MTBPS 2006

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MTBPS 2006

• Comments on macroeconomic aspects
• 1 November 2006

Dennis Dykes Chief Economist, Nedbank
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Growth has been ratcheting up
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Economic considerations

• Demand-side elements are largely in place
• A more favourable global environment
• Strong, commodity-intensive growth driven by Asia
• Improved policies have meant better ratings,
  reducing the risk premium and cost of borrowing

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Global economy has been strong
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Strong resources need has driven up prices with
good medium-term prospects
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Good policies and global deflation in certain
prices have pushed inflation and interest rates
lower
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Economic considerations

• Demand-side elements are largely in place
• A more favourable global environment
• Strong, commodity-intensive growth driven by Asia
• Improved policies have meant better ratings,
  reducing the risk premium and cost of borrowing
• Broader or more inclusive growth
• Government policies have been very redistributive
• Black empowerment has led to a rising black
  middle and upper class
• Higher and more consistent economic growth is
  resulting in employment growth and strong
  disposable income growth

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Low interest rates have stimulated asset prices
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Good personal income growth, a willingness to buy
on credit and BEE have improved consumer
purchasing power
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Low prices, low rates, increased spending power
and rising asset prices helped boom
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Low prices, low rates, increased spending power
and rising asset prices helped boom
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Growth and investment good news is that
significant plans are on the table
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Economic considerations

• Demand-side elements are largely in place
• A more favourable global environment
• Strong, commodity-intensive growth driven by Asia
• Improved policies have meant better ratings,
  reducing the risk premium and cost of borrowing
• Broader or more inclusive growth
• Government policies have been very redistributive
• Black empowerment has led to a rising black
  middle and upper class
• Higher and more consistent economic growth is
  resulting in employment growth and strong
  disposable income growth
• World Cup, Gautrain and other largely
  cycle-insensitive projects will provide constant
  demand

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Growth accelerating but performance in different
sectors has been mixed
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Economic considerations

• However, supply side has been largely neglected
• Capital formation has been inadequate and is now
  a s-t constraint
• Transport and electricity now being addressed but
  late start
• Other public sector infrastructure also neglected

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The bad news is that the investment drive comes a
bit late
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Investment rising but still inadequate
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Economic considerations

• However, supply side has been largely neglected
• Capital formation has been inadequate and is now
  a s-t constraint
• Transport and electricity now being addressed but
  late start
• Other public sector infrastructure also neglected
• Skills have been insufficiently developed in key
  areas
• Engineering and scientific skills deficit

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Economic considerations

• However, supply side has been largely neglected
• Capital formation has been inadequate and is now
  a s-t constraint
• Transport and electricity now being addressed but
  late start
• Other public sector infrastructure also neglected
• Skills have been insufficiently developed in key
  areas
• Engineering and scientific skills deficit
• Regulation is not always conducive
• Example mining rights conversion blockages
• Taxation needs to address supply side

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One consequence a rising current account deficit
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And deficit has put pressure on the rand
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And upward pressure on prices and interest rates
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But several outcomes are possible
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Economic considerations

• Some conclusions
• Demand side of economy has been exceptionally
  strong and prospects remain good
• Supply side has been unable to respond due to a
  long period of neglect, modest expectations and
  delivery capability
• Short term growth will therefore be hampered by
• Physical constraints
• Financial constraints (rand, inflation and
  interest rates)
• Long-term growth should ratchet higher, with
  increased physical infrastructure,capacity and
  skills development key ingredients

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Policy implications

• Demand side of economy does not need any more
  stimulation
• Pure economic response would be to raise indirect
  taxes
• Supply side has lagged and needs encouragement
• Infrastructure spending
• Education
• Crime prevention
• Regulatory burden must encourage any potential
  investors
• Reduced taxation burden to encourage capacity
  growth in private sector as well as FDI. Could be
  in the form of targeted incentives, but more
  preferable would be a strong cut in corporate
  taxes
• Should be running a surplus
• If believe close to end of cycle
• To increase savings

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Savings versus investment
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Our forecasts are similar to those of MTBPS, with
slightly weaker global growth assumptions in 2007
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MTBPS budget figures look appropriate
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Reduction in real interest bill again encouraging
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MTBPS 2006

• Some conclusions
• Basic thrust is again very logical
• Policy geared towards ensuring macroeconomic
  imbalance doesnt threaten economy, while at same
  time addressing key issues
• Space has been left open on the revenue side for
  appropriate tax relief
• Spending priorities geared towards unblocking the
  constraints while at the same time maintaining a
  heavy social and redistributive bias