Republic of South AfricaInvestor Presentation
March 2011
2
Economic recovery bolstered by:
• Structural tailwinds from strong regional growth and low domestic debt levels
• Sustained improvements in external and internal demand supports investment and
employment prospects
• Accommodative policies afforded by low inflation levels
Public finances on a solid footing:
• Recovery in revenue and moderate growth in public spending lowers the fiscal deficit
• Debt ratios remain low
• Emphasis on fiscal sustainability by setting a target for the structural budget balance
External vulnerability reduced:
• Sustainable long-term policy solutions to strengthen and diversify current account funding
sources
• External vulnerability reduced by low external debt
• Banking sector systemically sound
Key Highlights
3
1. South Africa Macro Backdrop
• Structural shift in world demand
underway as economic power shifts
to emerging market economies
• Rising EM intensity in South Africa’s
export basket:
– Share of exports to advanced
economies declined to 58% in
3Q10 (73% in 3Q06)
– Exports to developing Asia
increased to 19% in 3Q10
(6% in 3Q06)
Rebalancing of world demand favours South-South Flows
4
Emerging market households’ final consumption expenditure (FCE)
Source: World Bank
Emerging markets claim a greater share of SA exports
*Greece, Ireland, Italy, Portugal and SpainSource: IMF
52
54
56
58
60
2000-2005 2006 2007 2008 2009
Emerging economies FCE % of world FCE
%
0
20
40
60
2006-2007 2008 2009 2010China Emerging markets (excl China)Advanced economies (excl. Euro-area) GIIPS*Euro area (excl. GIIPS)
% of total exports
South Africa is part of a positive regional growth story
World vs. Sub-Saharan Africa real GDP growth
FDI flow into sub-Saharan Africa
Source: UNCTAD
• What explains the SSA surge?
– Favourable demographic
developments
– Improvements in the political
environment
– Pay-offs from better
macroeconomic policies
• Lower inflation and
interest rates
• Smaller budget deficits
• Lower levels of
sovereign debt
– Benefits directly related to
strong growth in developing
economies
-3
0
3
6
9
1980 1985 1990 1995 2000 2005 2010 2015
World Sub-Saharan Africa
% yoy
0
1
2
3
1990 1995 2000 2005 2010
% of world
Source: IMF
-24
-16
-8
0
8
16
24
-12
-8
-4
0
4
8
12
2000 2002 2004 2006 2008 2010
Leading indicator of trading partnersExport volumes incl. gold - lagged 3 quarters (RHS)
% yoy % yoy, smoothed• GDP recovery toward potential
expected over medium term,
underpinned by:
– Accommodative fiscal and
monetary policies
– Public sector capital
formation supportive of the
broader recovery in private
fixed investment
– Inflation anchored within
target band
– Trade partner growth leading
exports higher
The domestic economic outlook is positive
6
Strong demand from global trading partners for SA exports
Macroeconomic growth forecasts, 2009 - 2013
2009 2010 2011 2012 2013
Calendar year Actual Estimate Forecast
Percentage change unless otherwise indicated
Final household consumption -2.0 4.6 4.2 4.3 4.5
Gross fixed capital formation -2.2 -3.6 3.9 5.5 6.8
Real GDP growth -1.7 2.7 3.4 4.1 4.4
GDP at current prices (R billion) 2 396.0 2 615.7 2 846.5 3 122.0 3 445.9
CPI inflation 7.1 4.3 4.9 5.2 5.5
Current account balance (% of GDP) -4.1 -3.2 -4.2 -4.9 -5.0
Source: SARB
Source: SA National Treasury
Low debt ratios support household and public demand
Private sector credit-to-GDP ratio – EM comparisons (2009/10*)
Government debt and funding requirement ratios (2011)
• Household debt service cost is low
in comparison to historical levels
• The government debt-to-GDP ratio
remains low relative to that of the
developed world and compares
favourably with other EMs
• The relatively low debt ratios create
room for household and government
expenditure to meaningfully
contribute to domestic demand
growth
0 50 100 150 200
RussiaBrazilIndia
UkraineHungary
South AfricaIsrael
SingaporeLatvia
MalaysiaChina
Hong Kong
Private sector credit % of GDP
0 20 40 60 80 100
HungaryIndiaIsraelBrazil
MalaysiaLatvia
UkraineSouth Africa
ChinaRussia Public debt 2011
Gross financing requirement 2011
% of GDP
*Average from 4Q09 – 3Q10 Source: IMF
Source: IMF
-24
-16
-8
0
8
16
24
-50
-25
0
25
50
1999 2001 2003 2005 2007 2009
Real capital goods imports* Real gross fixed capital formation (RHS)
% yoy, smoothed % yoy
• Corporate profitability improved in
2010 and employment prospects are
firming
– Unemployment has fallen from
25.3% in 3Q10 to 24% in 4Q10
– 120,000 formal non-agriculture
jobs have been created between
October and December 2010
• Growth in capital imports is picking
up
• Real investment in productive
capacity will foster higher economic
activity.
