Download Recommending a Strategy

Macro-economic implications of the
budget
BER presentation to the
PORTFOLIO COMMITTEE ON FINANCE
Pieter Laubscher
27 February 2007
Presentation outline



Macro-economic backdrop
The 2007/8 budget & macro-economic policy
Economic implications of the budget





Economic growth
Inflation & interest rates
BoP & exchange rate
General remarks
Economic forecasts, 2007/8
Macro-economic backdrop
Weaker expectations point to a flattening
out of global economic conditions …
Real GDP growth accelerated to a 5%
tempo, 2004/6





Business cycle upswing
more than 7 years old
Growth is more stable &
sustainable
Household consumption
contributed 85% of the
growth 2004/6
But GDFI has been
growing in excess of 9%
pa since 2003
Net exports made a
strong negative
contribution (-2.4%)
7
Ave 2004/6
6
5
4
3
2
1
0
99Q1
01Q1
03Q1
05Q1
Real GDP growth
Business and consumer confidence trend
at historical highs …


100
80
index
Relentless increase in
business confidence
since 1999Q3
RMB/BER BCI above 80
index points since end2004
Consumer confidence
increased sharply since
2004/5 – currently close
to historical peaks
60
40
20
0
99Q1
01Q1
03Q1
05Q1
RMB/BER BCI
30
20
index

10
0
-10
-20
99Q1
01Q1
03Q1
FNB/BER CCI
05Q1
Mov ave
Up-tick in inflation is expected to be
contained …




CPIX inflation has
averaged within 3-6%
range for 41 consecutive
months
CPIX expected for 2007,
5.4%, up from 4.6%,
06Q1
Inflation outlook
improved since the end
of 2006
Inflation expectations
appear to be wellanchored
10
9
8
2006Q4
7
6
5
4
3
2
1
0
03Q1
05Q1
07Q1
CPIX expectations
Actual CPIX
Long-term interest rates at historical low,
despite up-tick in CPI and repo rate …




Repo rate increased 200
bps, 2006H2
Fiscal surplus boosted
bond market end-2006
Bond market discounting
lower inflation &
growth?
Short-term interest rates
probably have peaked,
but upside risk …
16
14
12
10
8
6
99
01
03
05
R157 yield
07
Current account deficit approaches 6% of
GDP … but handsomely financed …



Strong expansion of
GDE & imports, 2004/6
Poor export growth,
2002/6 (3% pa)
Accelerating SACU
payments (1.1% of
GDP)
Capital account
prospects remain
promising
10
Forecast
8
6
4
% of GDP

2
0
-2
-4
-6
-8
99Q1
BCA
01Q1
03Q1
05Q1
07Q1
Net capital flows
Longest business cycle upswing on record …
190
84
180
index: base=100
170
44
160
150
140
44
130
120
110
100
1
10
19
28
37
46
55
64
months since start of upswing
1961-1965
1978-1981
+99Q3
73
82
The current expansion: 1999Q3 - present

Initial phase: 99Q3 – 2002

2nd phase: 2002/3 – present

Steady growth 3.2% pa,
particularly GDE (2.5% pa)

More rapid growth 4.5% pa, led
by GDE (6.7% pa)

Fiscal ‘austerity’

Moderate fiscal stimulation

Limited formal employment
creation

Stronger employment growth:
private sector ‘upsizing’

Mild household credit
spending

Strong hhold debt accumulation/
sharp interest rate cuts, 2003/5

Supportive net export
growth: BCA surplus in 2002
/ weak ZAR

Weak export growth: BCA deficit
5.7% of GDP (2006) / strong
ZAR

Domestic economic
resilience in face of 2000/1
world recession

Strong capital inflows in BoP
The 2007/8 budget & macro-economic
policy
Public sector spending: more expansionary
since 2001/2
23
12
22
10
21
2001/2
8
percent
percent
20
19
6
18
17
4
16
15
M a r- 80
2
M a r- 85
M a r- 90
Consumption: GDP
M a r- 95
M a r- 00
Fixed investment: GDP
M a r- 05
Consolidated expenditure: economic
classification – strong real growth
R billion
2006/7 est
Ave annual %
growth
264.0
11.0
Wages & salaries
172.3
10.0
Goods & services
90.6
12.5
Transfers & subsidies
179.9
11.0
93.1
11.6
Capital expenditure
29.9
21.3
Total non-interest expenditure
473.8
12.4
-
7.7
Current payments
Households & non-profit org
real growth
Budgeting for a balanced budget over the
MTEF …

