Transcript The South African Economy in a Nutshell.ppt

The South African Economy
in a Nutshell
Presented by:
Dawie Roodt
22 May 2008
In This Presentation:
1.
2.
3.
4.
5.
6.
7.
8.
Global Factors to Consider: US Subprime Crisis
Economic Overview
Monetary Policy
Eskom
Fiscal Policy
State Expenditure Analysis
Public Sector Financial Discipline (?)
Asset Allocation
Subprime, Say Wha’ ??
• Subprime definition:
– A loan that is offered at a rate above prime
(0.1% - 0.6% higher) to individuals who do not
qualify for prime rate loans.
•
•
•
•
A.k.a “NINJA” loans
Improved Borrowing Power
Decline in Lending Standards
Large-scale lending and borrowing
U.S. Borrowing Power
-39.4%
Source: T2 Partners LLC, March 2008
Decline in Lending Standards
Since 2001:
Between 1995 and 2006
– Combined Loan to Value increased from
Total
79.8%
toValue
89.1%of Subprime Loans
Increased
– 100% Financing more than Tripled
15 times!!
($40 bn to $600bn)
– “Liar’s Loans” almost Doubled
Source: T2 Partners LLC, March 2008
Fed Funds Rate – A Matter of
Interest
Federal Funds Rate
6.5
5.5
4.5
3.5
2.5
Subprime Lending
1.5
0.5
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Federal Funds Rate
Jan-06
Jan-07
Poppo Strikes The Fan
• Dec 2004:
interest rates hiked 125%
from 1% to 2.25%
•
•
•
•
Continuously hiked till 5.25% (Jun 06 to Aug 07)
Borrowers start to default..
Banks and Securities firms report losses
Total losses are estimated +/- $900bn losses
(est) –
– Nearly FOUR times the SA’s economy!!
Fed’s Rescue Plans
• Dramatic cuts in interest rates start:
5.25% (Sept 07) to 2.25% (Mar 08)
• $200bn Securities for Mortgage Loans
• $168bn Fiscal Injection
• Lender of Last Resort
• Orchestrate buy-out of Bear Sterns by JP
Morgan Chase
• Major Regulation Overhaul: Fed gains
more oversight responsibility
Fed Funds Rate – A matter of
Interest
Federal Funds Rate
6.5
5.5
4.5
3.5
2.5
Subprime Lending
1.5
0.5
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Federal Funds Rate
Jan-06
Jan-07
Jan-08
Dow Jones – Jan 2007 to now….
Dow Jones Industrial Average Index
14500
14000
13500
13000
12500
12000
11500
7
7
7
7
7
7
7
7
7
7
7
7
07 t-07 t-07 -07 -07 -07 -08 -08 r-08 r-08 r-08
-0 n-0 b-0 r-0 r-0 r-0 y-0 n-0 n-0 l-0 g-0 g-0
n
p
c
c
a Ap Ap
a Ju Ju
ov ec ec Jan Feb Ma Ma Ap
Ju Au Au Se
Ja Ja Fe M
O
O
M
N
D
D
Dow Jones Ind
U.S. Greenback vs Euro
U.S. Greenback vs Euro
1.60
1.55
1.50
1.45
Fed starts to cut
rates
1.40
1.35
1.30
1.25
1.20
Jan-07
Jan-08
Dollar vs Euro
Not only Uncle Sam’s Problem
• “Decoupling” theory tested
• BRIC’s role in surviving?
