A Macroeconomic Perspective on the2009 National Budget Jac Laubscher

Group Economist 16 February 2009

Overall assessment

● A pragmatic response to a challenging economic environment over which SA has little control

● Taking counter-cyclical fiscal policy to the next level without abandoning fiscal discipline, but the strains are showing

● Balancing immediate needs with strategic thrust

● Confirming the national budget as the outcome of government policy in its entirety

● Reiterating the necessity of effective and efficient policy implementation

The global recession

Industrial production and merchandise trade

Source: IMF World Economic Outlook Update January 2009

SA manufacturing production collapsing

Global GDP growth

Source: IMF World Economic Outlook Update January 2009

Economic growth : SA vs. OECD

Source: I-Graph

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

-5

-3

-1

1

3

5

7%

OECD

SA

Real commodity prices

Source: IMF World Economic Outlook Update January 2009

Capital flows to emerging markets

Source: Institute for International Finance January 2009

International capital flow

Source: I-Graph

-29

-24

-19

-14

-9

-4

1

6

11

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

R'billion

Net foreign portfolio purchases

Fiscal balances

Source: IMF World Economic Outlook Update January 2009

Likely fiscal stimulus

% of GDP Expected growth

Brazil 0.2 1.8

Britain 1.1 -2.8

Canada 2.0 -1.2

China 6.0 6.7

France 0.4 -1.9

Germany 2.4 -2.5

India 0.5 5.1

Italy 0.5 -2.1

Japan 2.0 -2.6

Russia 1.1 -0.7

United States 5.8 -0.9

Source: The Economist, 31 January 2009; IMF Revised WEO, 28 January 2009

The downturn in the domestic economy

Economic growth: last 6 months on previous 6 months

Source : I-Graph

-4

-2

0

2

4

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

Household consumption expenditure

Source : I-Graph

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

2001 2002 2003 2004 2005 2006 2007 2008

%

-9

-4

1

6

11

%

Car sales (lhs)

Retail sales (rhs)

Private sector investment spending

Source : I-Graph

-10

-5

0

5

10

15

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

%

-25

-15

-5

5

15

25

35%

Private sector investment spending

Household consumption

SARB Leading indicator vs. GDP Growth

Source: I-Graph

-15

-10

-5

0

5

10

15

20

25

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

-5

-3

-1

1

3

5

7

9%

GDP Growth

Leading indicator

Outlook for interest rates

Source: I-Graph

2

4

6

8

10

12

14

16

18

20

22

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

%

Repo rate

CPIX inflation

Effective exchange rate of the rand

Source: I-Graph

50

75

100

125

150

175

200

225

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Index

70

80

90

100

110

120

130Index

Nominal (lhs)

Real (rhs)

Budget macro-economic projections

2008 2009 2010 2011

Oct 08

Feb 09

Oct 08

Feb 09

Oct 08

Feb 09

Oct 08

Feb 09

GDP (%)

3.7 3.1 3.0 1.2 4.0 3.0 4.3 4.0

CPI (%)

11.6 11.6 6.2 5.8 5.3 5.3 4.7 4.7

C/A (%)

-7.6 -8.1 -7.8 -6.3 -8.9 -6.9 -8.8 -6.9

Budget macro-economic projections 2

% p.a. 2008 2009 2010 2011

GDP 3.1 1.2 3.0 4.0

HCE 2.5 -0.2 1.9 3.2

GCE 4.5 4.0 4.0 4.0

GFCF 11.5 3.7 5.7 9.0

X 2.1 -1.4 3.3 4.9

M 3.2 -3.7 6.7 7.7

Revenue projections (R billion)

0100200300400500600700800900

2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Do’s of fiscal stimulus

● Increased investment spending

● Targeted transfer payments

● Temporary reduction in consumption tax rates

● Lump sum targeted tax rebates

● Temporary reduction in UIF contributions

Source: “Fiscal Policy for the Crisis”. IMF Staff Position Note. 29 December 2008

Don'ts of fiscal stimulus

● Large-scale new entitlement programs

● Increase in public sector wage bill

● Increased subsidies to specific industries

● Reduction in corporate tax rates, dividends and capital gains tax

● Amnesties/exemptions for troubled companies

● Tax distortions, e.g. increases in tariffs

● Bolstering financial markets and prices

Source: “Fiscal Policy for the Crisis”. IMF Staff Position Note. 29 December 2008

National budget balance (% of GDP)

Source: Medium Term Budget Policy Statement 2008

-4

-3

-2

-1

0

1

2

2007/08 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

SA fiscal stimulus in perspective% of GDP Expected growth

South Africa 2.6 1.2

Brazil 0.2 1.8

Britain 1.1 -2.8

Canada 2.0 -1.2

China 6.0 6.7

France 0.4 -1.9

Germany 2.4 -2.5

India 0.5 5.1

Italy 0.5 -2.1

Japan 2.0 -2.6

Russia 1.1 -0.7

United States 5.8 -0.9

Source: The Economist, 31 January 2009; IMF Revised WEO, 28 January 2009

Combined stimulus

● Fiscal policy: 2.6% of GDP

● Monetary policy: repo rate -4,5%?

● Exchange rate: nominal effective -42% from peak; real effective -26% from peak

Fiscal sustainability

● Primary balance turning negative

● Government savings turning negative

● Government expenditure/GDP ratio increasing

Primary budget balance (% of GDP)

Source: Medium Term Budget Policy Statement 2008

-2

-1

0

1

2

3

4

5

2007/08 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Net loan debt (% of GDP)

0

10

20

30

40

50

2000/01 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Source: Medium Term Budget Policy Statement 2008

State debt cost (% of GDP)

0

1

2

3

4

5

6

2000/01 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Source: Medium Term Budget Policy Statement 2008

Government bond yield vs. debt/GDP

Source: I-Graph

20

25

30

35

40

45

50

55

1994 1996 1998 2000 2002 2004 2006 2008

% of GDP

5

7

9

11

13

15

17

%

Government Debt/GDP

10 year yield

Current account vs. government savings

Source: I-Graph

-0.09

-0.07

-0.05

-0.03

-0.01

0.01

0.03

0.05

0.07

1964 1969 1974 1979 1984 1989 1994 1999 2004

% of GDP

Current account

Government savings

Government expenditure to GDP ratio

0

5

10

15

20

25

30

35

2002/03 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Source: Medium Term Budget Policy Statement 2008

Tax-to GDP ratio (% of GDP)

24

25

26

27

28

29

2000/01 2008/09 2009/10 2010/11 2011/12

2008 MTBPS 2009 Budget

Source: Medium Term Budget Policy Statement 2008

“Government is not the proximate cause of growth. That role falls to the private sector, to investment and entrepreneurship responding to price signals and market forces. But stable, honest, and effective government is critical in the long run. The remit of the government, for example, includes maintaining price stability and fiscal responsibility, both of which influence the risks and returns faced by private investors.”

“The Growth Report. Strategies for Sustained Growth and Inclusive Development” Commission on Growth and Development. 2008