2005 MTBPS: Quite Conservative... What Happens to the Extra Cash? Nazmeera Moola Economist Merrill Lynch (South Africa) (27) 21 425 9525 nazmeera_moola@ml.com 28 October 2005 2005 MTBPS: Quite Conservative... What Happens to the Extra Cash? Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 38. Global Securities Research & Economics Group Global Fundamental Equity Research Department

Strong Government Finances Far More Controlled Deficit SA Government Deficit to GDP From a peak of 10% of GDP in the early 1990’s, the deficit has come in sharply. Source: National Treasury

Strong Government Finances Very Healthy Debt Levels SA Government Debt to GDP In 1995 many were concerned about a debt trap developing in South Africa. That is obviously not a concern any more. Source: National Treasury

Strong Government Finances Less Money Directed at Interest Payments Debt Servicing to Total Expenditure & GDP In 1999/2000 22.2% of govt expenditure was directed at interest payments. This has since fallen to 12.5%. Source: National Treasury

Strong Government Finances Helped by Strong Economic Performance in 2005/06 National Budget Revenue for 2005/06 Fiscal Year Difference Feb Budget Revised ZARbn % Taxes on income & profits 205.8 225.4 19.6 9.5% Individuals 116.9 125.2 8.3 7.1% Companies 68.7 79.1 10.4 15.1% STC 8.7 10.2 1.5 17.2% VAT 106.0 115.0 9.0 8.5% Export & Import Duties 13.2 16.3 3.1 23.5% Far stronger than expected revenue growth supported by robust economic growth. Source: National Treasury

Strong Government Finances The Treasury has Done a Great Job! Reigned in Unnecessary Spending Greater checks and balances have been put in place to ensure that less money is wasted. Contributed Greatly to the Structural Decline in Interest Rates A more conservative fiscus has helped the structural decline in interest rates. The 10-year bond yield averaged 15% between 1990 and 1995. In the last two years they have averaged 10%. Spending is More Evenly Distributed Where previously the bulk of government spending was directed at a small portion of the SA population, it is now more evenly distributed.

Increased Spending to Boost Growth Higher Social Welfare Grants Increase in Social Welfare Grant Payments, in ZARbn & yoy% Social Welfare Grant payments have grown strongly in the last 5 years. Source: National Treasury

Increased Spending to Boost Growth Increased Commitment to Infrastructure Spending Government Infrastructure Spending in ZARbn Transport accounts for 15% of GDP in SA. In developed countries, the average is 9%. Source: National Treasury

BUT Budget Still Conservative Deficit Projections have Fallen Sharply Budget Deficit to GDP Government Borrowing to GDP Source: National Treasury Source: National Treasury The budget deficit fell sharply from February’s projection of 3.1% of GDP to 1.0%. As a result government borrowing will slow dramatically.

Conservative Budget Focus on Spending Efficiently Education Expenditure as % of GDP South Africa does not have a lack of cash. It has a lack of ability to spend! Source: National Treasury & World Bank

What to do with the Excess Revenue? Time to Lower Tax Rates? Corporate Tax Rates South African corporate tax rates are high in an emerging markets context – especially when you add in STC! Source: Heritage Foundation

Time for a Combination Infrastructure & Social Spending + Lower Corporate Taxes Lower the Cost of Doing Business The infrastructure programme is geared at this. But we need to add to this by lowering corporate taxes and simplifying business regulation. It is currently extremely onerous. Promote Job Creation Only by promoting business development, will job creation be promoted. One vital, non-budgetary element, is the de-regulation of the labour market. We still need a Catch-Net The social spending is necessary. But job creation is more important in the long run.

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