• Europe influenced –
– Euro appreciates vs Dollar,
– European banks also exposed to subprime market
• Japan influenced
– Japanese Export demand fuelled by American
consumers
• Resources = ‘safe havens’
Gold Price
Gold Price
1050
1000
950
900
850
800
750
700
650
600
Jan-07
Jan-08
Gold
Platinum Price
Platinum Price
2200
2000
1800
1600
1400
1200
1000
Jan-07
Jan-08
Platinum
Economic Overview
2006
2007
2008
M3 (average)
23.1%
23.7%
20.7%
PSCE (adj. average)
27.6%
22.2%
18.4%
CPIX (average)
4.6%
6.5%
10.8%
Prime (end of year)
12.5%
14.5%
16.0%
Current Account: Nom
-R111.0bn
-R138.2bn
-R160.0bn
Current Account: GDP
-6.4%
-7.3%
-6.9%
R/$ (end of year)
R7.04
R6.84
R7.50
GDP (full year)
5.4%
5.1%
3.0%
(0.3%)
0.7%
1.0%
Budget Surplus/(Deficit):
GDP
Monetary Policy
Inflation
CPI and CPIX
15
CPIX Ave 2008:
10.8%
12
9
6
3
0
Jan-01
Jan-03
Jan-05
CPIX
EstmX
Jan-07
CPI
Jan-09
Jan-11
Estm
Source: StatsSA and own calculations
Interest Rates
%
18
Prime
17
Toothless
16
SARB
15
14
Mboweni Ave: 12.8%
?
13
12
11
20
02
20
02
20
02
20
03
20
03
20
03
20
04
20
04
20
04
20
05
20
05
20
05
20
06
20
06
20
06
20
07
20
07
20
07
20
08
20
08
20
08
20
09
10
Source: SARB and own calculations
Inflation…The Real Villain
• Price
= Purchasing Power of $
• Thus, if wage increases don’t equal price
increases – WE are WORSE off
• AND…
– The poor spends more of their money on living
expenses than the rich
– Thus, inflation is almost a “tax on the poor”
“The Good, the Bad & the Ugly”
• The Good –
 Economy still likely to grow
• The Bad –
 C/A Deficit
 Credit demand remains strong
 End of Inflation targets?
• The Ugly  Eskom
 Toothless SARB
South Africa:
GDP
GDP at Market Prices
%
GDP market prices, q:q seasonal
8
7
6
5
Average:
3%
4
3
2
1
0
2002
2003
2004
2005
2006
2007
2008
Source: StatsSA and own calculations
A Quick Eish’kom
Calculation
Vision:
"Together building the powerbase
for sustainable growth and
development."
Load Shedding: The 3 Hour Effect
Average GDP per day:
•
•
•
GDP, 2007 (current): R1,973.4bn
Workdays: 240
GDP per day: R8.3bn
Average GDP per sector:
• Allocate equal weights to GDP sectors: (3 out of 24)
– Loss per day: R1.1bn (13.3%)
Average GDP loss per sector:
• Allocate weights to GDP sectors:
– Finance, real estate and business services (3 out of 8)
– Mining and quarrying (3 out of 24),etc.
– Loss per day: R1.9bn (22.8%)
Potential Job Losses
Case Study:
+/- 400 000 employees in Mining Sector
Mining production at 90% electricity – Lose 15% - 20%
1% loss in production = 1% reduction in workforce
Thus, potential reduction in mining workforce:
60 000 – 80 000 jobs lost
Source: Thousands face job chop at GFI, 31 Jan 2008, Fin24
GDP Loss: Base Case Scenario
Adjusted Growth Estimate:
4.6% na 3.0%
Loss in Real Terms:
R19.76 bn
Potential Loss in Tax Revenue:
R5.9 bn
Fiscal Policy
Background
%
Revenue & Expenditure:GDP
30
29
Trevor’s reign!
28
27
25
24
23
22
Gold
Deficit
26
Surplus
21
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Fiscal Revenue
Contribution to Fiscus
Revenue
Sources
(Est.(1994)
2007/08)
Revenue
Sources
13%
26%
26%
27%
5%
3%
8%
4%
39%
30%
10%
9%
Individual Tax
Company Tax
VAT
Excise Duties
Fuel Levy
Other
Is Tax Crowding Out Savings..?
Personal Income Tax vs Household Savings
(base year 1990 - real)
200
Crowding Out ?
150
100
50
0
-50
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20
HH Savings Index
PIT Index
Source: SARB Quarterly Bulletin, December 07 & MTBPS Oct 07; Efficient Research
Is Tax Crowding Out Savings..?
Corporate Income Tax vs Corporate Savings
(base year 1990 - real)
250
200
Crowding Out ?
