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MTBPS and macroeconomic assessment (Nov 2003)
Brief economic background
Government’s macroeconomic assumptions
Budget arithmetic and the overall fiscal stance
Assessment of fiscal policy direction
Other issues
Economic Environment
Global environment:
– Cyclical momentum picking up
• Policy-induced upswing in US, China strong, elsewhere weak
Forecasts have also been revised up: IMF September
Real gdp growth rates (%)
2001
2.4
2002
3.0
Advanced economies
US
Euro area
Japan
1.0
0.3
1.5
0.4
1.8
2.4
0.9
0.2
1.8
2.6
0.5
2.0
(1.9)
(2.2)
(1.1)
(0.8)
2.9
3.9 (3.6)
1.9 (2.3)
1.4 (1.0)
Developing economies
Africa
South Africa
Namibia
4.1
3.7
2.8
2.4
4.6
3.1
3.0
2.7
5.0
3.7 (3.9)
2.2 (2.8)
3.7 (3.7)
5.6 (5.8)
4.8 (5.2)
3.0 (3.2)
4.7 (4.7)
Developing Asia
M iddle East
5.8
2.0
6.4
4.8
6.4 (6.3)
5.1
6.5
4.6 (4.9)
World
2003f
3.2
Figure s in bra cke ts a re Ma y 2003 fore ca sts
2004f
4.1
US growth
Q-o-q annualised
17
15
13
11
9
7
5
3
1
-1
-3
-5
-7
-9
Actual
70
72
74
76
78
80
82
84
86
88
90
Average for period
92
94
96
98
00
02
Policies have been very stimulatory
%
15
Japan
14
UK
USA
Euro
12
11
9
8
6
5
3
2
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
Fiscal deficits on the up: the US
% of gdp
3
2
August 2003 mid-term revisions
1
February 2003 budget
0
-1
-2
-3
-4
-5
-6
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
-7
US dollar under pressure
Deficit as % of gdp
1.0
Euro/$
0.5
0.6
0.0
0.7
-1.0
0.8
0.9
-2.0
1.0
-3.0
1.1
1.2
-4.0
-5.0
As % of gdp
US$ per DM
-6.0
1.3
1.4
1.5
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Commodities looking good
220
Index Jan 1994 =100
Coal
Aluminium
96
97
Hot rolled steel
Gold
Platinum
200
180
160
140
120
100
80
60
94
95
98
99
00
01
02
03
04
But less so in rand terms
Commodity export price indices
Index: Jan '94 =100
380
360
340
320
300
280
260
240
220
200
180
160
140
120
100
80
$ index
94
95
96
Rand index
97
98
SDR
99
00
01
02
03
Economic Environment
Global environment:
– Cyclical momentum picking up
• Policy-induced upswing in US, China strong, elsewhere weak
– However, structurally problems remain which could
frustrate and limit the length of the upswing
• US corporate and individual debt very high, budget deficit
growing, current account reflects strong dissaving
• Europe structural labour market problems, large government
deficits
• Japan bank problems dating back to 1980s, ageing population
• China rampant credit and bankrupt state banks, but dynamic
Rand reacting to dollar weakness
$ per Euro
Real rand 1995=100
0.50
140
Euro-$
Effective rand
0.60
130
0.70
120
0.80
110
0.90
1.00
100
1.10
90
1.20
80
1.30
70
1.40
1.50
60
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
Is the rand fairly valued?
Real effective rand
Index 1995=100
140
130
120
40
Deviation from neutral
Real effective rand
30
20
110
10
100
0
90
-10
80
-20
70
Real effective rand = TW rand*ppi(sa)/ppi(int)
60
-30
-40
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Is the rand fairly valued? Structural factors
Real effective rand
Index 1995=100
140
130
120
40
Deviation from neutral
Real effective rand
Lower fair value
Upper fair value
30
20
110
10
100
0
90
-10
80
-20
70
-30
60
-40
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Rand possibilities in context
Real effective rand
Index 1995=100
140
40
130
$/Euro
1.17
1.30
120
30
R/$
6.28
5.92
20
110
10
*
100
90
80
70
0
-10
Deviation from neutral
Real effective rand
Lower fair value
Upper fair value
*
$/Euro
1.17
1.30
R/$
7.79
7.35
60
-20
-30
-40
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Good opportunity to build up reserves
Import cover and the oversold forward book (OFB)
Months of imports
OFB ($bn)
6.0
35
OFB
30
Import cover - months of official
reserves
5.0
25
4.0
20
3.0
15
2.0
10
1.0
5
0.0
1994
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
Will mixed economic fortunes continue?
