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REPUBLIC OF SOUTH AFRICA

REPUBLIC OF SOUTH AFRICA . Investor Presentation. Presenter: Lungisa Fuzile | Director General, National Treasury | February 2012. Key highlights. Economy is recovering, supported by: favourable market backdrop for emerging markets robust domestic demand

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REPUBLIC OF SOUTH AFRICA

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  1. REPUBLIC OF SOUTH AFRICA Investor Presentation Presenter: Lungisa Fuzile | Director General, National Treasury | February 2012

  2. Key highlights • Economy is recovering, supported by: • favourable market backdrop for emerging markets • robust domestic demand • steadily improving public and private investment • accommodative monetary policy and counter-cyclical fiscal policy • redirection of exports to emerging markets, the East and Africa • Fiscal finances on a sound footing • budget deficit narrowing over the medium-term • shifting the composition of spending from current to investment expenditure • public sector borrowing to moderate over the medium-term • debt and debt service ratios to remain stable • debt sustainability a priority • External balance comfortably financed • slow growth reflected in narrow current account gap • capital flow adequately providing financing

  3. Table of contents • Slide 1) Global Macro Developments 4 2) South African Economic Performance 7 3) Public Finance 14 4) Monetary Policy 23 5) External Vulnerability 27 6)Conclusion 29

  4. 1. Global Macro Developments

  5. Europe to drag global growth, hints IMF • Global growth in 2012 revised down from 4.0% to 3.3% (IMF) • Slow growth in advanced economies • Euro area recession in 2012 as a result of sovereign debt crisis • fragile financial conditions • Robust expansion in emerging economies but below recent growth rates • Geopolitical risks are a threat to rising oil prices IMF growth projections Source: IMF

  6. Global manufacturing activity tentative Eurozone : Some silver lining could emerge USA: Signs of health evident China : Expansion slowing down UK : On a potential path to recovery Source: Bloomberg , SA National Treasury

  7. 2. South Africa Economic Performance

  8. The domestic economic outlook show signs of strength Macroeconomic growth forecasts, 2010 - 2014 • Domestic economy has proven resilient given the international backdrop • Growth is expected to reach 4.2% in 2014 • GDP recovery expected over medium-term, led by: • robust household consumption; • stronger public and private investment; and • accommodative fiscal and monetary policy Source: SA National Treasury

  9. Household consumption supportive of economic growth Household consumption recovering in line with disposable income Low interest rate supportive of household consumption Source: SA National Treasury Source: Bloomberg, SA National Treasury Household debt as % of disposable income continues to fall Strong growth in durable and semi durable goods Source: SARB Source: SARB

  10. Promising near-term outlook for manufacturing Growth in manufacturing output 2001 - 2011 • PMI maintaining above the 50 level, supported by: • strong business activity • new sales order • Increasing capacity utilisation-reflects strong demand pull • Growth in household consumption expenditure to see increased capacity utilisation in the coming quarters Manufacturing capacity utilisation 1996-2011 Source: Statistics SA

  11. Manufacturing to benefit from government support Growth in manufacturing output by sector, 2008-2011 • Manufacturing production increased by 2.5% during 2011. Supported by: • production of motor vehicle & parts; • basic iron and steel; and • petrochemicals • Manufacturing competitiveness enhancement programme will begin in 2012/13, • production support mechanism; • distressed funding support to boost productivity and competitiveness; and • raise investment and create jobs • R5.75 billion allocation to the programme over three years 1. Weights are based on Statistics South Africa 2005 Large Sample Survey 2. Second half of 2011 compared with first half of 2008 3. Quarter on quarter, seasonally adjusted and annualised Source: Statistics South Africa

  12. Gold production dragging mining performance • Real value added in mining grew by 2.9% during the first three quarters of 2011 compared to same period in 2010 • Commodity demand dependent on: • growth in China and other emerging markets. • recovery in global demand for PGMs (vehicle demand and production) Growth in mining output by sector,2008-2011 1. Second half of 2011 compared with first half of 2007 2. Quarter on quarter, seasonally adjusted and annualised Source: Statistics South Africa

