PRESENTATION TO BUSINESS FORUM SOUTH AFRICA

Pravin Gordhan 30 August 2013

SECRET 2

Region / country 2012 2013 2014 2013 2014

Percentage

World 3.1 3.1 3.8 -0.2 -0.2

Advanced economies 1.2 1.2 2.1 -0.1 -0.2

US 2.2 1.7 2.7 -0.2 -0.2

Euro area -0.6 -0.6 0.9 -0.2 -0.1

UK 0.3 0.9 1.5 0.3 0.0

Japan 1.9 2.0 1.2 0.5 -0.3

Emerging markets and developing countries

4.9 5.0 5.4 -0.3 -0.3

Developing Asia 6.5 6.9 7.0 -0.3 -0.3

China 7.8 7.8 7.7 -0.3 -0.6

India 3.2 5.6 6.3 -0.2 -0.1

Sub-Saharan Africa 4.9 5.1 5.9 -0.4 -0.2

South Africa 2.5 2.0 2.9 -0.8 -0.4

Source: IMF WEO Update, July 2013

GDP projections Change from April 2013 WEO

Annual percentage change in GDP in selected regions/countries

• High levels of financial market volatility due to expectations of US monetary policy tightening (“tapering”)

• Global growth close to LR averages– Some acceleration

expected in 2014– Led by EU, UK

rebound– China growth still

“low” in 2014

• IMF growth forecasts revised lower– Growth

disappointments in EMs (especially China)

– Deeper than expected EU recession

– Higher than expected US fiscal drag

GLOBAL GROWTH OUTLOOK HAS CHANGED

• EU growth has begun to decline– ECB continues to try support growth (extended forward guidance in July) – but consensus on growth

remains limited – Fiscal drag, banking problems persist; lower growth in China could have negative feedback loop for

Germany; Italy’s appetite for fiscal reform may be waning

• Strong private growth in US dampened by fiscal tightening– 2014 and beyond growth looks reasonable– But tempered with expectations of monetary policy tightening

• Japan growth has picked up – Net exports risen thanks to yen depreciation– Consumption other major driver of growth

• So 2014 June consumption tax could cause growth shock

• Chinese growth faltering– Political leadership seeking more balanced growth, don’t want to encourage bubbles– Investment sustainability, bank NPLs, local gov’t debt levels

• Emerging market growth has begun to slow– Weak global trade, soft commodity prices– BRICS have led slowdown 3

UNDERSTANDING GROWTH DYNAMICS: THE THREE SPEED ECONOMY AS EMs DROP A GEAR

4

Growth supported by: - structural reforms - solid growth in Asia and Africa

Downside risks - weaker domestic demand - infrastructure bottlenecks - lower commodity prices - increased external vulnerability – capital outflows

In recession: - sluggish domestic demand especially in periphery countries - fiscal consolidation

Downside risks - slow implementation of the OMT - weaker growth in France and Germany - high unemployment

Growth supported by: - solid domestic demand - supportive housing and labour markets

Downside risks - fiscal consolidation

2000 2002 2004 2006 2008 2010 2012 2014-6

-4

-2

0

2

4

6

8

10

Euro AreaEmerging market and developing economiesUnited States

per

cent

THREE-SPEED GLOBAL RECOVERY: EU IN RECESSION; REBOUND IN US & GROWTH IN EMs

• Stronger US growth = tighter US monetary policy– Employment numbers have been improving– May: Bernanke signals policy will need to tighten

• According to Fed guidance:– QE programme likely to wind out by end 2014 (unemployment rate: 7.0%)– Rates likely to rise in H2 2015 (unemployment rate: 6.5%)

• Market moves since May reflect re-pricing of global risks– Market expects that by September 2013, Fed will begin to reduce its US$85bn per month bond

buying programme– This will cause prices for bonds to fall (yields to rise)– This makes EM bonds look relatively more expensive / unattractive– Driven sell-off in EM markets (esp. bonds)

5CONFIDENTIAL

This is compounding EM problems: slower growth domestically, slower trade globally, lower commodity pricesEM investors sold US$35.9bn of EM assets (bonds US$28.6bn)Total net sales / purchases of US mutual and pension fund investors of EM assets. Source: EPFR

UNDERSTANDING GROWTH DYNAMICS: THE DOUBLE-EDGED SWORD OF US MONETARY POLICY

• Varied drivers of EM slowdown:– “growth disappointments in major emerging market economies, reflecting, to varying degrees,

infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support” IMF July WEO update

• Brazil– Growth (already slowing as monetary policy normalised) hit by social unrest– Currency volatility, weakness – makes more hikes likely

• India– Global issues are now also beginning to impact - rupee very vulnerable; monetary policy

beginning to tighten in response– Politics also continue to create policy paralysis, domestic investment falling

