Title: The MTBPS and the SA economy Facing down the challenges
1The MTBPS and the SA economyFacing down the
challenges
- Chris Hart
- Economic Strategy Unit
- Absa Capital
- October 2006
2The SA economy
3The Business Cycle
4Inflation Under pressure due to rand and oil
Pressure expected to ease by the end of the year
5S.A. lower inflation, higher growth
The first time since the early 1970s. The
favourable shift in the risk-reward profile will
help to attract investors over the longer term.
However, over the next year, the growth/inflation
profile may slip back below the line should the
rand not start to recover in the short term.
6Economic growth shift
Investment boom
Consumption boom
Strong profit generation, strong economic growth
and interest rate stability are expected to drive
the economy. The commodity boom and the
infrastructure rollout will be further drivers of
the economy. Consumers, business and government
all have considerable capacity to increase credit
levels. The growth cycle does not appear to have
reached the stage of diminishing returns, which
still suggests that there are a number of years
before exhaustion of the current
phase. Developments in the property market and
credit extension provide some evidence of this
shift taking place
7The rand Current drivers
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9The region
10Sub Saharan Africa
Commodity boom
End of cold war
Demise of Apartheid
Improvement of governance
Integration with the continent
Now starting to benefit
Sub Saharan Africa has developed into a growth
region, which holds numerous opportunities in
contrast to a few years ago where this was the
worst neighbourhood in the world.
11- Summary of Prospects
- Economic growth could exceed expectations
- Economic conditions shift
- Refugees and entrepreneurs
- Southern Africa
12The SA economic challenges
13Debt levels
Household Debt 70 of income
Public Debt 35 of GDP
External Debt gt20 of GDP
Trend downwards
Trend downwards
Trend upwards
Debt levels are not a problem in absolute and
relative terms. The trend in Household debt is a
problem but not one that interest rates alone can
resolve
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15Economic imbalances
Current account deficit
Credit-led consumption expenditure
High demand levels can be expected in an economy
undergoing structural transformation. Balance to
the economy will be restored when supply matches
demand. This can be achieved by suppressing
demand to match supply or by boosting supply to
meet demand. Suppressing demand to match supply
is the low growth option and will only prove to
be a band-aid solution the demand will manifest
itself sooner or later. The long term solution
(and high growth option) is to boost supply in
order to meet demand. This would involve a
combination and coordination of official and
private sector initiatives that make sense but
could prove to be politically difficult.
16Major economic challenges
Poverty unemployment
Most important blemish of SAs economy
Capacity
Constrained but too narrow. Needs massive
expansion to reduce joblessness
Savings
Lack of savings is a major constraint on
sustainable growth. Places too much reliance on
FDI and credit.
17Supply side focus
18The Current a/c and household expenditure
Household expenditure high but not wild
While the SARB has been warning households to
moderate expenditure and demand for credit,
household demand growth does not appear to be at
alarming levels. However, gross fixed capital
formation has been accelerating, which would be
one of the culprits behind the current account
deficit.
19- Fiscal measures
- Shift the tax burden onto consumption and away
from savings investment - Lower the overall tax burden back to below 25 of
GDP - Raise VAT, lower income taxes but design the
shift so that it transforms into savings - Shift a greater portion of income into pension
provision through tax incentives - Lower the CGT burden
- Monetary measures
- Aim to align real interest rates with major
trading partners - Selectively apply reserve requirements for
different debt categories - Selectively accommodate different debt categories
- Coordinate with the National Treasury but retain
independence - Aim for a strong currency
20- Regulatory measures
- Scrap exchange controls
- Abolish the dept of home affairs
- Red tape
- Apply a policing/complaints policy wrt regulatory
requirements - Revisit the skills export policy
- Infant industry regulatory exemption/dilution
support measures - BEE and AA
- Concentrate on regulatory failures rather than on
market failures
- Social measures
- Social grants
- Corporate Gini coefficient
- Land reform
21The MTBPS Meeting the challenges
22Life expectancy income does matter
23Typical B/S of Lower Skilled Workers
Age 30 40 50 60 65
Assets 135 286 422 604 716
Pension 73 154 267 424 523
Bond 37 85 74 46 22
Net 90 193 340 550 686
The shortened lifespan of the average South
African is a major economic drag. If
anti-retrovirals or improved health care can
extend the economically active lifespan by 10
years, the difference to families is substantial.
The social bottom line report could include an
approximation of the economic value added of an
HIV program.
24Social spending spiral
25- Exchange Controls
- Tax competitiveness
- Energy
- Capital Equipment
- Coega
- Gautrain
- Energy
- Capital Equipment
26Questions and summaryContact Details082 494
2258chrisha_at_absa.co.za
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28The global context
29CRB commodities index strong performance
expected after the global slowdown
Could come under some pressure over the next two
to three quarters due to slowing global economy
but primary upward trend could last for a further
15 years or more.
30Bank of Japan
Raise interest rates
Tighten liquidity
The Bank of Japan has been one of the biggest
sources of global liquidity. Recent indications
are that deflation will be officially over by the
second half of 2006 and this will signal the end
of the zero interest rate policy. The first step
in tightening monetary policy has been to
tightening liquidity and the first of a series of
tentative hikes has already been effected. This
development has negative implications for global
bond and equity markets. Tighter liquidity
conditions would also provide a headwind for all
deficit countries that have benefited from the
carry trade.
31USD bear market 2005 just a correction in a
10-year trend
Reserves rebalancing, lower growth and a turn in
the interest rate cycle to contribute to dollar
weakness. Uncertainty over policy direction of
the FED and mixed economic signals could result
in further dollar losses with the euro possibly
moving back to the 1,35 level reached at the end
of 2004. This could happen over the next two to
three months. A move below the 80 level on the
index could be a crisis trigger.
32Currency stress precious metal price divergence
from other commodities and the euro.
Growing investment demand, a drop in new mine
supplies and increasing Central Bank interest to
buy have been contributing factors. The
divergence between gold and the euro will
continue due to protracted problems in the US and
Eurozone. Gold is rising primarily for monetary
reasons.