BUSINESS UNITY SOUTH AFRICA (BUSA)

Presentation to the Portfolio Committee on Finance and

the Joint Budget CommitteeOn the 2008/09 National Budget

16 February 2009, Cape Town

OUTLINE OF THE PRESENTATION:

• Introduction – Adv. Abri Meiring.

• Introductory remarks – Professor Raymond Parsons deputy CEO BUSA

• Economic assessment of the budget – Mr Roger Baxter, Chairman – BUSA Committee on Economic Policy and Ms Simi Siwisa, Director Economic Policy at BUSA.

• Taxation aspects of the budget – Adv. Abri Meiring.

• Concluding Remarks - Professor Raymond Parsons deputy CEO BUSA

• Questions.

ECONOMIC ASSESSMENT OF THE BUDGET

Economic assessment of the budget :• Global environment characterised by worst economic crisis since the Great

Depression.

• World economic growth in 2009 will fall to just 0.5% the lowest level of peace time growth since the great depression.

• About US$25 to US$30 trillion has been wiped off global property and equity prices in the past year (equivalent to one year of US+EU GDP), thus significantly reducing the wealth of consumers.

• In USA, GDP expected to contract by 1.6% in 2009. In 2008, 2.6 million Americans had lost their jobs and 1 million bonds went into foreclosure.

• EU GDP to decline 2% in 2009. EU car sales down 27% in Jan 2009.

• The growth rates of emerging economies is expected to halve from 6.3% in 2008 to 3.3% in 2009, with China’s growth slowing to 6.7%.

• Global commodities boom which was running for 7 years has now tanked.

The New York TimesSeptember 3 1999

• “Fannie Mae Eases Credit To Aid Mortgage Lending”• “Fannie Mae, the nation's biggest underwriter of home mortgages,

has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people.

• In moving, even tentatively, into this new era of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during the flush economic times. But the government subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry of the 1980’s”

• “Scramble Led to Rescue Plan on Mortgages”• WASHINGTON — The Bush administration hastily arranged

the dramatic Sunday evening rescue of Fannie Mae and Freddie Mac after Wall Street executives and foreign central bankers told Washington that any further erosion of confidence could have a cascading effect around the world, officials said on Monday.

• For the second time in four months, the housing crisis prompted the government to scramble over a weekend to rescue a major financial institution.

The New York TimesJuly 15 2008

GLOBAL FINANCIAL CRISIS World Must Act Together to Limit Crisis

Damage—IMF October 13, 2008

• World going through most dangerous financial crisis since 1930s

• Coordinated action will ensure world gets through "with economies intact"

GLOBAL FINANCIAL CRISIS World Growth Grinds to Virtual Halt—IMF Urges Decisive Global Policy Response –

January 28 2009 • Coordinated action necessary to try and enable that

the world gets through "with economies intact" • Global growth downgraded to 0.5% in 2009:

– US to contract by 1.6%– UK to contract by 2.8%– Developing country growth downgraded to 3.3%– South Africa’s growth likely to fall to 0.7% in 2009

• Fundamental reforms necessary to ensure a better functioning global financial system.

Spread to emerging markets

• Until recently, emerging markets had appeared resilient to spillovers from mature markets (the decoupling theory). But all emerging economies have now had significant Capital outflows as investors have sought safety in the US T-bill market.

• Nevertheless, emerging economies have higher fiscal balances, less sovereign debt, more foreign exchange reserves, better policy making structures, and healthier economies. Many of these improvements are related to the recent commodity price boom.

• Nonetheless, the linkages to global markets and economies have continued to grow and these have begun to overwhelm the improved domestic fundamentals.

Impact on Emerging economies Global credit crunch will in all likelihood remain intact through to the

end of 2009, and this means that the ability of emerging economies (that rely on foreign flows) to raise gross international funding will probably be half of the 2008 level in 2009 . SO FINANCING OF INVESTMENT AND TRADE WILL BE BIG ISSUES FOR DEVELOPING COUNTRIES

Slowdown’s in developed markets will reduce demand for manufactured products, which will slow down (not stop) the industrialization and urbanization processes in BRICs countries.

Among the most affected are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems will be severely challenged.

Many countries responding to the global crisis via monetary easing and fiscal stimulus programs.

Likely duration of the financial crisis• Lessons are clear. Early decisive government action to recapitalise banks

can help stem the rot.– The 1990’s Japanese banking crisis was handled in a piecemeal manner and the

economic and financial slump lasted more than a decade.

– The 1990’s Swedish banking crisis witnessed a swift government response and quick recovery.

• However, this crisis affects more types of markets and covers many more countries.– So a collective multilateral response is required

• Perhaps the key timing issue is when will the reflationary policy response overcome the economic deflationary effect of the financial crisis?– In the short-term credit markets remain very tight and the policy responses have not yet

engendered sufficient confidence for a reflationary response.

• Global capital flows in 2009 to emerging markets are expected to be half 2008 levels (with little available in the short-term).