• Russia– Demand for credit weakening, few reforms to help boost investment – even if monetary policy

loosens

• Turkey– Political turmoil; high current account deficits; tighter monetary policy to protect currency

6

EMs IN THE SPOTLIGHT

• GDP growth has decelerated steadily – from 7.9%YoY in Q42012 to 7.5%YoY in Q22013– IMF forecasts 7.7% in 2013; 7.8% in 2014

• Many market commentators see growth below that

• New government continues to emphasise reforms– Rebalancing from investment-led growth to consumption-based model. – Use reforms rather than stimulus to sustain growth

• Credit market is chief concern– China's debt: GDP ratio over 200%

• Higher than US / Europe• 50% pts higher in just 4 years

– Shadow banking chief concern– Lower credit growth could hit investment

• backbone of economic growth

7

Uncertainty will probably add to market volatilityAlthough concerns are valid in long term, not immediately apparent what will trigger “meltdown”Slower Chinese growth = lower commodity prices, slower but not collapsing African growth

THE UNRAVELLING OF CHINA?

• Africa– The IMF expects Sub-Saharan Africa to grow by 5.6 per cent in 2013 and 6.1 per cent

in 2014• Decline since April (-0.4%pts in 2013; -0.2%pts in 2014)

– Weaker commodity prices, weaker Chinese growth – also may be raising concerns about sustainability of fiscal issuance in recent months

– Political risks in more fragile states could be affected by lower global risk appetite

• Long term growth story remains in tact– Growing working population out of an estimated population of 1billion in 54 countries– More stable macro-economic environment, growing intra-regional trade, large scale

investments from many BRIC economies– Growth in extractive industries (mining, oil, gas) and opportunities in consumer goods,

and infrastructure/construction.

8

Summary for EMs:Looking ahead China & US forces should offset “–” and “+” impacts on EM growth However, financial market volatility will remain highCapital flows competition to rise – many budget and current account deficits need to be fundedDomestic fundamentals may help to secure longer term flows

EMs IN THE SPOTLIGHT

9

Global factors contributed to broad sell-off in emerging currencies since May

South Africa’s exchange rate movements have decoupled from general EM trends since mid 2012

… suggests the importance of local idiosyncratic factors (same for Brazilian real and Indian rupee)

Although a lot was priced into SA scenario – so hence relative resilience in July / August compared to other EMs where bad news is resulting in some “catch up”

Rand versus EM currency index – 2011-2013EM currency changes vs US dollar, 2013

EMERGING MARKET VULNERABILITY SINCE MAY EVIDENT IN CURRENCY MOVEMENTS

65

70

75

80

85

90

95

100

EM currency indexRand/dollar

• Growth outlook much weaker than during the Budget

– IMF forecasting growth of 2.0% in 2013 and 2.9% in 2014

• (0.8%pts and 0.4%pts lower than April)

• Despite the rebound in 2Q GDP, growth is likely to be subdued in H2:2013

– Rand weakness and volatility - Strike activity intensifying, uncertainty in the Middle-East, fears of Fed tapering

– CPI inflation rose to 6.3% y/y in July on higher petrol prices, private transport operation costs, electricity tariffs and municipal assessment rates

– Rising inflation, high debt levels and unemployment weigh on spending

• But major growth constraints remain:

– Power constraints remain a major blockage to growth

– Unemployment is stubbornly high at 25% and government continues to sustain employment growth

– Investment very weak – just 2.5% in Q1 – SOEs grew by 1.5%

10CONFIDENTIAL

IN SA SPECIFICALLY

ZAF

COL

RUS

MEX

CHL

IDN

BRZ

THA

TUR

IND

0 2 4 6 8 10 12

THA

BRZ

ZAF

MEX

RUS

CHL

IDN

COL

IND

TUR

0 2 4 6 8 10

BRZ

ZAF

TUR

RUS

MEX

IND

COL

CHL

IDN

THA

0 2 4 6 8

ZAF

BRZ

RUS

MEX

TUR

COL

CHL

IND

THA

IDN

0 2 4 6 8

MEX

TUR

THA

CHL

ZAF

BRZ

IDN

COL

RUS

IND

0 2 4 6 8 10 12

TUR

MEX

THA

CHL

COL

ZAF

BRZ

RUS

IDN

IND

0 2 4 6 8

RUS

MEX

TUR

THA

ZAF

CHL

BRZ

COL

IDN

IND

-8 -6 -4 -2 0 2 4 6

BRZ

THA

MEX

IDN

ZAF

CHL

COL

TUR

RUS

IND

0 2 4 6 8 10 12

11

2006 200920082007

2010 2011 2012 2013*

BRZ = Brazil, CHL = Chile, COL = Colombia, IND = India, IDN = Indonesia, MEX = Mexico, RUS = Russia, ZAF = South Africa, THA = Thailand, TUR = Turkey

