Transcript Slide 1 - Amazon Web Services

The 2006 national budget in a
macro-economic context
Jac Laubscher
Group Economist
7 March 2006
In a nutshell
• “The fiscal stance offsets the impact
of the commodity price cycle and
robust consumption spending on the
current account deficit”.
- Budget Review 2006
Agenda
• A remarkable year…
• …but policymakers are changing
their tune…
• …because not everything is fine…
• …and it is time to manage the risks
carefully…
• …requiring an anti-cyclical fiscal
policy…
Agenda
• A remarkable year…
Credit ratings upgraded
S&P
Q3 02
Q3 03
Q3 04
Q3 05
China
BBB
BBB
BBB+
A-
Malaysia
BBB
BBB+
A-
A-
Tunisia
BBB
BBB
BBB
BBB
Mexico
BBB-
BBB-
BBB-
BBB
Thailand
BBB-
BBB-
BBB
BBB+
SA
BBB-
BBB
BBB
BBB+
BB
BB
BB-
Phil’pines BB+
Agenda
• A remarkable year…
• …but policymakers are changing
their tune…
Policymakers changing their tune…
“Our recent growth although welcome has
been unbalanced and based on strong
commodity prices, strong capital inflows
and strong domestic consumer demand,
which has increased imports and
strengthened the currency way beyond
desirable levels”.
- Deputy-president Phumzile MlamboNgquka, 6 February 2006
Policymakers changing their tune…
“Commodity prices may stay high for
another year, perhaps several years,
but one day they will retreat”.
- Minister of Finance, Trevor
Manuel, 15 February 2006
Policymakers changing their tune…
“…we cannot assume that global
circumstances will always work in our
favour. As has happened several times in
the past decade, financial flows could
swing away from emerging markets, and
these enormous shifts in global money
cannot be predicted”.
- Minister of Finance, Trevor Manuel, 15
February 2006
Agenda
• A remarkable year…
• …but policymakers are changing
their tune…
• …because not everything is fine…
Household savings rate lowest since 1952
%
15
13
11
9
7
5
3
1
-1
-3
'46
'51
'56
'61
'66
'71
'76
'81
'86
'91
'96
'01
'06
Household debt highest ever
65
63
1600
Household debt
Debt service
61
59
1400
1200
57
55
1000
53
800
51
49
600
47
45
400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
National savings rate lowest since 1949
%
32
27
22
17
12
7
'46
'51
'56
'61
'66
'71
'76
'81
'86
'91
'96
'01
'06
Agenda
• A remarkable year…
• …but policymakers are changing
their tune…
• …because not everything is fine…
• …and it is time to manage the risks
carefully…
Composition of capital flow to SA
%
2003
2004
-6.9
2005
H1
12.4
2005
Q1-3
45.5
Direct
1.5
Portfolio
9.8
40.5
65.7
48.3
Other
49.7
32.8
29.8
-12.9
Unrecorde
d
39.0
33.6
-7.9
19.1
Total
100
100
100
100
Emerging market spread vs. fed
funds rate
basis points
%
7.5
EMBI spread (lhs)
1380
Federal Funds (rhs)
1180
6.5
5.5
980
4.5
780
3.5
580
2.5
380
1.5
180
0.5
1999
2000
2001
2002
2003
2004
2005
2006
Current account balances
% of GDP
2005E
2006E
Asia
3.4
2.9
EEMEA
-0.9
-2.0
LATAM
0.3
0.2
Emerging markets
1.6
0.9
South Africa
-4.0
-4.5
JSE vs. emerging markets
235
JSE All Share
JSE Fin. & Ind.
Emerging Markets
210
185
160
135
110
85
60
2001
2002
2003
2004
2005
The fundamental question…
• What part of the boom conditions
can be attributed to structural
improvement and therefore be
expected to hold?
• What part is due to a strong cyclical
upswing that is bound to turn around
one day?
Agenda
• A remarkable year…
• …but policymakers are changing
their tune…
• …because not everything is fine…
• …and it is time to manage the risks
carefully…
• …requiring an anti-cyclical fiscal
policy…
Policymakers changing their tune…
“Our task, as government, as households,
as the business sector, is to turn the
opportunities before us into lasting
progress, to translate the resource gains
of an economic upswing into real
investment in productive capacity. To
moderate our consumption tendency, to
broaden and diversify economic activity”.
- Minister of Finance, Trevor Manuel, 15
February 2006
Change in fiscal stance
• Revenue overrun largely sterilised,
enabling currency intervention
• Government expenditure as budgeted in
MTBPS (deliberate or because of lack of
capacity?)
• Real growth in government expenditure to
slow down
• Deficit, borrowing requirement and debt
ratios reduced, supporting investment
spending by other institutions
Change in fiscal stance
• Budgeted revenue for 2006/07 probably
again underestimated, deficit
overestimated
• Tax relief skewed towards households,
favouring lower income groups
• Marginal relief for SME’s
• Withdrawal of RSC levies welcome
• Halving of tax on retirement funds
welcome
Change in fiscal stance
• Budget still expansionary, but less so
• Ample room created for future
expansionary policy if needed
• Proper debate on company tax
regime required
• Increasing tax burden needs
consideration
• Government dissaving taking too
long to address
Policymakers change their tune…
“Two particular frontiers loom large
in the period ahead: the challenge of
investment, and the challenge of
skills”.
- Minister of Finance, Trevor
Manuel, 15 February 2006
The infrastructure challenge
• In past twelve years…
 GDP increased 47% (if ASGI
successful, another 70% in next ten
years)
 4,5 million new vehicles were put on
our roads
 international trade increased 90%