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MTBPS and macroeconomic assessment (Nov 2003)
Brief economic background Government’s macroeconomic assumptions Budget arithmetic and the overall fiscal stance Assessment of fiscal policy direction Other issues
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Economic Environment Global environment: Cyclical momentum picking up
Policy-induced upswing in US, China strong, elsewhere weak
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Forecasts have also been revised up: IMF September
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US growth
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Policies have been very stimulatory
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Fiscal deficits on the up: the US
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US dollar under pressure
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Commodities looking good
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But less so in rand terms
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Economic Environment Global environment: Cyclical momentum picking up
Policy-induced upswing in US, China strong, elsewhere weak However, structurally problems remain which could frustrate and limit the length of the upswing US corporate and individual debt very high, budget deficit growing, current account reflects strong dissaving Europe structural labour market problems, large government deficits Japan bank problems dating back to 1980s, ageing population China rampant credit and bankrupt state banks, but dynamic
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Rand reacting to dollar weakness
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Is the rand fairly valued?
Real effective rand = TW rand*ppi(sa)/ppi(int)
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Is the rand fairly valued? Structural factors
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Rand possibilities in context
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Good opportunity to build up reserves
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Will mixed economic fortunes continue?
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Export volumes underperforming import volumes
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Production side of economy is still struggling
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But spending is rising
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Consumer spending strong
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Helped by lower interest rates
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However, Reserve Bank is still optimistic on CPIX
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Our view: short term outlook is very good but…
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At the bottom or more to go?
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Forecasts Main differences: Effect of rand on exports Global view
Inflationary expectations and base effect
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MTBPS and macroeconomic assessment (Nov 2003)
Brief economic background Government’s macroeconomic assumptions Budget arithmetic and the overall fiscal stance
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More expansionary mode
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Estimates for current year: MTBPS and pre-MTBPS
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Deficit rises above 3%
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Space created by lower interest bill
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Fiscal discipline and lower inflation drive yields down
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Debt as % gdp levels out
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Financing mix changes significantly
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Fiscal policy assessment
Some positive aspects: Space has been created by reducing the interest rate bill: Lower interest rates (capital and money market) by reducing debt and inflation and securing a better sovereign risk rating Spending was restricted until capacity and systems could be put in place More emphasis now on capital spending – building the economy’s capacity Job creation and poverty alleviation focus also good Appropriate that the fruits of fiscal discipline can now be enjoyed Period of consolidation on taxation side is necessary
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Fiscal policy assessment
Areas of caution: Potential problem if revenue disappoints due to weak global situation and the reversal in the rand May help overstimulate some areas of the economy and make it more difficult to keep within inflation targets Restructuring of state assets underemphasised Capacity to spend and delivery still in question Have to be careful not to reverse secular downtrend in bond yields
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Other issues Extension of tax amnesty:
Good as will increase the chances of a successful exercise Inflation targeting Easier to understand but may be more difficult to hit Good that targets kept the same – higher = higher interest bill and lower = unnecessary strain on short-term economic growth
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