150
100
50
90
19
92
19
94
19
96
19
98
19
CS Index
00
20
02
20
04
20
06
20
CIT Index
Source: SARB Quarterly Bulletin, December 07 & MTBPS Oct 07; Efficient Research
Tax Comparison: Companies
Company Tax Rates
%
45
Egypt
40
35
Median: 29.0%
30
25
USA
Average: 26.6%
20
South Africa
15
10
South Africa + STC (’07)
South Africa + STC (’06)
Ireland
5
Bulgaria
0
0
10
20
30
Countries
40
50
60
Source: worldwide-tax.com
Tax Comparison: Individuals
Individual Marginal Tax Rates
%
60
Denmark
50
Ireland
40
Russia
Median: 36.0%
Average: 35.4%
30
South Africa
USA
20
10
0
10
20
30
Countries
40
50
Source: worldwide-tax.com
Tax Comparison: VAT
VAT Rates
%
30
Denmark
Ireland
Median: 18.0%
20
Average: 16.7%
South Africa
10
Singapore
0
0
10
20
30
Countries
40
50
Source: worldwide-tax.com
Results...
• Tax Burden shifted to Companies
• Crowding out of Individual and Company
savings
• Few income tax payers
• Internationally:
– Income tax rates high
– VAT tax rate low
Fiscal Expenditure
Total Expenditure Trend Over Time
%
Expenditure: GDP
30
29
28
Trevor’s reign!
27
26
25
24
23
22
21
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: SARB and Efficient Research Forecast
Spending Priorities
Expenditure:
Expenditure:Functional
FunctionalClassification
Classification(1994)
(Est.
1%
2%
17%
2007/08)
9%
16%
8%
Social
Spending
15%
14%
4%
8%
52%
43%
21%
18%
10%
16%
11%
17%
6%
7%
Central Gov
Justice and Prot.
Eco. & Infra.
State Debt Cost
Other
Education
Social Dev.
Other Social Serv.
Health
Social Expenditure Analysis:
Money Well Spent?
Education
To Stay or Not to Stay...??
Total Self Declared Emigrants (thousand)
IMD World Competitiveness
Yearbook 2007:
SA’s brain drain is one of the
worst in the world
17.0
13.5
10.0
6.5
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Source: Documented Migration Publication, StatsSA
To Stay or Not to Stay...??
Average Destination of
Emigrants (%)
UK
Australia
Canada
33%
15%
3%
2.4%
4.3%
2.9%
South Africa
Eco Indicators
Real Eco Growth (GDP,
Q3)
Inflation (CPI, avg. 2008)
2.1%
3.2%
1.9%
32% of owners
to large privately
Currency p US$
£0.51 of medium
$1.14
CAN$1.02
held businesses wants to immigrate
Marginal Tax Rate
40%
48.5%
29%
Socio Indicators 82% of those said the main reason was crime
IBR 2008
Life Expectancy at birth
79.0-Grant Thornton80.9
80.3
Adult Literacy rate
(>15yr,%)
UN HDI Rank
Murders p capita, rank
(100 000)
4.7%
7.2%
R7.10
40%
43.0
99.0
99.0
99.0
82.4
16th – 0.853
4th – 0.961
3rd - 0.962
121th– 0.674
46th – 1.4
43th – 1.5
44th – 1.49
2nd – 49.6
Sources: Economic Indicators, Economist. UN HDI 2007/2008, 7 th UN Survey of Crime Trends 1998 – 2000
Importing Skills – A realistic
solution..?
Proclivity to Attracting Talent (2007)
40
Canada (3rd)
35
US
(1st)
Score
30
25
UK (7th)
India (17th)
Australia
(6th)
China (26th)
20
15
South Africa (30th)
10
0
5
10
15
20
25
30
Countries
Proclivity to Attracting Talent
Source: “Mapping Global Talent” - Heidrick&Struggles
and The Economist Intelligence Unit, 2007
The Reading Literacy of
Fourth Grade Students
Progress in International Reading Literacy Study (PIRLS)
600
550
Score
500
Russian Federation(565)
450
United States (540)
Macedonia (442)
Qatar (353)
400
Morocco (323)
350
South Africa (302)
300
250
0
High
10
20 Intermediate 30
Low40
None
50
Countries
Source: US Department of Education, PIRLS 2006
Pass Rates for SC, HG Maths &
Science
53% HG Maths Passes
– 4.8%
43% HG Science
Passes – 5.7%
Source: Department of Education, Education Statistics in SA at a glance, SC Examination Results, 2006
Social Security
and
Welfare
Correlation? Excise Duties vs. Social
Grants
1% Increase
Social vs.
