The SA Economy 2012: Managing Crises or Unlocking Golden Opportunities Presentation for:

The SA Economy 2012:Managing Crises or Unlocking Golden Opportunities

Presentation for:

Cape Town Press Club

21 February 2012

By

Dr Iraj AbedianPan-African Investment & Research Services (Pty) Ltd.

Slide # 2

Outline

1. Stylized Facts of the SA Political Economy

2. Assessing the Fiscal Framework

3. Conditions for Unlocking the Golden Opportunities

4. Concluding Remarks

Stylized Facts of SA Political Economy

Slide # 4

Average GDP growth: SA vs. Peer Countries (2000-2010)

South Africa’s average growth has been lower than that of its peer countries

Source: IMF & Respective Statistical Bureaus

Slide # 5

South Africa’s GDP Outdone by the BRIC Countries

Source: IMF, RMB FICC Research, August 2011

Slide # 6

Unemployment –Global Comparison

Slide # 7

Public Backlog Needs Decade-long Attention

Source: DBSA Barometer, 2008

Slide # 8

Rand Foreign Exchange Volatility

Peer Group Countries:ArgentinaTurkeyHungaryChilePolandMalaysiaPhilippinesMexicoIsraelUkraineKoreaIndonesiaRussiaBrazilPeruColombiaThailand

South Africa’s Eroding Global Competitiveness

Slide # 10

Administered Prices: 2000-2011

High administered prices, in particular the negative impact of the ongoing surge in electricity prices, deplete South Africa’s

competitiveness

Source: IMF & Respective Statistical Bureaus

India: Fuel, Power, Light and Lubricants (2000-2009)Brazil: ElectricityChina: ElectricityRussia: Public UtilitiesSouth Africa: Electricity

Slide # 11

Global Competitiveness Index

Source: World Economic Forum, Competitiveness Report 2011/12

Slide # 12

De-IndustrialisationDeclining Manufacturing Output and Contribution to GDP

Source: SARB & PAIRS

Contraction due toApartheid policies

Expansion due to

democracy

Contraction due to

poor macro policies

Slide # 13

Policy Environment: Manufacturing Employment

IPAPIPAP 2

NGP

IPAP 1

Slide # 14

Most Problematic Factors for Doing Business in South Africa


Assessing SA’s Fiscal Framework

Slide # 16

Financial , Economic and Effectiveness Assessment of the Fiscal Framework

1. Financial Criteria: Deficit/GDP Ratio, Debt/GDP Ratio

Financial Sustainability Condition:

Rate of Debt Service Changes <= Rate of GDP Growth (Tax Revenue)2. Economic Criteria:

a) Financial Sustainability Conditionb) State of Economic Infrastructure Needed for Sustainable Growth.

3. Effectiveness Criteria

Slide # 17

SA Government Debt as % of GDP

Forecast – 2011 -2014 Source: SARB

Slide # 18

SA Public Debt in Global Context :

Slide # 19

Public Sector Finances at a Glance

Source: National Treasury

2010/11 2011/12 2012/13 2013/14 2014/15

R billion Outcome Estimate Medium-term estimates

Revenue 758.4 814.2 890.0 994.5 1113.0

Percentage of GDP 27.6 27.3 27.0 27.3 27.7

Expenditure 885.8 978.8 1062.3 1157.4 1247.0

Percentage of GDP 32.2 32.9 32.2 31.8 31.0

Budget balance -127.4 -164.6 -172.3 -162.9 -134.1

Percentage of GDP -4.6 -5.5 -5.2 -4.5 -3.3

Real GDP growth (%) 2.8 3.1 3.4 4.1 4.3

GDP at current prices 2 664.3 2 931.8 3 208.2 3 555.0 3 930.5

Slide # 20

Effectiveness Assessment of the Fiscal Framework

1. Overall effectiveness of fiscal expenditure is poor- at best.

2. The level of abuse and corruption is way too high. a) Over R5 billion is under formal investigation!b) Chronic annual audit qualification is the norm!c) Four Provinces are subject to Section C100d) The majority of municipalities are dysfunctional and

financially stressed due to abuse and incompetence.3. The spirit and the skills needed for managing for

effectiveness are lacking.Note: Fixing this is a pre-condition for poverty alleviation

and social development.

Slide # 21

The upshot……………..

1. Financial Criteria: SA is doing fine subject to cyclical changes

2. Economic Criteria: SA has a considerable and unsustainable deficit, unfunded and largely neglected.

3. Effectiveness Criteria: SA is facing a dangerous deficit! This is a real challenge, if not a crisis, of fiscal efficacy! For social development this is a pre-requisite.

Unlocking The Economy’s

Golden Opportunities :

Slide # 23

Unlocking SA’s Economic Potential

Key Sources of SA’s Growth and Job Creation Potential:

1. An integrated mineral beneficiation strategy;

2. A re-industrialisation policy;

3. An effective regional integration strategy.

Slide # 24

Urbanisation Fuelling Demand of Commodities in the BRIC and elsewhere…..

