OUTLOOK FOR THE SA ECONOMY IN THE CURRENT GLOBAL ENVIRONMENT July 2010 SABITA Rob Jeffrey Managing Director

OVERVIEW Global economic outlook Domestic economic outlook Significant trends affecting policy China and Africa Economic trends and forecasts Conclusion

INTERNATIONAL TRENDS 3

THE GLOBAL ECONOMY Premier of China Unsustainable low savings and high consumption Excessive expansion of financial institutions Lack of self discipline Failure of supervision and regulation

PRIVATE EXCESS CREDIT AND BORROWING

GLOBAL IMBALANCE

INEQUALITY AND GREED

LOOSENING MONETARY POLICY LEADS TO ASSET INFLATION Inflation in asset prices, not goods prices First equities, then housing, finally commodities 8

SLUMP AND RECOVERY

REQUIRED DOMESTIC & INTERNATIONAL POLICY SHIFTS Major realignment of exchange rates Cultural changes Lower consumption higher saving in West Higher consumption lower saving in East Curbing profligate politicians dependent on: Pet projects and populism for power Debt levels need to be reduced Past excess debt and current stimulatory debt

APPREHENSION REGARDING SUSTAINABILITY OF UPSWING Traditionally, rallies following severe bear markets have averaged 70%, S & P up 83% already since March 2009 China tightening up on lending to slow speculation Could be a precursor to global rise in interest rates? Could be a precursor to slowdown in Chinese economy Obama acting to prevent banks from speculating with their own money Interference in market system Unknown impacts Concerns with Greek debt default possibility Fear of impact on Euro integrity from contagion Increased fiscal prudence to slow European recovery

SPECTRE OF RISING WORLD DEBT How do governments in advanced economies extricate themselves from rising debt levels? Greece now, who’s next? Hope that sustained growth will eventually generate revenues to rein in government debt

GLOBAL RECESSION: V-SHAPE OR W-SHAPE? Massive stimulus is having effect Huge build up of cash balances Risk of unsustainable rally in asset prices, commodity prices & economic activity or 13 13

SOUTH AFRICAN ECONOMIC TRENDS 14

THE SOUTH AFRICAN ECONOMY Unsustainable low savings and high consumption Excessive imports insufficient exports 15

EXCESSIVE CONSUMPTION 16

EXCESSIVE IMPORTS 17

Public debt as % of GDP

Gross general government debt as % of GDP 19

BALANCED SECTORAL GROWTH IN SA POLICY REQUIREMENTS Create environment to increase domestic and foreign investment in manufacturing & mining sectors Increase investment in export orientated mining, processing & manufacturing industries Increase investment in import replacement industries 20

CRITICAL FACTORS AFFECTING FUTURE SOUTH AFRICAN ECONOMIC GROWTH 21

The age of globalisation

GLOBALISATION & GROWTH Irreversible trend Prices will be influenced by world pricing trends Long term costs follow international costs Environmental issues will grow Domestic & foreign investment are essential Technological trends will influence development Intervention and protectionism are dangers 23

GLOBAL SUCCESS REQUIREMENTS Growing influence of market forces and capital movements Efficiency must be measured in global terms. Critical mass is important in the global market High quality required to be competitive Important to offer new technologies Critical size often means A dominant local player Producing for export Government should foster an environment for global success

FORECASTS OF SA ELECTRICITY GENERATING CAPACITY REQUIREMENTS 25

SOURCES OF ELECTRICITY 26

ENVIRONMENTAL & OTHER TRENDS Market share of fossil fuels will decline & the share supplied by sustainable clean electricity will grow Share of oil from traditional sources will decline but oil from alternative sources such as tar sands & coal will increase The cost of electricity will increase as the true environmental costs are factored in to cost structures The cost of alternative sources of electricity will reduce & they will become more competitive Alternative electricity sources (such as solar, wind & wave) will continue to have limited large-scale viability Coal and nuclear power currently only technologies available to offer large-scale electricity source for global economy. 27

ENERGY CONSUMPTION AND INCOME 28

SECTORAL ELECTRICITY INTENSITY 29

SECTORAL ELECTRICITY INTENSITY 30

LONG TERM ECONOMIC GROWTH OBJECTIVES 31

ESKOM FORECAST CAPACITY 32

THE CHINDIA FACTOR SUBSTANTIAL IMPACT ON AFRICA AND SA

CHINA FUTURE GIANT

THE CHINA FACTOR The long term objective Plays a long game (Hong Kong) Has 1,3 billion people Requires commodities & markets Unorthodox business practice