Grants
= 0.49%
increase
Excise
Duties
ExciseinDuties
Social
Grants
(Indexinbase
= 1999)
R-squared = 0.966 (small sample)
275
250
225
200
175
150
125
100
75
50
1999
2000
2001
2002
Excise Index
2003
2004
2005
2006
SocExp Index
Source: 2007 Budget, SARB Quarterly Bulletin; Efficient Research
Redistribution Estimation:
R1 in = R? out
Rand In : Rand
Out Ratio
1997
2003
2007
Family 1* (R20k)
R4.29
R13.94 (225%)
R15.62 (12%)
Family 2 (R43k)
R1.36
R2.10 (54%)
R3.22 (53%)
Family 3 (R100k)
R0.30
R0.61 (100%)
R0.87 (43%)
Family 4 (R300k)
R0.80
R0.14 (87%)
R0.21 (44%)
Family 5 (R500k)
R0.04
R0.08 (81%)
R0.11 (37%)
Family 6 (R1mil)
R0.02
R0.03 (77%)
R0.04 (24%)
*Average family consists of 4 people,
aggregates taken per capita
Source: Efficient Research
Aiming For Equality
Before & After (2007)
500,000
400,000
300,000
200,000
100,000
0
<20k
<43k
<100k
<300k
<500k
Category
Source: Efficient Research
Aiming For Equality
Before & After (2007)
500,000
400,000
300,000
+224.0%
-39.0%
200,000
100,000
0
<20k
<43k
<100k
Category
<300k
<500k
Effect
Source: Efficient Research
Aiming For Equality
Before and After (2007)
500,000
400,000
300,000
27.5% closer
19.9%closer
200,000
100,000
0
<20k
<43k
<100k
Category
Effect
<300k
<500k
GDP per capita
Source: Efficient Research
From those who give….more will
be taken
Accountability
Spilling the Milk…?
Qualified Audit Opinions:
General Report of the Auditor General on Audit Outcomes for the Financial Year 2005-06
Department
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
Independent Complaints
Directorate
✓
Land Affairs
✓
Transport
✓
✓
Labour
✓
✓
Justice
✓
Parliament
✓
✓
✓
Health
✓
✓
✓
Defense
✓
✓
✓
✓
Correctional Services
✓
✓
✓
✓
✓
Water Affairs & Forestry
✓
✓
✓
✓
✓
Home Affairs
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Any Upside?
Country and Province GDP 2008 ($ Bn)
Countries Compared to
Provinces
São Tomé and Príncipe
Guinea-Bissau
Gambia
Somalia
Burundi
Swaziland
46th
Malawi
Niger
Northern Cape
Mali
Burkina Faso
Senegal
Côte d'Ivoire
21st
Free State
Limpopo
Eastern Cape
10th
Ghana
Ethiopia
Sudan
4th
Gauteng
South Africa
0
200
400
600
Source: UN
Performance: Different Asset
Classes
Source: Asset Performance Survey 2008, Credit Suisse Standard Securities
Possible Investment Opportunities
2006
M3 (end of year)
23.1%
Financials
PSCE (adj. end of year)
27.6%
- Banks
Financials
CPIX (average)
4.6%
Retailers
Positive for equity, property
Prime (end of year)
Negative12.5%
for bonds
Current Account: Nom
2007
2008
23.7%
20.7%
22.2%
18.4%
6.5%
10.8%
14.5%
16.0%
-R111.0bn
-R138.2bn
Negative
equities
bonds
(short term)
Current Account: GDP Negative
-6.4%
-7.0%
Positive
for
rand
hedges
Positive bonds (long term)
Negative for7.04
importers
R/$ (end of year)
6.84
Positive
rand
Negative
forhedges
bonds
GDP (full year)
5.4%
5.1%
Positive exporters
Negative importers
Neutral equities
Negative
bonds
Positive bonds
-R160.0bn
-6.9%
7.50
3.0%
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