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Republic of South Africa Investor Presentation


Title: A SUMMURY OF THE BUGDGET PROCESS. Author: bronwen Last modified by: Louis de Villiers Created Date: 5/24/2010 8:09:56 AM Document presentation format – PowerPoint PPT presentation

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Title: Republic of South Africa Investor Presentation

Republic of South AfricaInvestor 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
  • Accommodative policies afforded by low inflation
  • 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
  • External vulnerability reduced by low external
  • Banking sector systemically sound

1. South Africa Macro Backdrop
Rebalancing of world demand favours South-South
Emerging market households final consumption
expenditure (FCE)
  • Structural shift in world demand underway as
    economic power shifts to emerging market
  • Rising EM intensity in South Africas export
  • 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)

Source World Bank
Emerging markets claim a greater share of SA
Greece, Ireland, Italy, Portugal and
Spain Source IMF
South Africa is part of a positive regional
growth story
World vs. Sub-Saharan Africa real GDP growth
  • What explains the SSA surge?
  • Favourable demographic developments
  • Improvements in the political environment
  • Pay-offs from better macroeconomic policies
  • Lower inflation and interest rates
  • Smaller budget deficits
  • Lower levels of sovereign debt
  • Benefits directly related to strong growth in
    developing economies

Source IMF
FDI flow into sub-Saharan Africa
The domestic economic outlook is positive
Strong demand from global trading partners for SA
  • 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

Source SARB
Macroeconomic growth forecasts, 2009 - 2013
  2009 2010 2011 2012 2013
Calendar year Actual  Estimate   Forecast  
Percentage change unless otherwise indicated  
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
GDP at current prices (R billion) 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
Source SA National Treasury
Low debt ratios support household and public
Private sector credit-to-GDP ratio EM
comparisons (2009/10)
  • 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

Average from 4Q09 3Q10 Source IMF
Government debt and funding requirement ratios
Source IMF
Healthy corporate profits potentially supportive
of investment and employment
Corporate profits and employment in trade- and
non-trade sectors
  • Corporate profitability improved in 2010 and
    employment prospects are firming
  • 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
  • Growth in capital imports is picking up
  • Real investment in productive capacity will
    foster higher economic activity.

Proxied by gross operating surplus. Source SARB
Progress in fixed capital formation underway
Nominal imports deflated by trade-weighted
exchange rate. Source Department of trade and
Industry (DTI), SARB
2. Monetary Policy and Prices
Monetary policy by no means excessively loose
Nominal policy rates
  • South Africas policy rate is at a 30-year low.
    Low rates are stimulating consumer spending
  • Real rates are positive, though still

Source Reuters Ecowin
Real policy rates
Source Reuters Ecowin
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 withsecond-round
    inflation pressures, which remain absent in
    non-food and energy inflation

Source Stats SA
Low core inflation justifies low policy rate
Source SARB, StatsSA
Room to absorb upside risk from food and fuel
The Economist Food Index vs. brent crude oil
  • 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
  • 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

Source Bloomberg
Core vs food and fuel inflation
Source Stats SA
3. Public Finance
New growth cycle encourages fiscal consolidation
Consolidated government fiscal framework, 2009/10
  • Fiscal discipline is critical to create scope for
    future countercyclical policy when the need
  • 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

  2009/10 2010/11 2011/12 2012/13 2013/14
Rbn Outcome Estimate Medium-term estimates  Medium-term estimates  Medium-term estimates 
Revenue 664.84 755 824.5 908.7 1017.2
of GDP 27.2 28.3 28.3 28.4 28.8
Expenditure 825.9 897.4 979.3 1061.6 1151.8
of GDP 33.8 33.6 33.6 33.2 32.6
Budget balance -161.076 -142.4 -154.8 -152.9 -134.6
of GDP -6.6 -5.3 -5.3 -4.8 -3.8
Nominal GDP 2442.6 2666.894 2914.9 3201.3 3536
Source SA National Treasury
Primary budget deficit projected to narrow
significantly over the medium term
Source SA National Treasury
Borrowing requirement reined in over medium term
Public sector borrowing requirement
  • 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 non-financial public
    enterprises as own revenue streams come on line
    once capital projects are completed and become

Source SA National Treasury
Fiscal debt sustainable over medium term
  • The countercyclical fiscal stance led to
    increased borrowing to meet expenditure
  • Fiscal sustainability will be guided by
  • 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
  • Setting a time-line to bring the budget back on
    target following large fiscal shocks

Net loan debt expected to stabilise at 40 of GDP
Source SA National Treasury
4. External Vulnerability
External vulnerability reduced by a positive
balance of payments position
Net capital and FDI inflows reduces balance of
payments risks
  • Portfolio inflows continue to fund the current
    account deficit. Recent FDI deals to improve
    balance of payments funding mix
  • 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

Source SARB, Bloomberg
Structure of current account deficit
Southern African Customs Union, comprising
Botswana, Lesotho, Namibia and Swaziland Source
South Africa benefiting handsomely from rising
interest in EM assets
Cumulative inflows into bond and equity markets
support rand
  • 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 Africas
    growth prospects and business-friendly policy
  • The recent revisions in South Africas credit
    rating outlook to stable confirm that external
    balance sheet dynamics remain manageable

Source Bloomberg
South African equity market outperforms the EM
asset class
Source Bloomberg
Reserves accumulation assist in reducing rand
Reserves accumulation assist in limiting rand
  • Coordinated fiscal and monetary policy response
    to building reserves have contributed to lowering
    rand volatility
  • Rising import cover assist in reducing external

Source Bloomberg, SARB
External Vulnerability Index
(Short-term external debt currently maturing
long-term external debt total non-resident
deposits over one year)/ Official foreign
exchange reserves Source Moodys Ratings Agency
5. Banking System Stability
Ample banking liquidity
  • 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)

Capital adequacy
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
Banking system remains systemically sound
  • 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

Robust primary issuance volumes in the local
capital markets
Source JSE
Credit spread of bank vs. public sector entities
Source JSE
6. Conclusion
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

7. Appendix
Public-sector infrastructure spending
  • R392.6bn (49) of spending by non-financial
    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

Major state-owned entities capital expenditure
programmes, 2009/10 2014/15
  2009/10 2010/11 2010/11 2011/12 2012/13 2013/14 2014/15
R billion Outcome Budget Revised Medium-term estimate Medium-term estimate Medium-term estimate Medium-term estimate
Total public sector capital expenditure 235.2 261.9 260.1 252.9 269.3 286.4 252.9
SOE capital expenditure 88.6 149.5 136.2 136.5 122.7 104.3 123.9
Of which    
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
Central Energy Fund 1.4 5.8 6.8 4.3 8.2 10.1 5.5
South African National Roads Agency Limited 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
Source SA National Treasury
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 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
Africas 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