1. The SA Economy 2012: Managing Crises or Unlocking Golden Opportunities Presentation for: Cape Town Press Club 21 February 2012 By Dr Iraj Abedian Pan-African Investment & Research Services (Pty) Ltd.

2. Slide # 2 Outline 1. Stylized Facts of the SA Political Economy 2. Assessing the Fiscal Framework 3. Conditions for Unlocking the Golden Opportunities 4. Concluding Remarks

3. Stylized Facts of SA Political Economy

4. Slide # 4 Average GDP growth: SA vs. Peer Countries (2000-2010) South Africa’s average growth has been lower than that of its peer countries Source: IMF & Respective Statistical Bureaus

5. Slide # 5 South Africa’s GDP Outdone by the BRIC Countries Source: IMF, RMB FICC Research, August 2011

6. Slide # 6 Unemployment –Global Comparison

7. Slide # 7 Public Backlog Needs Decade-long Attention Source: DBSA Barometer, 2008

8. Slide # 8 Rand Foreign Exchange Volatility Peer Group Countries:  Argentina  Turkey  Hungary  Chile  Poland  Malaysia  Philippines  Mexico  Israel  Ukraine  Korea  Indonesia  Russia  Brazil  Peru  Colombia  Thailand

9. South Africa’s Eroding Global Competitiveness

10. Slide # 10 Administered Prices: 2000-2011 High administered prices, in particular the negative impact of the ongoing surge in electricity prices, deplete South Africa’s competitiveness Source: IMF & Respective Statistical Bureaus India: Fuel, Power, Light and Lubricants (2000-2009) Brazil: Electricity China: Electricity Russia: Public Utilities South Africa: Electricity

11. Slide # 11 Global Competitiveness Index Source: World Economic Forum, Competitiveness Report 2011/12

12. Slide # 12 De-Industrialisation Declining Manufacturing Output and Contribution to GDP Source: SARB & PAIRS Contraction due to Apartheid policies Expansion due to democracy Contraction due to poor macro policies

13. Slide # 13 Policy Environment: Manufacturing Employment IPAP IPAP 2 NGP IPAP 1

14. Slide # 14 Most Problematic Factors for Doing Business in South Africa Source: World Economic Forum, Competitiveness Report 2010/11

15. Assessing SA’s Fiscal Framework

16. Slide # 16 Financial, Economic and Effectiveness Assessment of the Fiscal Framework 1. Financial Criteria: Deficit/GDP Ratio, Debt/GDP Ratio Financial Sustainability Condition: Rate of Debt Service Changes <= Rate of GDP Growth (Tax Revenue) 2. Economic Criteria: a) Financial Sustainability Condition b) State of Economic Infrastructure Needed for Sustainable Growth. 3. Effectiveness Criteria

17. Slide # 17 SA Government Debt as % of GDP Forecast – 2011 -2014 Source: SARB

18. Slide # 18 SA Public Debt in Global Context :

19. Slide # 19 Public Sector Finances at a Glance Source: National Treasury 2010/112011/122012/132013/142014/15 R billionOutcomeEstimateMedium-term estimates Revenue758.4814.2890.0994.51113.0 Percentage of GDP27.627.327.027.327.7 Expenditure885.8978.81062.31157.41247.0 Percentage of GDP32.232.932.231.831.0 Budget balance-127.4-164.6-172.3-162.9-134.1 Percentage of GDP-4.6-5.5-5.2-4.5-3.3 Real GDP growth (%)2.83.13.44.14.3 GDP at current prices2 664.32 931.83 208.23 555.03 930.5

20. Slide # 20 Effectiveness Assessment of the Fiscal Framework 1. Overall effectiveness of fiscal expenditure is poor- at best. 2. The level of abuse and corruption is way too high. a) Over R5 billion is under formal investigation! b) Chronic annual audit qualification is the norm! c) Four Provinces are subject to Section C100 d) The majority of municipalities are dysfunctional and financially stressed due to abuse and incompetence. 3. The spirit and the skills needed for managing for effectiveness are lacking. Note: Fixing this is a pre-condition for poverty alleviation and social development.

21. Slide # 21 The upshot…………….. 1. Financial Criteria: SA is doing fine subject to cyclical changes 2. Economic Criteria: SA has a considerable and unsustainable deficit, unfunded and largely neglected. 3. Effectiveness Criteria: SA is facing a dangerous deficit! This is a real challenge, if not a crisis, of fiscal efficacy! For social development this is a pre-requisite.

22. Unlocking The Economy’s Golden Opportunities :

23. Slide # 23 Unlocking SA’s Economic Potential Key Sources of SA’s Growth and Job Creation Potential: 1. An integrated mineral beneficiation strategy; 2. A re-industrialisation policy; 3. An effective regional integration strategy.