Economic growth rates in key markets (source:IMF 28/1/2009)

-3

-1

1

3

5

7

9

11

% g

row

th r

ate

avg 1998-2007

2008

2009

2010

Continued downward revisions in GDP growth :

Platinum price (Jan 2000 to Jan 2009)

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500.00

1000.00

1500.00

2000.00

2500.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

US

$ p

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4,000

6,000

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10,000

12,000

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16,000

18,000

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US$ per oz

Rand per ounce

Commodity prices have tanked:

Several global risks remain• In an almost unprecedented period of global crisis.

• If the global credit markets do not unfreeze the global economy could move beyond “recession” to “depression”.

• The large fiscal stimulus, solvency and liquidity programs of many countries has not yet thawed credit markets:– Financing of investment and trade very challenging in the short-term.

• The “psychological” impact of the crisis is just as important as the “real” impact on consumers and investment.

• A number of imbalances have been created over the past decade, which need to be unwound. This takes time.

• The history of most banking/credit crises suggests that it does take some time for asset prices to recover.

Impact of the Global Crisis on South Africa• South Africa’s prudent macroeconomic policies and

appropriate financial regulatory environment has provided a significant “Buffer” to help the country weather the global financial storm.– Prudent macroeconomic policy choices have enabled counter-cyclical

fiscal policies, including the sustenance of a large capital investment program, which should improve the productive base of the economy.

– The monetary policy framework has provided a solid anchor for inflationary expectations and investment.

– The flexible exchange rate has weakened appropriately in response to the exogenous shock of the global crisis.

– The country’s financial sector remains relatively robust and well regulated and has limited exposure to the sub-prime crisis.

Impact of the Global Crisis on South Africa• But for a small open economy like South Africa, the impact of

the crisis is significant:– Funding our INVESTMENT-SAVINGS gap has become more

challenging.– Lower global growth has reduced demand for South Africa’s exports

and commodity prices have fallen.– Raising capital for trade and investment is much more challenging

(and expensive).– Confidence of consumers and business already negatively affected.– Many sectors have moved into survival mode. This includes

reviewing capex, reviewing all costs and potential restructuring.– Economic growth downgraded to 1.2% in 2009 (Treasury).

The South African response to the Crisis• Appropriate macroeconomic policies acting as a buffer to the

global storm.• Joint Presidential Working Group task team established in

December 2008 – focus on:– Ameliorating impact of global crisis in the short-term.– Repositioning South Africa in the longer term to take advantage when

the global upswing recommences.

• Sectoral working groups for specific sectors.• 2009/10 Budget encapsulates five key pillars of managing the

crisis and building for the longer-term.

Business proposed response to the Crisis• Continue to inspire confidence in the economy through stable,

predictable and certain policies (keep macroeconomic buffers firmly in place for the long-term).

• Timely, targeted and temporary support package made up of the following key elements:– Appropriate counter-cyclical fiscal policies

• Protect the poor (sustain social expenditures)• Continue with large capital programs (to improve the productive base of the

economy).– Differentiate South Africa from other emerging economies.– Use the opportunity of the crisis to deal with constraints to

longer-term economic growth:• Move from “red-tape” in some areas to “smart tape”• Continue to invest in key areas of infrastructure.• Sustain and grow investment in human capital

National Budget response to the Crisis• Five key pillars

– Protect the poor.– Build the capacity for long-term growth (human and infrastructural

capital).– Sustain employment.– Maintain a sustainable debt level.– Tackle microeconomic reforms to growth.

• Two additional areas proposed:– Comprehensive expenditure review– Raise the country’s export performance

Economic assessment of the budget:

“BUSA believes that the broad decisions in the budget embody a realistic balance between the need to build on the

already sound macroeconomic foundation for growth, employment creation, transformation and poverty alleviation on the one hand, as well as displaying a high degree of fiscal responsibility, while also effectively dealing with the global

economic crisis.”

BUSA broadly supports the five key pillars and two additional areas captured in the Budget Review.

TAXATION ASPECTS OF THE BUDGET2.Macro Taxation Environment

– Tax to GDP ratio

– Tax policy objectives for 2009/10

– Tax administration and collection

3.Specific Proposals Important to Business– The corporate income tax rate

– Industrial policy incentives

– Mineral and petroleum royalties

– Fuel levies and the Road Accident Fund levy

– Environmental fiscal reform

– Value added tax

– Individual tax relief

– Social security

4. Conclusion: Tax competitiveness

CONCLUDING REMARKS

• The global environment is brutal and savage.

• The country’s excellent macroeconomic framework and financial regulation have helped buffer the economy from the global storm.

• The achievement of a 1.2% growth rate depends on the country implementing the 2008/09 budget and dealing with the challenges to growth as outlined in ASGISA.

• We in BUSA commit to doubling our efforts on engaging with government and labour on ASGISA as we try to build on the solid platform for growth, transformation, employment and poverty reduction that has already been laid. The 2009/10 National Budget continues the good work in very trying global conditions.