SOUTH AFRICA GDP GROWTH FALLING BEHIND PEERS

2006 200920082007

2010 2011 2012 2013*

12

ZAF

TUR

COL

MEX

IND

BRZ

IDN

CHL

RUS

THA

-10 -5 0 5 10

ZAF

TUR

CHL

COL

IND

MEX

BRZ

IDN

THA

RUS

-8 -6 -4 -2 0 2 4 6 8

ZAF

TUR

COL

IND

BRZ

MEX

IDN

CHL

RUS

THA

-5 0 5 10

TUR

ZAF

COL

IND

MEX

THA

BRZ

IDN

CHL

RUS

-10 -5 0 5 10

TUR

IND

COL

ZAF

BRZ

MEX

IDN

CHL

THA

RUS

-8 -6 -4 -2 0 2 4 6

TUR

IND

ZAF

COL

BRZ

CHL

MEX

IDN

THA

RUS

-10 -5 0 5 10

ZAF

TUR

IND

CHL

COL

IDN

BRZ

MEX

THA

RUS

-8 -6 -4 -2 0 2 4 6

TUR

ZAF

IND

CHL

COL

IDN

BRZ

MEX

THA

RUS

-8 -6 -4 -2 0 2 4

Rising external vulnerability • Structural weaknesses • Near term risks • Medium term risks • Government response

CURRENT ACCOUNT BALANCE (% of GDP)

13

GDP growth rebounded in the second quarter – but underlying momentum remains weak

• Services sectors (excluding government) have been the chief contributor to growth (account for more that 40 per cent of GDP)

• Mining, manufacturing and agriculture are the main swing factors to GDP

-8

-6

-4

-2

0

2

4

6

8Agriculture Mining Manufacturing GovernmentServices (non-gov) Other industry Real GDP growth

pe

rce

nta

ge

po

ints

•Recovery in manufacturing sector was responsible for GDP acceleration in 1Q

•Primary sector was the main underperformer during the quarter

SA’S ACHIEVEMENTS SINCE 1994

• GDP growth: The South African economy has expanded by 83 per cent over the past 19 years.

• National income per capita has increased from R27 500 in 1993 to R38 500 in 2012 – an increase of 40 per cent. Disposable income per capita has increased by 43 per cent (just over 1.9 per cent a year).

SA’S ACHIEVEMENTS SINCE 1994

• Gross fixed capital formation increased from 15% of GDP in 1993 to an average of 20% over the past five years.

• While income inequality remains high, the expansion of the social grants system has contributed to a reduction in the proportion of households living in poverty.

SA’S ACHIEVEMENTS SINCE 1994

• Substantial progress has been made in the provision of basic services:– Housing: RDP housing programme has built over 3

million housing units– Social assistance: from 2.5 million to approximately

15 million recipients – Water services: percentage of households with access

to potable water has increased from 60% to over 90%– Access to electricity has increased from 50% of

households to 85%.

SA’S ACHIEVEMENTS SINCE 1994

• Over 1.6 million work opportunities were created in phase 1 of the Expanded Public Works Programme and the programme now aims to achieve over 500 000 fulltime employment opportunities.

• Stable public finances: from the fragmented public administrations of the apartheid era we have constructed a unitary state, nine provinces and a reconfigured municipal landscape; debt as a % of GDP has been reduced while doubling expenditure on public services in real terms.

SA’S ACHIEVEMENTS SINCE 1994

• A new tax administration system has been established in the SARS, and an overhaul and modernisation of the tax structure has allowed lower rates of company tax to be phased in together with broadening of the tax base.

• South Africa’s financial sector remains robust and healthy, with strong growth in turnover on the JSE stock exchange, highly liquid capital markets and a well regulated banking and financial services industries.

SA’S ACHIEVEMENTS SINCE 1994

• Transformation of ownership and management is under way through an orderly process governed by law and agreements between stakeholders.

• Over R600 billion in BEE transactions have been recorded since 1995;

• black people and women in senior management has increased from less than 10% in the 1990s to over 40% today – more progress is needed, but the trend is in the right direction.

• Dynamic growth in telecommunications has transformed the way people communicate with each other, and there is steady progress in internet access.

SA’S ACHIEVEMENTS SINCE 1994

• In hosting the 2010 FIFA World Cup we have demonstrated our capacity to manage major events and undertake large construction projects in record time;

• other major infrastructure projects include our partnership with Lesotho in building the Lesotho Highlands Water Project,

• completion of the Gautrain rapid rail project, • expansion and rehabilitation of our main airports, major

national road improvements and the expansion of power generation capacity and rail transport capacity that is now in progress.

