Transcript Economic growth

The MTBPS and the SA economy
Facing down the challenges
Chris Hart
Economic Strategy Unit
Absa Capital
October 2006
The SA
economy
$/R
BoP
PPI
Trade
Balance
The
Business
Cycle
CPI
GDP
Demand
Interest
Rates
Inflation: Under pressure due to rand and oil
Pressure expected to ease by the end of the year
SA Inflation % average
PPI
CPIX
CPI
15.0
13.0
11.0
9.0
7.0
5.0
3.0
1.0
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
Jul-94
-3.0
Jan-94
-1.0
S.A.: lower inflation, higher growth
SA Economic Growth and Inflation: 1993 to 2004
GDP
6.0
1996
5.0
2005
4.0
2002
1994
2000
2004
3.0
2003
2001
2.0
1995
1997
1.0
1998
0.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
The first time since the early 1970’s. 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.
5
10.0 CPI
Economic
growth shift
Consumption
boom
Investment
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
The rand:
Current drivers
USD
Commodities
Longer-term
recovery
prospects
Macroeconomic
management
Precious metals
Growth
8
The region
Sub Saharan
Africa
End of cold war
Improvement of
governance
Demise of
Apartheid
Commodity
boom
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.
Summary of Prospects:
 Economic growth: could exceed expectations
 Economic conditions shift
 Refugees and entrepreneurs
 Southern Africa
The SA economic
challenges
Debt levels
Public Debt
~35% of GDP
Trend: downwards
External Debt
>20% of GDP
Household Debt
~70% of income
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
Consumption
Produces liabilities
Kinds of debt
.
Investment
Produces income
Economic
imbalances
Credit-led consumption
expenditure
Current account deficit
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.
Major economic challenges
Poverty &
unemployment
Capacity
Savings
Most important blemish of SA’s
economy
Constrained but too narrow. Needs
massive expansion to reduce
joblessness
Lack of savings is a major constraint
on sustainable growth. Places too
much reliance on FDI and credit.
Supply side
focus
The 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.
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
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
The MTBPS:
Meeting the challenges
Life expectancy: income does matter
Life Expectancy and Income
Life Expectancy
90
80
70
60
50
40
30
0
2500
5000
7500
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500 35000 37500
GNI per capita
Typical 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 antiretrovirals 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.
Social
impact
Need
Budget
GDP
growth
Social
spending
spiral
Tax
Investor
response
Economic
viability
Economic
cost
Financial center
Social spending
Needs investment and
policy support
Cost or contributor
Growing the
economy
Industrial Projects
Coega
Gautrain
Energy
Capital Equipment
Exchange Controls
Tax competitiveness
Energy
Capital Equipment
WTO Trade
Meeting consumption
needs
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South South cooperation
Region
SADEC, borders
and 2010
25
Questions and summary
Contact Details:
082 494 2258
[email protected]
The global
context
CRB 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.
Bank of
Japan
Tighten liquidity
Raise interest
rates
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.
USD 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.
Currency 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.