LONG TERM DEMAND TREND

AFRICA AND CHINA Africa produces more than 60 minerals Africa hosts 30% world’s mineral resources Africa’s market share of world mineral production <10%

ECONOMIC TRENDS AND FORECASTS

Forecasts for World Growth Revised Upwards Assume economic recovery will be sustained Revisions of IMF Forecasts for 2010 Sep 08 Feb 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 World Output 4.2 3.0 1.9 2.5 3.1 3.9 Sub-Saharan Africa 6.5 5.0 3.8 4.1 4.3 4.7 South Africa 2.3 1.7 na 2.6 Latest IMF Forecast Growth in GDP (%)   2009 2010 2011 World -0.6 4.2 4.3 Advanced economies -3.2 2.3 2.4 China 8.7 10.0 9.9 Sub-Saharan Africa 2.1 4.7 5.9 South Africa -1.8 2.6 3.6 IMF, World Economic Outlook Database, April 2010

IMF Forecasts for Growth of Sub-Saharan Countries   2010 2011 Angola 7.1 8.3 Nigeria 7.0 7.3 Mozambique 6.5 7.5 Botswana 6.3 5.1 Tanzania 6.2 6.7 Malawi 6.0 Zambia 5.8 Uganda 5.6 6.4 Democratic Republic of Congo 5.4 Ghana 4.5 20.1 Kenya 4.1 Mauritius 4.7 Senegal 3.4 Côte d'Ivoire 3.0 4.0 Lesotho 2.8 South Africa 2.6 3.6 Zimbabwe 2.2 0.0 Namibia 1.7 Swaziland 1.1 2.5 Source: IMF WEO, Apr 10

Rand Remains Vulnerable Still benefiting from carry trade & low money supply growth However, weakening relative to other emerging markets Fears of left-wing shift (bluster meant to mask lack of service delivery) Concerns with lack of leadership (presidency) of country & of economy (who is in charge of economic policy?) Growing underperformance of SA Economy

Net Foreign Reserves ($bn) * Emerging Markets 07 June 2010 China 2447.1 Russia 435.6 Taiwan 357.6 South Korea 278.9 Hong Kong 259.2 India 256.4 Brazil 242.6 Singapore 203.4 Thailand 141.1 Mexico 101.3 Malaysia 94.0 Poland 84.7 Indonesia 75.8 Turkey 69.5 Israel 62.1 Argentina 45.5 Hungary Philippines 40.7 Czech Republic 38.8 South Africa ** 36.7 Egypt 32.5 Chile 25.5 Colombia 24.9 Venezuela 17.3 * Excluding gold, except Singapore and China Source : The Economist   **Source: SARB

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Estimated Principal Areas of Government Expenditure (% Growth) 2009/10-2012/13 General Public Services 2.4 Defence 6.3 Public Order & Safety 8.2 Economic affairs -2.1 Housing & Community Amenities 11.6 Health 7.1 Education 8.4 Social protection (Welfare) 9.5 Interest 21.8 Total

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SA Economic Growth Forecasts (Growth %) 2009 2010 2011 2012 2013 Gross Domestic Product -1.8 3.1 3.5 2.6 4.5 Year End (Q4) -1.6 3.7 2.9 4.8   Gross Domestic Expenditure 4.4 3.6 2.5 4.1 -1.2 5.4 2.7 Private Consumption -3.1 1.9 2.3 3.3 -2.9 3.0 3.9 Fixed Investment 2.4 2.0 5.3 -1.3 5.7 6.5 Government Expenditure 4.7 4.0 3.8 Current A/C Balance As % of GDP -4.0 -3.2 -4.2 -3.5

Underperformance of SA Economy Increasing Lack of competitiveness & high import dependence due to: Skills & education deficiency Wages high relative to productivity Lack of sufficient market size & economies of scale Economic concentration in hands of “Golden Triangle” Lack of entrepreneurship Stifling regulatory environment

GLOBAL ECONOMY CONCLUSION Current slide arrested Second economic slowdown Slower growth Correction of imbalances Reduction of debt Cultural changes take time Time span of recovery: 3 to 8 years South Africa will be affected South Africa cushioned in short to medium term