ECONOMETRIX

OUTLOOK FOR THE SA ECONOMY IN THE CURRENT GLOBAL

ENVIRONMENT July 2010

SABITA

Rob JeffreyManaging Director

Global economic outlook

Domestic economic outlook

Significant trends affecting policy

China and Africa

Economic trends and forecasts

Conclusion

OVERVIEW

ECONOMETRIX

INTERNATIONAL TRENDS

Unsustainable low savings and high

consumption

Excessive expansion of financial institutions

Lack of self discipline

Failure of supervision and regulation

THE GLOBAL ECONOMYPremier of China

ECONOMETRIX

PRIVATE EXCESS CREDIT AND BORROWING

80

90

100

110

120

130

140

US

(%

)

50

55

60

65

70

75

80

85

SA

%

96 97 98 99 00 01 02 03 04 05 06 07 08 09

Household debt as a %of disposable income

USA

SA

ECONOMETRIX

GLOBAL IMBALANCE

-600

-400

-200

0

200

400

600

800

$b

n

96 97 98 99 00 01 02 03 04 05 06 07 08 09

Current Account Balances, $bn

Emerging economies

Developed economies

Source : IMF

ECONOMETRIX

INEQUALITY AND GREED

ECONOMETRIX

0

40

80

120

160

200

240

280

320

36 42 48 54 60 66 72 78 84 90 96 02

Executive Pay * Relative to AverageWages in the US

#

* Includes salary, bonuses, long-term bonus payments and stock-option grants Based on the three highest-paid officers in the 50 largest firms of the S&P 500 in1940, 1960 and 1990

# estimatesSource : The Economist

ECONOMETRIX

LOOSENING MONETARY POLICY LEADS TO ASSET INFLATION

Inflation in asset prices, not goods prices First equities, then housing, finally commodities

50

100

150

200

250

300

350

Ind

ex

20

00

=1

00

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Metals Non food ag Food

Commodity Price Index : $ Terms

ECONOMETRIX

SLUMP AND RECOVERY

-30

-25

-20

-15

-10

-5

0

5

10

Gro

wth

%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Germany Japan UK US

Industrial Production Growth

Major realignment of exchange ratesCultural 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

REQUIRED DOMESTIC & INTERNATIONAL POLICY SHIFTS

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

APPREHENSION REGARDING SUSTAINABILITY OF UPSWING

ECONOMETRIX

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

SPECTRE OF RISING WORLD DEBT

40

50

60

70

80

90

100

%

Government Gross Debt in Advanced Economies as % of GDP

Source : Financial Times

ECONOMETRIX13

GLOBAL RECESSION: V-SHAPE OR W-SHAPE?

Massive stimulus is having effectHuge build up of cash balancesRisk of unsustainable rally in asset prices, commodity prices & economic activity

Which Scenario for Global Economy ?

V Shape

W Shape

Eta Shape

or

0

500

1000

1500

2000

2500

$B

n

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US Monetary Base

ECONOMETRIX

SOUTH AFRICAN ECONOMIC

TRENDS

Unsustainable low savings and high consumption

Excessive imports insufficient exports

THE SOUTH AFRICAN ECONOMY

ECONOMETRIX90

100

110

120

130

140

150

Ind

ex

20

04

=1

00

04 05 06 07 08 09

Manufacturing Retail New Revised

Manufacturing Productionvs Retail Sales

EXCESSIVE CONSUMPTION

ECONOMETRIX

-200000

-100000

0

100000

200000

Rm

(c

urr

en

t p

ric

es

)

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Balance on current account Foreign Investment Net capital inflows

Current Account vs Capital Inflows

EXCESSIVE IMPORTS

ECONOMETRIX

20

25

30

35

40

45

50

Pe

rce

nta

ge

91 93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 08/09 10/11 12/13

Actual 2010 Budget

Public Debt as % of GDP

Public debt as % of GDP

ECONOMETRIX

Gross general government debt as % of GDP

0 50 100 150 200 250

South Africa

Ireland

UK

Spain

US

Germany

Portugal

France

Greece

Italy

Japan

Gross General Government Debt as % of GDP

1999-20082011-Forecast

Source : Financial Times

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

BALANCED SECTORAL GROWTH IN SA POLICY REQUIREMENTS

ECONOMETRIX

CRITICAL FACTORS AFFECTING

FUTURE SOUTH AFRICAN

ECONOMIC

GROWTH

ECONOMETRIX

-4

-2

0

2

4

6

8

ye

ar-

on

-ye

ar

Gro

wth

(%

)

61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

World GDP (%) (forecast)South Africa GDP (%) (forecast)

The Age of GlobalisationWorld GDP vs SA GDP

The age of globalisation

ECONOMETRIX

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

ECONOMETRIX

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

ECONOMETRIX

FORECASTS OF SA

ELECTRICITY GENERATING

CAPACITY REQUIREMENTS

ECONOMETRIX

SOURCES OF ELECTRICITY

•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.