Source: Standard Bank Research

Slide # 25

Mineral Beneficiation – A Narrow Perspective

Source: PAIRS

Mining &Production

of Ore

Mining &Production

of Ore

Conversion of ore into bulk tonnage

intermediate goods

(e.g. metals

and alloys)

Conversion of ore into bulk tonnage

intermediate goods

(e.g. metals

and alloys)

Conversion of the

intermediate goods

into a refined product

for use by small and sophistica

ted Industries

Conversion of the

intermediate goods

into a refined product

for use by small and sophistica

ted Industries

Slide # 26

Beneficiation Value Chain

Source: PAIRS

Supply chain

industries providing

equipment and

services to the mining

sector

Supply chain

industries providing

equipment and

services to the mining

sector

Extraction and mining activities including

processing

Extraction and mining activities including

processing

Industrial application

s, utilization

and downstream activities

Industrial application

s, utilization

and downstream activities

Related industries

& multiplier effects

Related industries

& multiplier effects

Slide # 27

Core vs Integrated Mineral Beneficiation

Source: PAIRS

Mineral beneficiation

&

Re-industrialisation

are inseparable....

A significant business reality:

An Econometric Illustration…

At present, SA enjoys a golden opportunity for the second wave of re-industrialisation with significant and

meaningful political economy benefits....

Slide # 30

3.4% growth over 10 years

(baseline scenario)

10% growth over 10 years(sustainable

scenario)

Change from baseline to sustainable scenario

Output R184 billion R537 billion 191.85%

Employment 158,000 454,000 187.34%

Investment R116 billion R339 billion 192.24%

Household consumption

R136 billion R398 billion 192.65%

Real wages R61 billion R177 billion 190.16%

Fiscal revenue R62 billion R182 billion 193.55%

Exports R52 billion R151 billion 190.38%

Imports R102 billion R297 billion 191.18%

Exchange rate (R/$) -1.43% -4.08% 185.31%

Consumer inflation -0.58% -1.66% 186.21%

10-year cumulative effects of the economy-wide 10-year cumulative effects of the economy-wide impact of an increase in manufacturing outputimpact of an increase in manufacturing output

Source: PAIRS

Slide # 31

Employment effects (no. of jobs)Employment effects (no. of jobs)

3.4% growth over 10 years

(baseline scenario)

10% growth over 10 years(sustainable

scenario)

Change from baseline to sustainable scenario

Manufacturing 61,000 173,000 183.61%

Mining 8,700 25,300 190.80%

Agriculture 2,500 7,100 184.00%

Wholesale & retail trade 39,800 112,400 182.41%

Finance 16,600 47,500 186.14%

Construction 4,300 12,500 190.70%

Transport & Communication 2,800 8,200 192.86%

Electricity 7,400 21,800 194.59%

Source: PAIRS

Slide # 32

First things First: some necessary urgent steps.....

To unlock the potential:

a. Professionalization/De-politicization of the key technocratic layer of the pubic sector and its SOEs as well as state agencies.

b. A radical reform of the education and human resources development paradigm, even if this entails a ‘terminal tax compact’

c. Re-industrialisation policy based on an integrated mineral beneficiation strategy.

d. An active African integration policy, especially for Sub-Saharan Africa.

Slide # 33

Concluding Remarks

In 2012, South Africa finds itself at a cross-road again;

Key capabilities are built over the past 15 years, Major fault-lines remain and need urgent

attention;The solutions require a heavy mix of political

and technical inputs.The speed with which we respond to the urgent

issues will define the trajectory and the pace of the country’s democratization process and global standing over the next decade.

Slide # 34

Concluding Remarks

Slide # 35

Thank you for your attention

[email protected] Tel: 011 883 8036/7Fax: 011 883 8038

Slide # 36

Global Competitiveness: Global Competitive Index

South Africa is falling in its relative competitiveness.

Slide # 37



Labour market

efficiencyRank/142

Financial market &

developmentRank/142

Technological readinessRank/142

Market sizeRank/142

Business sophistication

Rank/142

InnovationRank/142

Brazil 83 43 54 10 31 44

Russia 65 127 68 8 114 71

India 81 21 93 3 43 38

China 36 48 77 2 37 29

South Africa

95 4 76 25 38 41

Slide # 38



GCI 2011-12

Rank/142GCI2010-11

Rank/139Basic

RequirementsEfficiency enhancers

Innovation & sophistication

factors

Brazil 53 58 83 41 35

Russia 66 63 63 55 97

India 56 51 91 37 40

China 26 27 30 26 31

South Africa

50 54 85 38 39

Slide # 39



InstitutionsRank/142

InfrastructureRank/142

Macro-economic

environmentRank/142

Health and primary

educationRank/142

Higher education &

TrainingRank/142

Goods market

efficiencyRank/142

Brazil 77 64 115 87 57 113

Russia 128 48 44 68 52 128

India 69 89 105 101 87 70

China 48 44 10 32 85 45

South Africa

46 62 55 131 73 32

Slide # 40

Reserves lower than IMF Adequacy Range More Accumulation May Be Needed…

Source: Country Authorities & IMF staff estimates

Slide # 41

Skills ShortageOverall poor ranking in Basic Education


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The SA Economy 2012: Managing Crises or Unlocking Golden Opportunities Presentation for: