Portfolio Committee on Finance Jac Laubscher Chief Economist Portfolio Committee on Finance The Medium-term Budget Policy Statement 1 November 2002

Macro-economic trends Government contribution to growth has turned positive Private capital spending trend encouraging SA bucking the global trend, but for how long?

SA vs. USA GDP growth

Macro-economic trends Government contribution to growth has turned positive Private capital spending trend encouraging SA bucking the global trend, but for how long? Steady growth to continue

Economic growth volatility: 1994 - 2001 High Ave. SA ave. Low Source: IMF World Economic Outlook; May 2002

Macro-economic trends Government contribution to growth has turned positive Private capital spending trend encouraging SA bucking the global trend, but for how long? Steady growth to continue Employment to start benefiting

Productivity growth vs. job losses

Macro-economic trends Government contribution to growth has turned positive Private capital spending trend encouraging SA bucking the global trend, but for how long? Steady growth to continue Employment to start benefiting Rand outlook steady

R/$ 12-week moving average

Macro-economic trends Government contribution to growth has turned positive Private capital spending trend encouraging SA bucking the global trend, but for how long? Steady growth to continue Employment to start benefiting Rand outlook steady Inflation rate to decline sharply, but be aware of base effect Interest rates at peak

Macro-economic policy Shift in priorities from inflation to growth Inflation target now realistic Further structural decline in inflation will be difficult to achieve

The secular decline in inflation is intact

“If inflation expectations are primarily backward-looking and are dependent on movements in the aggregate inflation rate, exchange rate changes will tend to have a larger and more persistent impact on both aggregate and non-traded inflation, as they get built into expectations. If on the other hand, inflation expectations are forward-looking, temporary exchange rate changes (which are recognised as being so by wage and price-setters) will not lead to much movement in inflation expectations. This is a key part of the process that affects the extent to which exchange rate changes lead to a temporary boost to inflation rather than a permanent pick-up.” Source: Guy Debelle and Jenny Wilkinson: Inflation targeting and the inflation process Some lessons from an open economy – Reserve Bank of Australia Jan.2002

Macro-economic policy Shift in priorities from inflation to growth Inflation target now realistic Further structural decline in inflation will be difficult to achieve Fiscal policy increasingly expansionary Positive output gap must be maintained Decline in general level of interest rates over

Public sector borrowing requirement vs. bond yields

Macro-economic policy Shift in priorities from inflation to growth Inflation target now realistic Further structural decline in inflation will be difficult to achieve Fiscal policy increasingly expansionary Positive output gap must be maintained Decline in general level of interest rates over Savings / Investment must be point of focus Exchange controls

Net foreign transactions : Equities (R’bn) Technology Bubble burst Asian crisis Russian crisis WTC attack Foreigners voted with their feet - Mining charter - Financial charter - Community reinvestment bill - Slowdown in world growth and earnings concerns (Worldcom)

Macro-economic policy Shift in priorities from inflation to growth Inflation target now realistic Further structural decline in inflation will be difficult to achieve Fiscal policy increasingly expansionary Positive output gap must be maintained Decline in general level of interest rates over Savings / Investment must be point of focus Exchange controls Taxation of retirement funds Further measures to encourage savings required

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