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

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

3. 3 Global economic developments

4. 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 economy to 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 4 Global economic developments (cont.)

5. 5 Recent developments in the SA economy

6. 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 6 Developments in the SA economy (cont.)

7. 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 stood at 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. 7 Developments in the SA economy (cont.)

8. 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 borrowing for 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. 8 What are the implications

9. 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 9 SA policy pronouncements

10. 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 10 In Conclusion

11. Thank You 11 THANK YOU