24. Slide # 24 Urbanisation Fuelling Demand of Commodities in the BRIC and elsewhere….. Source: Standard Bank Research

25. Slide # 25 Mineral Beneficiation – A Narrow Perspective Source: PAIRS Mining & Production of Ore Mining & Production of Ore Conversion of ore into bulk tonnage intermediate goods (e.g. metals and alloys) Conversion of the intermediate goods into a refined product for use by small and sophisticated Industries

26. Slide # 26 Beneficiation Value Chain Source: PAIRS Supply chain industries providing equipment and services to the mining sector Extraction and mining activities including processing Industrial applications, utilization and downstream activities Related industries & multiplier effects

27. Slide # 27 Core vs Integrated Mineral Beneficiation Source: PAIRS

28. Mineral beneficiation & Re-industrialisation are inseparable.... A significant business reality:

29. An Econometric Illustration… At present, SA enjoys a golden opportunity for the second wave of re- industrialisation with significant and meaningful political economy benefits....

30. Slide # 30 3.4% growth over 10 years (baseline scenario) 10% growth over 10 years (sustainable scenario) Change from baseline to sustainable scenario OutputR184 billionR537 billion 191.85% Employment158,000454,000 187.34% InvestmentR116 billionR339 billion 192.24% Household consumption R136 billionR398 billion 192.65% Real wagesR61 billionR177 billion 190.16% Fiscal revenueR62 billionR182 billion 193.55% ExportsR52 billionR151 billion 190.38% ImportsR102 billionR297 billion 191.18% Exchange rate (R/$)-1.43%-4.08% 185.31% Consumer inflation-0.58%-1.66% 186.21% 10-year cumulative effects of the economy-wide impact of an increase in manufacturing output Source: PAIRS

31. Slide # 31 Employment effects (no. of jobs) 3.4% growth over 10 years (baseline scenario) 10% growth over 10 years (sustainable scenario) Change from baseline to sustainable scenario Manufacturing61,000173,000 183.61% Mining8,70025,300 190.80% Agriculture2,5007,100 184.00% Wholesale & retail trade39,800112,400 182.41% Finance16,60047,500 186.14% Construction4,30012,500 190.70% Transport & Communication2,8008,200 192.86% Electricity7,40021,800 194.59% Source: PAIRS

32. Slide # 32 First things First: some necessary urgent steps..... To unlock the potential: a. Professionalization/De-politicization of the key technocratic layer of the pubic sector and its SOEs as well as state agencies. b. A radical reform of the education and human resources development paradigm, even if this entails a ‘terminal tax compact’ c. Re-industrialisation policy based on an integrated mineral beneficiation strategy. d. An active African integration policy, especially for Sub-Saharan Africa.

33. Slide # 33 Concluding Remarks  In 2012, South Africa finds itself at a cross-road again;  Key capabilities are built over the past 15 years,  Major fault-lines remain and need urgent attention;  The solutions require a heavy mix of political and technical inputs.  The speed with which we respond to the urgent issues will define the trajectory and the pace of the country’s democratization process and global standing over the next decade.

34. Slide # 34 Concluding Remarks

35. Slide # 35 Thank you for your attention abedian@pan-african.co.za Tel: 011 883 8036/7 Fax: 011 883 8038

36. Slide # 36 Global Competitiveness: Global Competitive Index  South Africa is falling in its relative competitiveness.

37. Slide # 37 Most Problematic Factors for Doing Business in South Africa Source: World Economic Forum, Competitiveness Report 2011/12 Labour market efficiency Rank/142 Financial market & development Rank/142 Technological readiness Rank/142 Market size Rank/142 Business sophistication Rank/142 Innovation Rank/142 Brazil834354103144 Russia6512768811471 India81219334338 China36487723729 South Africa 95476253841

38. Slide # 38 Most Problematic Factors for Doing Business in South Africa Source: World Economic Forum, Competitiveness Report 2011/12 GCI 2011-12 Rank/142 GCI2010-11 Rank/139 Basic Requirements Efficiency enhancers Innovation & sophistication factors Brazil5358834135 Russia6663 5597 India5651913740 China2627302631 South Africa 5054853839

39. Slide # 39 Most Problematic Factors for Doing Business in South Africa Source: World Economic Forum, Competitiveness Report 2011/12 Institutions Rank/142 Infrastructure Rank/142 Macro- economic environment Rank/142 Health and primary education Rank/142 Higher education & Training Rank/142 Goods market efficiency Rank/142 Brazil77641158757113 Russia12848446852128 India69891051018770 China484410328545 South Africa 4662551317332

40. Slide # 40 Reserves lower than IMF Adequacy Range More Accumulation May Be Needed… Source: Country Authorities & IMF staff estimates

41. Slide # 41 Skills Shortage Overall poor ranking in Basic Education Source: World Economic Forum, Competitiveness Report 2010/11