The SA Miracle. Changes in Factor costs will help the SA economy grow and help sustain lower rates at the same time. Looking at the facts.

How SA has changed and future developments. Changes in factor costs. Better & cheaper labour. Lower Inflation. Leads to cheaper capital costs. Brings further changes. Higher growth Higher profits. More Investment JOBS! The Road ahead.

GDP per person employed – 1998 GDP in international $ on PPP basis. Source: Angus Maddison & T-sec

GDP per person employed – 1998 In groups of countries.

Annual Productivity growth from 1990 to 2000. Source: ILO, SA stats from SARB.

SA Productivity improvement. Getting better all the time.

Lower all the time. Payments to employees as % of GDP. This is the lowest compensation that employees have received in the last five decades. Employee factor costs are 10% lower than in the 1970’s. This is why people felt “poorer” and perhaps negative.

Recent results. Although SA productivity still lags according to Proudfoot consulting, SA has shown the best productivity improvement since 2000 of nine countries surveyed. World Bank confirms Harvard University study of SA labour market being one of the most flexible in the world today.

The Phases of the structural change.

There are still problems. Skills shortage in some areas. Recent data indicates that nearly 30% of graduates leave SA. While Strikes have declined they are still high. Government employment is high in both costs to economy and numbers AIDS? SA lost one in five jobs over 12 years. This is the biggest destruction of employment since the great depression. Source: WCR, The Economy Today, Stats SA

SA employment numbers from 1967 (Reworked) SA employment numbers from 1967 (Reworked). Turn around after job hammering? Source: Stats SA SEE, Data splicing from SARB.

Long term trend in inflation is down.

What actually drove inflation? % change from end 1994 to end 2001 Nominal Unit labour costs 44.9% CPI 54.7% Import price of Big Mac (Rand trade weighted) 169.5% Administrative Prices 72.2% CPI ex Administrative 42.1% Source: T-sec, StatsSA

…pushing capital market yields lower Since December 2000 - 10 year yield under 13%. Since February 2003 under 10%. Source: SARB

Yield Spreads: SA 10 year all bonds vs. US 10 year Treasuries. Source: BESSA and Morgan Stanley. T-sec for calculations

Short term rates are declining too… Average nominal prime rate per decade.

Leading to overall lower interest rates Prime rate now 11%. There is a 70% chance that prime will fall to 10% or lower in next cycle. (could average 11% 2nd half of the decade.) Average so far 14.1% Long term capital market rates Outlook: Broke 10% barrier and may stay there for a short time. 8% is possible in the medium term.

At the same time SA lowered its debt. Both government and Private debt are low in relation to GDP.

Central Government debt to GDP - % Source: OECD, FRB, SARB, IMF. 2002 or 2001.

…while SA Private sector debt as % of GDP remains low Source: World Bank, FRB, BIS & SA Reserve Bank.

The Budget deficit as a % of GDP - Better than ever. Big Time Success and the best long term performance ever!!!!! Source: SARB; MTEF of Oct 2003.

Lower debt leads to… Better international ratings from S&P, Moody's etc. More sustainable expenditure. Less demand side inflation. Less supply of bonds and therefore lower interest rates.

Leading to a SUSTAINED export boom Lower labour and capital costs Together with some lower transport costs. Must make SA firms much more competitive. Must give us better exports and growth. Lets see

The pyramid for growth.

Exports and imports as % of GDP 2002 was the highest export to GDP ratio that SA has ever had. Source: SARB except 2004 - T-sec forecast

Value added manufacturing as % of total exports. Source: T-Sec. Manufacturing refers to non commodity manufacturing and would exclude: steel, aluminum, gold, platinum.

SA value added exports as a % of GDP over last five decades Source: SARS and TIPS. Value added exports excludes all commodities and includes Business Services, Financial Services and Tourism.

Export Winners: Average annual real growth in exports since 91 to 02. Basic Source: TIPS industrial data.

Long term GDP growth on the up Long term GDP growth on the up. Did last six years actually already grow faster?

More on GDP. We are currently in the longest upswing on record, now five years old! GDP has been underestimated. Manufacturing, retail, wholesale etc have all been underestimated by at least 17% Hotels, land transport etc still have to be re-estimated. Air freight, financial sector, software etc not yet adjusted but is likely to be bigger. This will make SA ratios such as Debt to GDP seem better, plus would probably change our GDP growth substantially since 98.

Phase three of the structural change is happening now.

Profits starting to show! The SA economy has high profits. Is this why SA firms can afford to buy first world companies!!!!

Net Operating Surplus as % of GDP. 2002 Surplus the highest in 22 years. First time since 1965 that net operating surplus is over 30% for 2 years in a row. Gold Boom Transition phase Source: SARB, T-sec

Net operating surplus and Gross fixed investment.

Profits take time to turn into investments. While fixed investment has started to growth, it is still low. Profit growth can take up to a decade to turn into investment growth. The main thing now is to realize that GDFI is growing at about twice the GDP rate.

After Profits increase, so investment increases and so will employment. Source: Stats SA and SARB.

Local government is also getting into the act.

One small problem: The Rand

Real trade weighted Rand performance: % change year on year.

Real Rand Facts. Real Rand currently strongest in at least six years! If Rand were to end year at R6,25 to dollar and R7,70 to Euro, Real Rand will be strongest level in at least a decade. If Rand were to end year under R6 to dollar and under R7,40 to the Euro Rand will be at strongest levels in 20 years,! We have not had real benefits from stronger rand on inflation – in full. E.g. Car prices, telephone calls should all be at least 20% cheaper.

SA in world context. Broader export explosion than Japan in 1950 and 1960’s. Done without subsidies - 5% of GDP for most of East Asia in 1970’s and 1980’s. More sustainable as adjustment process has been greater than ANY other country over last half century!

Overview of short term forecasts. GDP growth of 3% in 2004 after 1,9% in 2003. Rest of decade seen at around 4% if world growth returns to trend. Inflation of around 4.5% in 2004 after 6,8% in 2003. Should stay at around 5% for rest of decade. Prime to average around 13% for decade. Long bond average around 9%? Unemployment to stay high for next five years. Real export growth should average around 7% (Slightly lower now but could pick up if rand falls.)

Longer term forecasts. Higher Growth. Sustainable lower inflation. Long term growth will increase. Sustainable lower inflation. Low interest rates will also be sustainable. SA growth more sustainable now.