The 2008 MTBPS: an exercise in the art of the possible Jac Laubscher

Group Economist24 October 2008

International financial crisis: financial system

● Systemic risk being addressed

● Tentative signs of stabilisation

● Normalisation will take some time

● Financial system needs to be reformed: beware throwing out the baby with the bath water

● The underlying cause is human failure

International financial crisis: real economy

● Recession on its way

Developed countries: classical recession

Developing and emerging market countries: growth recession

● How severe and how long?

International economic downturn

Source: IMF World Economic Outlook October 2008

%

OECD leading indicator vs. growth

Source : I-Graph

-12

-7

-2

3

8

13

1965 1970 1975 1980 1985 1990 1995 2000 2005

%

OECD leading indicator

GDP Growth

OECD leading indicator vs. commodity prices

Source : I-Graph

-5

-3

-1

1

3

5

7

9

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

%

-40

-20

0

20

40

60

80

100

120%

OECD leading indicatorCommodity prices

Current account (% of GDP)

Source : I-Graph

-8

-6

-4

-2

0

2

4

6

1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

%

Composition of current account

% of GDP 20042008 (H1

annualised)

Trade balance -0.1 -2.1

Net service receipts -0.3 -1.6

Net income receipts -2.0 -3.3

SACU transfers -0.8 -1.1

Current account -3.2 -8.1

Composition of capital inflow (%)

2003 2004 2007 H1 2008

Direct investment

10.9 5.2 17.0 48.5

Portfolio investment

14.8 47.2 45.6 8.3

Other investment

29.3 11.0 24.7 37.5

Unrecorded transactions

45.0 36.5 12.7 5.6

Inflow of capital

Source : I-Graph

-26

-21

-16

-11

-6

-1

4

9

14

2000 2001 2002 2003 2004 2005 2006 2007 2008

R'billion

Rand vs. major currencies

Source : I-Graph

70

90

110

130

150

170

190

210

2001 2002 2003 2004 2005 2006 2007 2008

Index

Rand/Dollar

Rand/Euro

Rand/Pound

R/$ vs. VIX

10

20

30

40

50

60

70

80

2005 2006 2007 2008

Index

5

6

7

8

9

10

11

12R/$

VIX (lhs)

R/$ (rhs)

Source : I-Graph

Reuters headlines: 23 October at 15:00

● Sterling hits multi-year lows

● C. European FX pressured, forint touches new low

● Norway finmin says “crisis pull-out” hit crown

● Brazil’s currency plunges nearly 6%

● Mexican peso loses 4.9% before official open

● Turkish lira weakens as central bank action eyed

● Romanian leu down 2.5% vs euro in volatile trade

● Asian FX plumbs multi-year lows on growth fears

CPIX inflation vs. R/$

Source : I-Graph

3

5

7

9

11

13

2000 2001 2002 2003 2004 2005 2006 2007 2008

Rand

-40

-20

0

20

40

60

80%

CPIX inflation (lhs)

R/$ (rhs)

Have interest rates peaked?

Source : I-Graph

2

4

6

8

10

12

14

16

18

20

22

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

Repo rate

CPIX inflation

Household consumption in recession

Source: I-Graph

-40

-30

-20

-10

0

10

20

30

40

50

2001 2002 2003 2004 2005 2006 2007 2008

%

-9

-4

1

6

11

%

Car sales (lhs)

Retail sales (rhs)

Yield on l.t. bonds: SA vs. global

Source : I-Graph

7

8

9

10

11

12

13

14

15

16

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Index

1

3

5

7

9

11

13

Index

SA long term bond yields (lhs)International norm (rhs)

Government debt (% of GDP)

0

5

10

15

20

25

2008/09 2009/10 2010/11 2011/12

Net loan debt Foreign debt

The MTBPS view: two scenarios

● A deep global recession → reduction in international trade → prolonged period of much slower growth in SA → real income and corporate profits under pressure

● Global economic adjustment in medium-term → more balanced growth → benign outcome for SA

● MTBPS is based on second (more optimistic) scenario

● The risk is to the downside

MTBPS macroeconomic projections

2008 2009 2010 2011

GDP growth (%) 3.7 3.0 4.0 4.3

CPI inflation (%) (CPIX 11.6) 6.2 5.3 4.7

Current account (% of GDP) -7.6 -7.8 -8.9 -8.8

Consolidated national government budget

2008/09 2009/10

Feb. budget MTBPS Feb. budget MTBPS

Tax Revenue 642.3 642.3 711.5 699.0

% of GDP 28.1 27.1 28.4 26.9

Non-interest Expenditure

559.9 581.5 630.5 682.2

% of GDP 24.5 24.6 25.2 26.3

Real growth (%) 7.7 6.7 7.5 11.5

Balance 18.5 3.2 16.0 -41.5

% of GDP 0.8 0.1 0.6 -1.6

National budget tax revenue

2008/09 2009/10

Feb. budget MTBPS Feb. budget MTBPS

Total Tax Revenue 642.3 642.3 711.5 699.0

Income & profits 369.8 380.6 409.6 416.3

Payroll & workforce

7.5 7.9 8.2 8.4

Property 14.2 10.3 15.7 11.2

Goods & services 218.6 215.9 241.7 233.5

International trade 31.5 26.9 36.3 29.6

National budget tax revenue (selected items)

2008/09 2009/10

Feb. budget MTBPS Feb. budget MTBPS

Total Tax Revenue 642.3 642.3 711.5 699.0

Companies 156.5 158.9 171.4 168.7

Transfer duties 8.6 6.0 9.5 6.5

VAT 167.0 167.0 185.2 180.3

Fuel levy 26.4 25.5 28.0 26.3

Customs duties 31.1 26.5 35.9 29.2

Borrowing requirement

2007/08 2008/09 2009/10 2010/11 2011/12

General government -17.0 2.6 46.9 38.7 7.5

% of GDP -0.8 0.1 1.8 1.3 0.2

Public sector -5.9 30.4 77.2 91.7 82.4

% of GDP -0.3 1.3 3.0 3.2 2.6