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
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Tax overruns a function
of strong economic
growth and sound fiscal
finances
Real non-interest
expenditure grow by
7.7% pa over MTEF
Net R12.4 billion tax
relief, 2007/8
Cyclical stimulus to
demand-side of the
economy
1
0
-1
MTEF
-2
-3
-4
-5
-6
1994
1997
2000
2003
2006
Budget deficit
2009
Tax on individuals (% of total revenue)



Personal tax relief
R8.4bn, 2007/8
Declining personal tax
contribution to total
revenue
Important driver of the
consumer boom
44
42
40
MTEF
38
36
34
32
30
28
1994
1997
2000
2003
Personal tax
2006
2009
Tax on companies (% of total revenue)

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
Corporate taxes have
been a key source of tax
overruns
Corporate tax
contribution to total tax
revenue has recovered
Could be more scope to
consider tax relief to
stimulate the production
side of the economy
30
28
26
24
MTEF
22
20
18
16
14
12
10
1994
1997
2000
2003
Company tax
2006
2009
Government debt (% of GDP)



Retirement of state debt
2nd consecutive fiscal
year
Smaller debt service
burden creates room for
additional spending
Fiscal prudence provide
solid basis for future
budgets & instills
confidence
50
45
40
MTEF
35
30
25
20
15
10
1994
1997
2000
2003
% of GDP
2006
2009
Public sector borrowing requirement …
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
Projected PSBR 2009/10
R32.3bn (1.4% of GDP)
Conducive to lower longterm interest rates
‘Crowding-in’ private
fixed investment
12
17
16
10
15
8
MTEF
6
14
13
12
4
11
10
2
9
0
8
-2
7
1994 1997 2000 2003 2006 2009
PSBR
R 157
Economic implications of the budget
Budget supports growth … may not be
anti-cyclical enough at this stage …

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Stimulates consumer
spending - net personal
tax relief - R6.6bn
(0.6% of HCE)
Real govt. wage growth,
4.7% pa
Company tax proposals
marginally positive i.t.o.
fixed investment
Bolsters consumer &
business confidence
6
Fcast
5
4
3
2
1
0
1994
1997
2000
2003
2006
Real GDP growth
2009
Inflation & interest rates …
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Excise & duties neutral
i.r.o. inflation
Stimulus of the demand
side of economy could
put pressure on inflation
Govt. wage growth
negative for inflation?
Budget stimulus will
keep SARB on the back
foot
25
20
Fcast
15
10
5
0
1994
1997
2000
2003
Prime rate
2006
2009
Balance of payments & exchange rate …
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Budget should bolster
investor confidence
Gradual exchange
control relaxation
positive
Current account to
remain under pressure
Rand vulnerable in case
of capital outflows
200
180
160
140
Fcast
120
100
80
60
40
20
0
1994
1997
2000
2003
2006
Trade-weighted rand
2009
General remarks

Mostly upside:
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Sound fiscal finances
Generally stable expenditure & tax ratios, implying no
dramatic fiscal effects
Attention to savings: government savings positive 2009/10;
savings & retirement reform
Some evidence of delivery i.t.o. infrastructure spend (e.g.
roads), but needs to be stepped up
Downside, if any:

Combination of ‘dovish’ monetary policy and ‘stable’ fiscal
policy at this point may not be enough to address macroeconomic imbalance reflected in BCA, which implies risk
Economic Forecasts, 2007/8
2006
2007
2008
- NT
7.0
5.7
4.8
- BER
7.0
4.3
4.2
- NT
4.9
4.8
5.1
- BER
5.0
4.5
4.5
- NT
4.6
5.1
4.7
- BER
4.6
5.4
5.1
- NT
-5.5
-5.3
-5.7
- BER
-5.6
-5.1
-5.5
Private household consumption
Gross domestic product
CPIX inflation
Current account balance (%)
Bureau for Economic Research
Economic information that works for
you
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