Economic Analysis & Policy Implications in South Africa

1. Standing Committee on Finance Sector Analysis 02 July 2014 Esther Mohube

2. Structure of the presentation Sector analysis • Global economic developments • Developments in the SA economy • SA Policy pronouncements • What are the Implications?

3. Global economic developments

4. Global economic developments (cont.) • IMF Global economic prospects January 2014 • Economic activity improved & world trade strengthened in 2013 • Economic growth, 3 % in 2013 • Driven by export rebound in emerging market economies • IMF expected growth to increase from 3 % in 2013 - 3.7 % in 2014 & 3.9 % in 2015 • On account of recovery in advanced economies • SSA was expected to remain the fastest growing region • SA economyto grow at 2.8 % in 2014 & 3.3 % in 2015 • IMF Global economic prospects: April 2014 • Economic activity strengthened, expected to improve further in 2014 & 2015, supported by advanced economies • World GDP is expected to grow at 3.6 % (slightly revised by 0.1 percentage points) in 2014 & 3.9 % in 2015 (unchanged) • Key drivers include reduction in fiscal tightening, except in Japan and still highly accommodative monetary policy • SSA growth forecast to increase from 4.9 % in 2013 - 5.4 % in 2014 & 5.5 % in 2015 • SA economy expected to grow at a rate of 2.3 % in 2014 (revised down) & 2.7 % in 2015

5. Recent developments in the SA economy

6. Developments in the SA economy (cont.) • NT Economic growth prospects: February 2014 • Growth rate1.9 % in 2013 • NT projected GDP of 2.7 % in 2014 & 3.2 % in 2015; • Drivers of growth: • New power plants & transport infrastructure; • Stronger global recovery expected to support exports; • Growth in sub-Saharan Africa will promote expanded trade & investment. • Economic growth prospects: Post February 2014 • SA economy contracted by 0.6 % in first quarter of 2014 (mining & manufacturing sectors) • Analysts, IMF, World Bank, Rating agencies, SARB, BER reduced SA growth rates from December/January 2014 forecasts • The 2014 forecast revised down by 0.7 percentage points, on average • On average, SA economy forecast to grow at 2 % in 2014 & 2.9 % in 2015; • During the MTBPS period, NT will determine its latest forecasts • SA growth expected to be supported by stronger external demand

7. Developments in the SA economy (cont.) • Reasons for reduced growth forecasts • All analysts cited prolonged platinum strike activity as the main reason • Electricity supply constraints, • Deterioration of the SA growth outlook (Slow GDP growth) • Risks posed by strike action on the fiscal consolidation path • Other economic developments • Inflation rate expected to stay outside 3-6 % target range until 2015, currently 6.1 % April 2014 • Interest rates hiked by 50 b.p. in April 2014, likely to increase by 25 b.p. • Consumer spending environment constrained • Unemployment rate stoodat 25.2 % Q1 of 2014, from 24.1 % in Q3 of 2013 • Strike disputes in platinum mines have since been resolved as at June 2014 • What does that mean?? • Economic environment has changed, recovery had been slow, outlook may have deteriorated • SA economy continue to growth below potential, pointing to the economy’s susceptibility to shocks • Economy not creating sufficient jobs to absorb new entrants in the labour market • These factors may have implications for the fiscus.

8. What are the implications Fiscal Implications • Countercyclical fiscal policy response to global economic crisis resulted in large budget deficit • Deficit remained persistently high as revenue& growth forecasts were repeatedly revised downwards • Deficit was expected to narrow from 4 % of GDP in 2013/14 to 2.8 % of GDP in 2016/17; assuming the economic growth & revenue collection pick up pace • Increased cost of borrowingfor businesses & government; • Increased debt servicing costs, but net national debt expected to stabilise as a % of GDP in 2016/17 • Fiscal space has been eroded by rising debt.

9. SA policy pronouncements NDP, Budget Review, SONA • Government prioritised the accelerated implementation of the NDP • SONA acknowledged that the SA economy needs to grow at a faster rate, than the current rate of 1.9 % in 2013 • Measures to unlock economic growth potential include: • Roll-out the infrastructure programme • A wide range of job creation initiatives • SMMEs • Transformation of the energy sector • Partnerships & collaboration between labour, business and the community • Fiscal policy • In the Budget Review released in February 2014, Government remain committed to maintain fiscal sustainability & keep its debt within manageable levels • Fiscal consolidation path continues, the commitment to reduce the budget deficit remain

10. In Conclusion • SA economic outlook may have deteriorated, growth expected to be modest • Mining & manufacturing production sectors likely to continue to struggle • Scope for a Q2 growth rebound limited (strikes & consumer environment) • However: • Platinum strike has been resolved by June • Overall GDP growth likely to recover in the second half of the year • New electricity capacity could provide the positive supply side shock which could help growth • New ways to deal with labour market issues may assist • The current fiscal stance (modelled on growth forecasts of 2.7 % in 2014) may have to be revised. • Economic uncertainty remain a key risk to fiscal sustainability

11. THANK YOU Thank You