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The SA Miracle.
Changes in Factor costs will help
the SA economy grow and help
sustain lower rates at the same
time.
Looking at the facts.
How SA has changed and
future developments.
• Changes in factor costs.
– Better & cheaper labour.
– Lower Inflation.
– Leads to cheaper capital costs.
• Brings further changes.
– Higher growth
– Higher profits.
– More Investment
– JOBS!
• The Road ahead.
GDP per person employed – 1998
GDP in international $ on PPP
basis.India
China
Philippines
Indonesia
Peru
Thailand
Brazil
Poland
Hungary
SA all
Mexico
Argentina
Chile
South Korea
Taiwan
SA Formal
Western
USA
0
10000
20000
30000
40000
Source: Angus Maddison & T-sec
50000
60000
GDP per person employed –
1998
In groups of countries.
50000
45000
40000
35000
30000
25000
20000
15000
10000
Developed
Average
SA Formal Emerging 22
SA all
Asia (excl
Jap,HK,Sing)
Annual Productivity growth from
1990 to 2000.
Latin America
Japan
World (unweighted)
Europe
USA
South East Asia
South Africa
0
1
2
3
Source: ILO, SA stats from SARB.
4
5
SA Productivity
improvement.
Getting better all the time.
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
70's
80's
90'
Decade so
far
Average
1970-current
Lower all the time.
Payments to employees as %
of GDP.
• This is the lowest
58
57
60's
56
70's
55
54
80's
53
90's
52
51
employee
compensation
2000's so
far
compensation that
employees have
received in the last five
decades.
• Employee factor costs
are 10% lower than in
the 1970’s.
• This is why people felt
“poorer” and perhaps
negative.
Recent results.
• Although SA productivity still lags
according to Proudfoot consulting, SA
has shown the best productivity
improvement since 2000 of nine
countries surveyed.
• World Bank confirms Harvard University
study of SA labour market being one of
the most flexible in the world today.
The Phases of the
structural change.
Lower Cost of Capital
Better productivity
Leads to lower inflation
Brings lower labour
costs for economy
There are still
problems.
• Skills shortage in some areas.
– Recent data indicates that nearly 30% of
graduates leave SA.
• While Strikes have declined they are still high.
• Government employment is high in both costs to
economy and numbers
• AIDS?
• SA lost one in five jobs over 12 years.
– This is the biggest destruction of employment
since the great depression.
Source: WCR, The Economy Today, Stats SA
SA employment numbers from
1967 (Reworked).
Turn around after job hammering?
8000000
7500000
7000000
6500000
6000000
5500000
5000000
4500000
Source: Stats SA SEE, Data splicing from SARB.
Jun-03
Jun-01
Jun-99
Jun-97
Jun-95
Jun-93
Jun-91
Jun-89
Jun-87
Jun-85
Jun-83
Jun-81
Jun-79
Jun-77
Jun-75
Jun-73
Jun-71
Jun-69
Jun-67
4000000
Long term trend in inflation is
down.
16
14
12
10
8
6
4
2
0
60's
70's
80's
90's
Decade sofar
Forecast
What actually drove inflation?
% change from end 1994 to end 2001
Nominal Unit labour costs 44.9%
CPI
54.7%
Import price of Big Mac
(Rand trade weighted)
169.5%
Administrative Prices
72.2%
CPI ex Administrative
42.1%
Source: T-sec, StatsSA
…pushing capital market yields lower
Since December 2000 - 10 year yield under
13%. Since February 2003 under 10%.
19
90
19 /01
90
19 /11
91
19 /09
92
19 /07
93
19 /05
94
19 /03
95
19 /01
95
19 /11
96
19 /09
97
19 /07
98
19 /05
99
20 /03
00
20 /01
00
/
O 11
ct
Au -01
gJu 02
nAp 03
r04
19
18
17
16
15
14
13
12
11
10
9
Source: SARB
Yield Spreads: SA 10 year all bonds
vs. US 10 year Treasuries.
14
13
12
11
10
9
8
7
6
5
4
Fe b- Aug- Fe b- Aug- Fe b- Aug- Fe b- Aug- Fe b- Aug- Fe b- Aug88
89
91
92
94
95
97
98
00
01
03
04
Source: BESSA and Morgan Stanley. T-sec for calculations
Short term rates are declining
too…
Average nominal prime rate per decade.
20
19
18
17
16
15
14
13
12
11
10
19.03
16.53
15.25
14.12
14
13
12.5
Eighties Ninieties 2000 plus Decade Average Previous 2000
forecast
from Forecast forecast
2004 on
Leading to overall lower
interest rates
• Prime rate now 11%. There is a 70%
chance that prime will fall to 10% or
lower in next cycle. (could average 11%
2nd half of the decade.)
– Average so far 14.1%
• Long term capital market rates
– Outlook: Broke 10% barrier and may stay
there for a short time. 8% is possible in the
medium term.
At the same time SA lowered
its debt.
Both government
and Private debt
are low in relation
to GDP.
Central Government debt to GDP - %
Italy
Belgium
Greece
Emerging
1st world
Germany
Spain
France
Portugal
Netherlands
Finland
SA
Ireland
USA
20
30
40
50
60
70
80
90
Source: OECD, FRB, SARB, IMF. 2002 or 2001.
100
110
120
…while SA Private sector debt as %
of GDP remains low
Brazil
Chile
SA
France
Spain
Thailand
Mayalsia
Norway
Japan
Germany
China
UK
USA
Hong Kong
30
50
70
90
110
130
Source: World Bank, FRB, BIS & SA Reserve Bank.
150
The Budget deficit as a % of GDP Better than ever.
0
-0.5
60s
70s
80s
90s
2001/05
-1
OECD
Ave
-1.5
-2
-2.5
-3
-3.5
-4
-4.5
-5
Deficit
Maastricht
Last year
This Year
Big Time Success
and the best long
term performance
ever!!!!!
Source: SARB; MTEF of Oct 2003.
Lower debt leads to…
• Better international ratings from S&P,
Moody's etc.
• More sustainable expenditure.
• Less demand side inflation.
• Less supply of bonds and therefore lower
interest rates.
Leading to a SUSTAINED
export boom
• Lower labour and capital costs
• Together with some lower transport costs.
• Must make SA firms much more
competitive.
• Must give us better exports and growth.
• Lets see
The pyramid for growth.
Higher
Growth
Makes economy
more competitive
Lower Factor Costs
and lower inflation
Exports and imports as % of GDP
2002 was the highest export to GDP ratio that
SA has ever had.
34
30
Exports
Imports
26
22
18
14
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: SARB except 2004 - T-sec forecast
Value added manufacturing
as % of total exports.
34
30
26
22
18
14
10
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 1- 2- 3- Jan90 91 92 93 94 95 96 97 98 99 00 Jan Jan Jan 04
Source: T-Sec. Manufacturing refers to non commodity manufacturing
and would exclude: steel, aluminum, gold, platinum.
SA value added exports as
a % of GDP over last five
decades
12
10
8
6
4
2
0
50's
60's
70's
80's
90's
Decade
sofar
Decade
Forecast
Source: SARS and TIPS. Value added exports excludes all commodities
and includes Business Services, Financial Services and Tourism.
Export Winners: Average annual
real growth in exports since 91 to
02.
Coke & petroleum
Radio, TV, Instruments, & clocks
Rubber products
Other transport equipment
Furniture
Machinery
Business services
Plastic products
Other chemicals
Motor vehicles, parts &
accessories
0
5
Basic Source: TIPS industrial data.
10
15
20
Long term GDP growth on the
up.
6
Did last six years actually already grow faster?
Average growth since
1950
GDP
5
4
3
2
1
fo
re
ca
st
D
ec
ad
e
A
dj
us
t
ed
?
r
so
fa
D
ec
ad
e
90
's
80
's
70
's
60
's
50
's
0
More on GDP.
• We are currently in the longest upswing on
record, now five years old!
• GDP has been underestimated.
– Manufacturing, retail, wholesale etc have all been
underestimated by at least 17%
– Hotels, land transport etc still have to be re-estimated.
– Air freight, financial sector, software etc not yet
adjusted but is likely to be bigger.
• This will make SA ratios such as Debt to GDP
seem better, plus would probably change our
GDP growth substantially since 98.
Phase three of the
structural change is
happening now.
More JOBS
Better profits
More Investment
Profits starting to show!
The SA economy has high profits.
Is this why SA firms can afford to buy first
world companies!!!!
Net Operating Surplus as % of GDP.
2002 Surplus the highest in 22 years. First time since 1965
that net operating surplus is over 30% for 2 years in a row.
34
Gold
Boom
32
30
28
Transition
26
phase
24
22
20
1960
1964
1968
1972
1976
1980
Source: SARB, T-sec
1984
1988
1992
1996
2000
Net operating surplus and
Gross fixed investment.
33
32
31
29
29
26
27
23
25
20
23
21
Net operating surplus
Gross fixed capital formation
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
17
14
Profits take time to turn
into investments.
• While fixed investment has started to
growth, it is still low.
• Profit growth can take up to a decade to
turn into investment growth.
• The main thing now is to realize that GDFI
is growing at about twice the GDP rate.
25.00
After Profits increase, so
investment increases and so
will employment. Gross fixed capital
formation
Employment
20.00
7.5
6
15.00
4.5
10.00
3
5.00
1.5
0.00
0
-1.5
-5.00
-10.00
-3
-15.00
-4.5
-20.00
-6
-25.00
-7.5
1/1970
3/1974
1/1979
3/1983
1/1988
Source: Stats SA and SARB.
3/1992
1/1997
3/2001
Local government is also
getting into the act.
25
20
Capital
expenditure
15
10
5
0
-5
-10
-15
2000
2002
2004e
One small problem:
The Rand
n1
97
Ju 9
l1
9
Ja 80
n1
98
Ju 2
l1
9
Ja 83
n1
98
Ju 5
l1
9
Ja 86
n1
98
Ju 8
l1
9
Ja 89
n1
99
Ju 1
l1
9
Ja 92
n1
99
Ju 4
l1
9
Ja 95
n1
99
Ju 7
l1
9
Ja 98
n2
00
Ju 0
l2
0
Ja 01
n2
00
3
Ja
Real trade weighted Rand performance:
% change year on year.
50
40
30
20
10
0
-10
-20
-30
-40
Real Rand Facts.
• Real Rand currently strongest in at least six
years!
– If Rand were to end year at R6,25 to dollar and R7,70
to Euro, Real Rand will be strongest level in at least a
decade.
– If Rand were to end year under R6 to dollar and under
R7,40 to the Euro Rand will be at strongest levels in
20 years,!
• We have not had real benefits from stronger rand
on inflation – in full.
– E.g. Car prices, telephone calls should all be at least
20% cheaper.
SA in world context.
• Broader export explosion than Japan in 1950
and 1960’s.
• Done without subsidies - 5% of GDP for most
of East Asia in 1970’s and 1980’s.
• More sustainable as adjustment process has
been greater than ANY other country over last
half century!
Overview of short term
forecasts.
• GDP growth of 3% in 2004 after 1,9% in 2003.
– Rest of decade seen at around 4% if world growth returns to
trend.
• Inflation of around 4.5% in 2004 after 6,8% in 2003.
Should stay at around 5% for rest of decade.
• Prime to average around 13% for decade.
– Long bond average around 9%?
• Unemployment to stay high for next five years.
• Real export growth should average around 7% (Slightly
lower now but could pick up if rand falls.)
Longer term forecasts.
• Higher Growth.
– Long term growth will increase.
• Sustainable lower inflation.
• Low interest rates will also be sustainable.
• SA growth more sustainable now.