8
Y-o-y % change
Gdp= gde+exports-imports
Gdp
Gde
7
Gde=hce+gce+gfcf+change inv+residual
6
5
4
3
2
1
0
-1
-2
94
95
96
97
98
99
00
01
02
03
04
Export volumes underperforming import volumes
180
Index: 1993=100
170
160
150
140
130
120
110
Exports
Imports
Gdp
100
90
93
94
95
96
97
98
99
00
01
02
03
04
Production side of economy is still struggling
Y-o-y %
18
Downswings
13
8
3
-2
Manufacturing production
-7
G7 industrial production
-12
91
92
93
94
95
96
97
98
99
00
01
02
03
04
But spending is rising
Retail sales: Y-o-y %
Real credit: Y-o-y %
20
17
16
13
12
9
8
5
4
1
0
-3
-4
-7
Retail sales
-11
Real asset-based credit
growth
-15
-8
-12
-16
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Consumer spending strong
Passenger vehicle sales
Y-o-y % change
100
Units sold
Y-o-y % change
80
26000
24000
Total units sold (mov avg)
22000
60
20000
40
18000
20
16000
0
14000
-20
12000
-40
10000
-60
8000
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
Helped by lower interest rates
Prime: Y-o-y %
28
Real credit: Y-o-y %
20
16
24
12
8
20
4
16
0
-4
12
Prime
Real asset-based credit growth
8
-8
-12
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
However, Reserve Bank is still optimistic on CPIX
Our view: short term outlook is very good but…
12.5
%
CPIX Monthly Forecast
11.5
10.5
9.5
CPIX monthly
8.5
7.5
6.5
5.5
CPIX annual average
Target range
4.5
3.5
2.5
98
99
00
01
02
03
04
05
At the bottom or more to go?
30
%
Real prime
Nominal prime
CPIX
25
20
15
10
5
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
Forecasts
GDP:
MTBPS
Nedcor
HCE:
MTBPS
Nedcor
GFCF:
MTBPS
Nedcor
Exports: MTBPS
Nedcor
Imports: MTBPS
Nedcor
CPIX:
MTBPS
Nedcor
Main differences:
Actual
2002
3.0
3.0
3.2
3.2
6.5
6.5
-1.4
-1.4
3.1
3.1
9.3
9.3
2003
2.2
1.9
2.8
3.1
7.7
6.8
-4.2
-4.8
5.8
6.0
6.9
6.8
– Effect of rand on exports
– Global view
– Inflationary expectations and base effect
Forecasts
2004
3.3
2.8
3.2
3.5
6.1
5.5
4.6
1.0
6.6
6.0
4.9
4.9
2005
3.7
3.1
3.5
3.2
6.7
4.0
6.3
6.5
6.7
4.0
5.4
6.2
2006
4.0
3.6
3.7
3.5
7.0
7.0
6.9
7.0
6.4
8.0
5.1
5.9
MTBPS and macroeconomic assessment (Nov 2003)
Brief economic background
Government’s macroeconomic assumptions
Budget arithmetic and the overall fiscal stance
More expansionary mode
Revenue & Expenditure: % of gdp
29.5
28.5
Deficit: % of gdp
-3.5
Deficit
Revenue
Expenditure
-3.0
-2.5
27.5
-2.0
26.5
-1.5
25.5
-1.0
24.5
-0.5
23.5
Deficit
Revenue
Expenditure
2002/03
2003/04
2004/05
2005/06
2006/07
-1.2
24.8
26.0
-2.6
24.8
27.5
-3.2
24.8
28.0
-3.1
24.8
28.0
-2.8
24.8
27.7
0.0
Estimates for current year: MTBPS and pre-MTBPS
2002/03
2003/04
estimate Budget Revised Diff Rbn Diff %
Taxes on income and profits
Persons and individuals
Companies
Secondary tax on companies
Other
Taxes on property
Domestic taxes on goods & serv
Value-added tax/sales tax
Specific excise duties
Levies on fuel
Other
Taxes on international trade
Stamp duties and fees
Miscellaneous
Total tax revenue
Non-tax revenue and repayments
Less: SACU payments
Main budget revenue
Expenditure
Deficit