Healthy corporate profits potentially supportive of investment and employment
8
Corporate profits and employment in trade- and non-trade sectors
* Proxied by gross operating surplus. Source: SARB
Progress in fixed capital formation underway
*Nominal imports deflated by trade-weighted exchange rate.Source: Department of trade and Industry (DTI), SARB
-12
-6
0
6
12
18
0
5
10
15
20
25
2002 2004 2006 2008 2010Corporate profitability* (LHS) Employment: non-trade sectorsEmployment: trade sectors
% yoy % yoy
9
2. Monetary Policy and Prices
Monetary policy by no means excessively loose
10Source: Reuters Ecowin, RMB FICC Research
Nominal policy rates
Real policy rates
Source: Reuters Ecowin
• South Africa’s policy rate is at a 30-
year low. Low rates are stimulating
consumer spending growth
• Real rates are positive, though still
accommodative
Source: Reuters Ecowin0 2 4 6 8 10 12
Brazil
Russia
China
India
South Africa
Australia
New Zealand
Canada
Euro Area
UK
US
%
-4 -2 0 2 4
Brazil
China
South Africa
Euro Area
Canada
US
Russia
New Zealand
UK
India
%
7
9
11
13
15
17
19
-6
-4
-2
0
2
4
6
2000 2002 2004 2006 2008 2010Core inflation (CPI excl. food & energy) - current versus previous yearPrime rate (RHS)
Percentage points %
• Currency appreciation and a
deceleration in global price
pressures dragged targeted inflation
below the mid-point of the 3-6%
target band
• Services inflation (45.8% of CPI)
lags disinflation in goods prices,
supportive of accommodative policy
• Administered price (14.8% of CPI)
inflation has trended lower too
• Policy tightening occurs with
second-round inflation pressures,
which remain absent in non-food
and energy inflation
Muted inflation affords accommodative policy response
11
Inflation well-below target
Source: Stats SA
Low core inflation justifies low policy rate
Source: SARB, StatsSA
0
6
12
18
2003 2004 2005 2006 2007 2008 2009 2010
Goods inflation Services inflation Headline inflation
% yoy
• Rising international food and energy
prices pose upside risk to global
inflation
• South Africa is in a better position
relative to EM peers to weather the
inflation storm
– Weight of food in CPI in SA is
currently 14.3% vs EM peer
group of between 15% and
35%
• Core inflation is very low at 3.5%
and historically shown much lower
volatility than headline inflation
Room to absorb upside risk from food and fuel prices
12
The Economist Food Index vs. brent crude oil
Source: Bloomberg
Core vs food and fuel inflation
Source: Stats SA
-3
0
3
6
9
12
15
18
21
24
1998 2000 2002 2004 2006 2008 2010
Core inflation Food and fuel inflation
% yoy
0
40
80
120
160
50
100
150
200
250
2003 2005 2007 2009 2011
The Economist Food Price Index Brent crude (RHS)
Index USD/bl
13
3. Public Finance
• Fiscal discipline is critical to create
scope for future countercyclical
policy when the need arises
• Public infrastructure programmes of
more than R800bn will maintain a
fair degree of stimulus
• A stabilisation of non-interest
spending and higher revenue
reduces the primary budget deficit
from of -4.3% in 2009/10 to -0.9% of
GDP in 2013/14
New growth cycle encourages fiscal consolidation
14
Consolidated government fiscal framework, 2009/10 – 2013/14
Source: SA National Treasury
Primary budget deficit projected to narrow significantly over the medium term
2009/10 2010/11 2011/12 2012/13 2013/14
Rbn Outcome Estimate Medium-term estimates