• The total value of infrastructure projects currently under way and in planning amounts to over R3.6 trillion.

SA’S ACHIEVEMENTS SINCE 1994

• We have initiated one of the largest renewable energy programmes in the world, bringing private sector capacity and new technologies into improving long term energy security and contributing to environmental sustainability.

• While the corporate conglomerates of the old South Africa have largely been dismantled, new and dynamic South African companies are making their mark on the global and regional front

SA’S ACHIEVEMENTS SINCE 1994

• SA mining and construction companies are contributing to Africa’s development

• Telecommunications companies are major players in many other countries, our retail and logistics companies are growing in significance in Africa’s trade and development.

• SA is playing its part in reconfiguring global economic arrangements, through participation in the IMF and World Bank, the G20, the Financial Stability Forum, the WTO and more recently in partnership with the BRICS countries.

SA’S ACHIEVEMENTS SINCE 1994

CABINET DECISIONSReignite inclusive growth

• REIGNITING ECONOMIC GROWTH• Cabinet recognised that the South African

economy can no longer rely heavily on the global economy to reignite growth and create jobs. The focus of government, business and labour must be on accelerated implementation of domestic plans to grow the economy in an inclusive way and create jobs, as well as seizing opportunities in the region.

• In this regard, Cabinet decided, among other things, to:

CABINET LEKGOTLA DECISIONS

• 2.1 Act immediately and take steps to resolve the energy constraint by:

• Starting the process towards building Coal 3 while working with relevant stakeholders to speed up co-generation;

• Finalising the process of authorising shale gas exploration in a responsible and environmentally friendly manner;

• Taking steps to encourage projects to enhance regional hydro-power capacity and enter into carefully considered contracts to import energy from the region.

• Improve the regulatory environment through, for example, streamlining licence approvals for water, mining and environmental impact assessments with the view of shortening the approval times.

• Strengthen industrial programmes, including mineral beneficiation projects in the platinum, titanium, iron and steel sectors.

ACT IMMEDIATELY

• Accelerate various infrastructure programmes: National Treasury and relevant departments will work with the Presidential Infrastructure Coordinating Commission to unblock procurement processes in infrastructure projects. This will cover priorities in education, health, transport, public works and human settlements.

• Stimulate agriculture and agro-processing for the benefit of rural development and job creation by finalising the Agricultural Policy Action Plan in partnership with the sector by the end of next month, September 2013.

• Upscale youth and public employment schemes through a new phase of the Extended Public Works Programme and expansion of the Community Work Programme. This will include implementation of youth employment incentives and the employment tax incentive for Special Economic Zones.

ACT IMMEDIATELY

• Stabilise the mining sector by supporting the Framework Agreement for a Sustainable Mining Industry as led by the Deputy President. Government will continue implementing its key commitments under the Framework to help stabilise the industry.

• Improve support to small businesses by, among other things, creating a one-stop shop and portal for SMME’s. This will start with the alignment of SMME programmes across all government spheres and departments and will be launched by the end of this year.

• Ministers leading Outcome 4 – Decent Employment Through Inclusive Growth will prepare an action plan to give effect to the aforementioned proposals by September this year. These implementation plans will see government acting on key elements of the National Development Plan as part of speeding up implementation of Vision 2030.

ACT IMMEDIATELY

• Symbiotic relationship between government and business, specifically focusing on – NDP,– Infrastructure and – Job creation

WE HAVE MADE A DIFFERENCE…!

• SYMBIOTIC• INTERDEPENDENT• SYNERGISTIC• CONTRADICTIONS / CONSTRUCTIVE TENSION• GOVERNMENT AS AN ENABLER, SUPPORTER, OF BUSINESS• REPRESENTS NATIONAL INTEREST, BALANCED ACTION • GOVERNMENT AS “REGULATOR” - EXCESSES• THE EXCLUDED……

• How the public and private sectors can work more closely together?

GOVERNMENT and BUSINESS?

• South Africans focus too intensely on what is bad, Archbishop Emeritus Desmond Tutu said last Wednesday.

• "Yes, the state of our political firmament, and the lawlessness, cannot be ignored," he said in a speech at Lead SA's third anniversary.

• "But my heart soared on Saturday where we witnessed ecstatic Bafana Bafana supporters giving the Springboks such a rousing welcome. And the Springboks bore the word, 'unite' on their sleeves."

• Anyone who imagined this scene in the 1980s would have been accused of hallucinating, if not terrorism, and would have been taken to an asylum or prison, Tutu said.

ARCHBISHOP EMERITUS TUTU

"Strong societies have strong civil societies, with citizens who are active and engaged,

who, through their active engagement, have earned the right to hold their

leadership to account."

ARCHBISHOP EMERITUS TUTU