  13. Shifting trade patterns Mapping South Africa’s exports,2011 • South Africa’s trade patterns have changed in response to global growth trends • Emerging Markets and SADC share in South Africa’s export basket is rising: • exports to China increased to 13% in 2011 (averaged 4.2% between 2005-2008) • SADC absorbed 10.5% of South Africa’s exports over the past year • share of exports to the European Union declined from 33% in 2005 to 21.6% in 2011 Region/Country Share of Exports (%) Main Products (%) Automobiles (26.1) Platinum (11.6) Rhodium( 5.9) Palladium (5.3) Purifying Machinery (11.4) Platinum (7.1) Coal (7.0) Automobiles (6.2) Aviation spirit (6.1) Iron & Steel (3.6) Electrical energy (2.1) Diesel trucks( 5.3) Iron ore(45.9) Coal (7.0) Chromium ores (10.9) Ferro-chromium (8.9) Platinum (37.5) Iron ore (11.8) Aluminium (4.8) Ferro-chromium (4.8) Source: SA National Treasury

  14. 3. Public Finance

  15. Consolidated government fiscal framework • Improvement of 0.7% in the budget balance from 5.5% at 2011 MTBPS as a result of: • revenue overruns • relatively slow growth in expenditure • Stabilisation of non-interest spending and higher revenue to reduce primary budget deficit from -1.6% in 2009/10 to -0.3% of GDP in 2014/15 • Shifting the composition of spending from current to investment expenditure Consolidated government fiscal framework, 2010/11 – 2014/15 Source: SA National Treasury Primary budget deficit to narrow significantly overthe medium-term Source: SA National Treasury

  16. Sustained infrastructure investment spending is critical • Capital investment in infrastructure projects set as the foundation of a national growth and development strategy • Public infrastructure spending over MTEF period totalling R844.5 billion • R3.2 trillion infrastructure projects under consideration. Projects to be subjected to rigorous assessment to determine feasibility Mega-projects under consideration,2012-2020 1.Ongoing programmes include multiple projects at different stages of development, such as universal access to electricity and school building program Source: SA National Treasury

  17. Major economic infrastructure projects • 1 415 MW of the 3 725 MW renewable energy programme has been procured • Kusile and Medupi are under construction – first units will be operational in 2013 and 2014 respectively Energy • SANRAL to spend R25 billion on new roads and R18 billion on maintenance • PRASA to spend R80 billion over 20 years on commuter rail Transport • The Komati water augmentation scheme scheduled to be completed in 2012 • Olifants river water resource scheduled to be completed in 2016 • R75 billion to be spent on water infrastructure over the MTEF • R433 million allocated to acid mine drainage Water & Sanitation • Sentech’s digitalization of the television terrestrial network • Infraco’s projects to increase broadband capacity Telecommunication

  18. Public sector borrowing requirement set to moderate over medium-term • The public sector borrowing requirement is projected to fall from 7.2% as a percentage of GDP in 2011/12 to 5.1% by 2014/15 • SOEs ability to collect internally generated funds has improved, putting less pressure on debt finance • lower municipal debt issuance • Borrowing of non-financial public enterprises to decline from 2.3% to 1.9% of GDP over the forecast period Public sector borrowing requirement Forecast to decrease from 7.2% to 5.1% Source: SA National Treasury

  19. Public debt sustainable over medium-term • Net loan debt forecasted to peak at around 38.5% of GDP in 2014/15 • Counter-cyclical fiscal stance led to increased borrowing to meet expenditure commitments • From 2013/14 onward, new government borrowing will finance investment spending Net loan debt stabilises at 38.5% of GDP 1. Forward estimates are based on projections of exchange and inflation rates 2. Net loan debt is calculated with due account of the cash balances of the National Revenue Fund (bank balances of government's accounts with the Reserve Bank and commercial banks) 3. Foreign currency deposits revaluated at forward estimates of exchange rates Source: National Treasury