ENVIRONMENTAL & OTHER TRENDS

ECONOMETRIX

ENERGY CONSUMPTION AND INCOME

ECONOMETRIX

SECTORAL ELECTRICITY INTENSITY

Electricity intensity

0.0

0.1

0.2

0.3

0.4

0.5

0.6

1980 1984 1988 1992 1996 2000 2004 2008

kWh

/ Ran

d

MiningManufacAgricResidTranspComm

ECONOMETRIX

SECTORAL ELECTRICITY INTENSITY

SA electricity intensity

0.10

0.12

0.14

0.16

0.18

0.20

0.22

0.24

1973 1978 1983 1988 1993 1998 2003 2008

kWh

/ ran

d

ECONOMETRIX

LONG TERM ECONOMIC GROWTH OBJECTIVES

Assumed Compound Growth Of Electricity Sales

% per annum

Electricity Growth For Agriculture (%Pa) 1.5 Electricity Growth For Mining (%Pa) 2.1 Electricity Growth For Industry (%Pa) 3.2 Electricity Growth For Services (%Pa) 3.0 Electricity Growth For Residential(%Pa) 4.1 Total 3.0

Associated GDP Growth % per annum

Agriculture 0.9 Mining 0.3 Industry 3.1 Services 4.4

Total 3.9 Balance of payments Associated Real Exports 3.1

Associated Real Imports 6.1

Employment *Associated Employment Index 4.4

* = Non Agricultural Sector

ECONOMETRIX

ESKOM FORECAST CAPACITY

ECONOMETRIX

-15

-10

-5

0

5

10

Gro

wth

%

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Electricity Units Consumed

ECONOMETRIX

THE CHINDIA FACTOR

SUBSTANTIAL IMPACT ON AFRICA AND SA

ECONOMETRIX

CHINA FUTURE GIANT

ECONOMETRIX

THE CHINA FACTOR

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

ECONOMETRIX

ECONOMETRIX

LONG TERM DEMAND TREND

World crude steel production

2250 2007-2030 2000 1900-2006 Total = 38 Bt* 1750

Total = 39 Bt 1500

1250 1000 750

500 250

0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

•At a hypothetical world average growth rate of 2% p.a . Source of data: IISI

Slide 13

ECONOMETRIX

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%

ECONOMETRIX

ECONOMIC TRENDS AND

FORECASTS

ECONOMETRIX

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 4.2 Sub-Saharan Africa 6.5 5.0 3.8 4.1 4.1 4.3 4.7 South Africa 4.2 3.0 1.9 2.3 1.7 na 2.6

Latest IMF Forecast Growth in GDP(%)

  2009 2010 2011World -0.6 4.2 4.3Advanced economies -3.2 2.3 2.4China 8.7 10.0 9.9Sub-Saharan Africa 2.1 4.7 5.9South Africa -1.8 2.6 3.6IMF, World Economic Outlook Database, April 2010

ECONOMETRIX

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 6.3 Zambia 5.8 6.0 Uganda 5.6 6.4

Democratic Republic of Congo 5.4 7.0

Ghana 4.5 20.1 Kenya 4.1 5.8 Mauritius 4.1 4.7 Senegal 3.4 4.1 Côte d'Ivoire 3.0 4.0 Lesotho 3.0 2.8 South Africa 2.6 3.6 Zimbabwe 2.2 0.0 Namibia 1.7 2.2 Swaziland 1.1 2.5 Source: IMF WEO, Apr 10

ECONOMETRIX

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

ECONOMETRIX

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 45.5 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 ChinaSource : The Economist  **Source: SARB

ECONOMETRIX

4

6

8

10

12

14

Ra

nd

99 00 01 02 03 04 05 06 07 08 09 10 11

Forecast : Rand Exchange Rate

R/$

R/Euro

ECONOMETRIX

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 8.2

ECONOMETRIX-6

-4

-2

0

2

4

6

8

10

Gro

wth

%

00 01 02 03 04 05 06 07 08 09 10 11

Forecast :Private ConsumptionExpenditure

ECONOMETRIX

500

1000

1500

2000

2500

3000

3500

Co

ns

tan

t '2

00

5 P

ric

es

(R

'm)

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Building Plans Passed :Non-Residential vs Residential

Residential

Non-Residential

ECONOMETRIX

-30

-20

-10

0

10

20

30

Gro

wth

%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Growth in Fixed Investment vsInvestment in Machinery

FixedInvestment

Machinery & OtherEquipment

ECONOMETRIX

0

100

200

300

400

500

600

Ind

ex

19

95

=1

00

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Gross Domestic Fixed Investment vsInvestment in Construction Works

ConstructionWorks

Fixed Investment

ECONOMETRIX

0

100

200

300

400

500

Ind

ex

19

95

=1

00

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Gross Domestic Fixed Investment vsInvestment by Electricty, Gas & Water

Fixed Investment

Electricity, Gas & Water

ECONOMETRIX

-4

-2

0

2

4

6

8

10

12

14

%

00 01 02 03 04 05 06 07 08 09 10 11 12

Forecast: CPI vs CPIX

Inflation Target

CPIX

CPI

ECONOMETRIX

9

11

13

15

17

19

21

23

25

%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Forecast: Prime Overdraft Rate

ECONOMETRIX

The Decline in Interest Rates Has Run its Course

10

12

14

16

18

20

22

24

26 %

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Forecast: Prime Overdraft Rate

ECONOMETRIX

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 3.7 2.9 4.8           

Gross Domestic Expenditure -1.8 4.4 3.6 2.5 4.1

Year End (Q4) -1.2 5.4 3.6 2.7 4.8            Private Consumption -3.1 1.9 3.1 2.3 3.3 Year End (Q4) -2.9 3.3 3.0 2.3 3.9            Fixed Investment 2.4 2.0 4.8 3.9 5.3 Year End (Q4) -1.3 3.1 5.7 3.9 6.5            Government Expenditure 4.7 3.9 4.0 3.8 3.7 Year End (Q4) 4.5 4.1 3.8 3.8 3.7            Current A/C Balance As % of GDP -4.0 -3.2 -4.2 -4.2 -3.5

ECONOMETRIX

-5

-4

-3

-2

-1

0

1

2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Difference Between Growth in SA Economy & World

World Emerging & Developing Africa

Forecasts

ECONOMETRIX

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

ECONOMETRIX

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