As % gdp
167.9 181.5
94.3
96.7
55.7
65.8
6.3
8.0
11.5
10.9
5.1
5.9
97.6 109.6
70.1
81.0
10.4
11.4
15.3
16.3
1.6
0.9
9.6
11.3
1.6
1.8
0.4
0.0
282.2 310.0
4.5
4.2
8.3
9.7
278.4 304.5
291.8 333.97
13.4
29.5
1.2%
2.4%
176.9
97.0
61.8
7.0
11.1
6.6
109.4
80.0
11.6
16.4
1.5
9.4
1.5
0.0
303.7
5.9
9.7
299.9
331.5
31.6
2.6%
-4.6
0.3
-4.0
-1.0
0.2
0.7
-0.2
-1.0
0.2
0.1
0.6
-1.9
-0.3
0.0
-6.3
1.7
0.0
-4.6
-2.5
2.1
0.0
-2.5
0.3
-6.1
-12.5
1.8
11.9
-0.2
-1.2
1.8
0.6
66.7
-16.8
-16.7
-2.0
40.5
0.0
-1.5
Nedcor Diff Rbn
Rev-Ned
176.3
0.6
100.1
-3.1
60.0
1.8
6.2
0.8
10.0
1.1
6.9
-0.3
108.2
1.2
79.2
0.8
10.9
0.7
16.6
-0.2
1.5
0.0
8.9
0.5
1.6
-0.1
0.0
0.0
300.3
3.4
5.9
0.0
9.7
0.0
296.4
3.5
331.5
0.0
35.1
-3.5
2.9%
0.0
Deficit rises above 3%
10
% of gdp
9.1
9
8.3
8
7
6
5
5.1
4.5 4.6
4.5
3.8
4
3.2 3.1
3
2.3
2
2.6
2.8
2.0 2.0
1.5
1.2
1
06/07
05/06
04/05
03/04
02/03
01/02
00/01
99/00
98/99
97/98
96/97
95/96
94/95
93/94
92/93
91/92
0
Space created by lower interest bill
70
R'billion
As % of gdp
6.0
Current (Rbn)
As % of gdp
60
5.5
50
5.0
40
30
4.5
20
4.0
10
0
3.5
95
96
97
98
99
00
01
02
03
04
05
06
07
Fiscal discipline and lower inflation drive yields down
Long bond yield and inflation
22
14
20
12
18
10
8
16
6
14
4
12
2
10
0
8
-2
6
-4
Business cycles
Real long bond
CPIX
12yrJSE
4
-6
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
Debt as % gdp levels out
60
% of gdp
Domestic
Foreign
50
40
30
20
10
0
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Financing mix changes significantly
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
R billion
Net bonds
Pvt receipts
Net short-term
Net foreign loans
Change in cash
Extraordinary transfers
Deficit before borrowing
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
Fiscal policy assessment
Some positive aspects:
– Space has been created by reducing the interest rate bill:
• Lower interest rates (capital and money market) by reducing
debt and inflation and securing a better sovereign risk rating
– Spending was restricted until capacity and systems could be
put in place
– More emphasis now on capital spending – building the
economy’s capacity
– Job creation and poverty alleviation focus also good
– Appropriate that the fruits of fiscal discipline can now be
enjoyed
– Period of consolidation on taxation side is necessary
Fiscal policy assessment
Areas of caution:
– Potential problem if revenue disappoints due to weak
global situation and the reversal in the rand
– May help overstimulate some areas of the economy and
make it more difficult to keep within inflation targets
– Restructuring of state assets underemphasised
– Capacity to spend and delivery still in question
– Have to be careful not to reverse secular downtrend in
bond yields
Other issues
Extension of tax amnesty:
– Good as will increase the chances of a successful
exercise
Inflation targeting
– Easier to understand but may be more difficult to hit
– Good that targets kept the same – higher = higher interest
bill and lower = unnecessary strain on short-term
economic growth