  20. Strong interest in domestic bonds by non-residents Bond yields and cumulative net bond and equity purchases by non-residents, 2010 – 2012 • Wider interest rate differential fostering appetite for emerging markets assets • Despite global uncertainties, non-residents continued to purchase SA local currency bonds: • net bond purchases by non-residents reached R48 bn in 2011 (R56 bn in 2010) • robust demand sign of investors confidence in SA sovereign credit • Non-residents ownership more than double since 2008 reaching a record high of 29.1% Source: SA National Treasury Ownership of domestic government bonds , 2007 - 2011 Source: Share Transaction Totally Electronic LTD(Strate)

  21. Debt servicing requirement remains comfortable • Debt service costs as a share of GDP is expected to peak at 2.8% in 2013/14 ,declining moderately to 2.7% in 2014/15 due to: • moderation in expenditure growth • recovery in tax revenue • majority of debt service costs are denominated in local currency - as such reduced exposure to currency fluctuations • Declining debt service costs will make funds available for • productive investment • social infrastructure development Debt service cost as a per cent of revenue, expenditure and GDP Source: SA National Treasury

  22. Debt metrics highlight South Africa as a relatively low risk investment destination • Government debt-to-GDP ratio remains low relative to that of the developed world • It compares favourably to that of emerging markets peers • The budget framework endeavours to keep the debt ratio low to avoid crowding out non-interest expenditure Gross debt-to-GDP comparison (2011 estimates) Source: IMF World Economic Outlook, September 2011

  23. 4. Monetary Policy

  24. Cost push pressures driving inflation • Headline inflation driven largely by cost push pressures • Price of electricity has been an important driver of administered prices, as well as petrol prices • Headline inflation is expected to peak at 6.6% in 2Q:2012 and remain outside the upper end of the target range during 2012 • Core inflation is expected to peak around 5.5 % Headline & Core CPI (% change y/y) Source: SARB Administered prices (% change y/y) Source: SARB

  25. Inflation expectations still anchored • The overall wage settlement rate increased at a slower pace in 2011, but it is uncertain whether this is sustainable • Employment growth has surprised on the upside • Inflation expectations have increased moderately, and seem to be anchored around the upper end of the inflation target Wage settlements Source: Andrew Levy Employment Publications and Statistics South Africa BER Inflation expectations survey, annual averages Source: Bureau for Economic Research, University of Stellenbosch

  26. Subdued credit extension and supportive monetary policy Subdued credit extension, 12 month growth • Recovery in total loans and advances has been slow when measured in a historical context • Housing market is relatively weak, reflected by slow growth in mortgage advances • Economic growth forecasts have been revised lower and subject to global developments • Conflicting pressures on monetary policy make a stable repo rate more desirable Months after return to positive growth Months before return to positive growth Short and long-term interest rates Source: SARB

  27. 5. External Vulnerability

  28. External vulnerability reduced by positive balance of payments position Summary of the current account • Higher dividend payments to non-residents remains the key contributor to the current account deficit • Net services and income payments to the world account for 90% of the current account deficit • Portfolio inflows continue to be the primary funding source of the current account deficit Source: SARB Net capital inflows reduces balance of payments risks 1. Including unrecorded transactions Source: SARB, National Treasury

  29. 7. Conclusion

  30. Concluding thoughts • The macroeconomic landscape remains constraint, requiring continued policy accommodation • Continued focus on job creation, expansion in infrastructure investment and spending on social development • Fiscal and monetary policy cushioning South Africa from the global slowdown, and employment should continue to expand • Prudent fiscal management and automatic stabilisers ensure that the fiscal position should return to pre-crisis levels without requiring meaningful fiscal austerity • Low debt to GDP levels and total external debt remains low and manageable

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