MTBPS and macroeconomic assessment Nov 2003

1
MTBPS and macroeconomic assessment (Nov 2003)

• Brief economic background
• Governments macroeconomic assumptions
• Budget arithmetic and the overall fiscal stance
• Assessment of fiscal policy direction
• Other issues

2
Economic Environment

• Global environment
• Cyclical momentum picking up
• Policy-induced upswing in US, China strong,
  elsewhere weak

3
Forecasts have also been revised up IMF September
4
US growth
5
Policies have been very stimulatory
6
Fiscal deficits on the up the US
7
US dollar under pressure
8
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

11
Rand reacting to dollar weakness
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Is the rand fairly valued?
Real effective rand TW randppi(sa)/ppi(int)
13
Is the rand fairly valued? Structural factors
14
Rand possibilities in context


15
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
24
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

26
MTBPS and macroeconomic assessment (Nov 2003)

• Brief economic background
• Governments macroeconomic assumptions
• Budget arithmetic and the overall fiscal stance

27
More expansionary mode
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Estimates for current year MTBPS and pre-MTBPS
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Deficit rises above 3
30
Space created by lower interest bill
31
Fiscal discipline and lower inflation drive
yields down
32
Debt as gdp levels out
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Financing mix changes significantly
34
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 economys 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

35
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

36
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