domestic Expenditure -1.8 4.4 3.6 2.5 4.1 Year End (Q4) -1.2 5.4 3.6 2.7 4.8 Private Consumption Year End (Q4) -3.1 -2.9 1.9 3.3 3.1 3.0 2.3 2.3 3.3 3.9 Fixed Investment Year End (Q4) 2.4 -1.3 2.0 3.1 4.8 5.7 3.9 3.9 5.3 6.5 Government Expenditure Year End (Q4) 4.7 4.5 3.9 4.1 4.0 3.8 3.8 3.8 3.7 3.7 -4.2 -3.5 Current A/C Balance As % of GDP ECONOMETRIX -4.0 -3.2 -4.2 Difference Between Growth in SA Economy & World 2 Forecasts 1 0 % -1 -2 -3 -4 -5 2001 2002 2003 2004 World 2005 2006 2007 2008 Emerging & Developing 2009 2010 ECONOMETRIX Africa 2011 2012 Underperformance of SA Economy Increasing Lack of competitiveness & high import dependence due to: Skills & education deficiency Wages high relative to productivity Lack of sufficient market size & economies of scale Economic concentration in hands of “Golden Triangle” Lack of entrepreneurship Stifling regulatory environment ECONOMETRIX GLOBAL ECONOMY CONCLUSION Current slide arrested Second economic slowdown Slower growth Correction of imbalances Reduction of debt Cultural changes take time Time span of recovery: 3 to 8 years South Africa will be affected South Africa cushioned in short to medium term ECONOMETRIX