Revenue 664.84 755 824.5 908.7 1017.2
% of GDP 27.2 28.3 28.3 28.4 28.8
Expenditure 825.9 897.4 979.3 1061.6 1151.8
% of GDP 33.8 33.6 33.6 33.2 32.6
Budget balance -161.076 -142.4 -154.8 -152.9 -134.6
% of GDP -6.6 -5.3 -5.3 -4.8 -3.8
Nominal GDP 2442.6 2666.894 2914.9 3201.3 3536
Source: SA National Treasury
21
24
27
30
33
-6
-4
-2
0
2
4
6
2002/03 2004/05 2006/07 2008/09 2010/11 2012/13f
Primary fiscal balance (LHS) Budget revenue Non-interest expenditure
% of GDP % of GDP
• The public sector borrowing
requirement is projected to fall from
10.5% of GDP in 2010/11 to 6.3%
by 2013/14
– Lower consolidated
government deficit
– Lower borrowing by non-
financial public enterprises as
own revenue streams come on
line once capital projects are
completed and become
operational
Borrowing requirement reined in over medium term
15
Public sector borrowing requirement
Source: SA National Treasury
-1.5
1.6
75.5 5.6 5
4.1
1.7
2.7
1.9 5.03.9
3.1
2.2
-4
-2
0
2
4
6
8
10
12
2007/08 2008/09 2009/10 2010/11f 2011/12f 2012/13f 2013/14f
General government Non-f inancial public enterprises
% of GDP
• The countercyclical fiscal stance led
to increased borrowing to meet
expenditure commitments
• Fiscal sustainability will be guided
by:
• The adoption of an annual target
for the structural budget balance
consistent with long-term growth,
the desired level of public debt
and inter-generational
considerations
• Communicating the costs of
existing and new programmes
that require a long-term
expenditure commitment
• Setting a time-line to bring the
budget back on target following
large fiscal shocks
Fiscal debt sustainable over medium term
16
Net loan debt expected to stabilise at 40% of GDP
Source: SA National Treasury
0
10
20
30
40
50
60
70
0
200
400
600
800
1000
1200
1400
1600
1800
Gross loan debt Net loan debt Total net loan debt as % of GDP (RHS)
R billion % of GDP
17
4. External Vulnerability
• Portfolio inflows continue to fund the
current account deficit. Recent FDI
deals to improve balance of
payments funding mix
• Structural deficit remains the key
contributor to the current account
deficit – net services and income
payments to the world account for
90% of the current account deficit
• Relaxation of exchange control a
sustainable long-term solution to
balancing financial market flows
External vulnerability reduced by a positive balance of payments position
18
Net capital and FDI inflows reduces balance of payments risks
Source: SARB, Bloomberg
Structure of current account deficit
* Southern African Customs Union, comprising Botswana, Lesotho, Namibia and SwazilandSource: SARB
5.5
6.5
7.5
8.5
9.5
10.5
11.5-9
-6
-3
0
3
6
9
2000 2002 2004 2006 2008 2010Current account balance less capital account (excluding unrecorded transactions)USDZAR (RHS-scale reversed)
% of GDP R
Threshold levels
Rand apprecation
Rand depreciation
-9
-6
-3
0
3
6
2003 2004 2005 2006 2007 2008 2009 2010Trade balanceNet service, income and transfers balanceCurrent account deficitCurrent account deficit excl. SACU* transfers
% of GDP
• Net capital inflows increased
strongly over the past two years,
reaching 3.7% of GDP in the first
three quarters of 2010, versus 3.4%
of GDP over the corresponding
period in 2009
• The recent shift in portfolio inflows
from bonds to equities reflect
confidence in South Africa’s growth
prospects and business-friendly
policy choices
• The recent revisions in South
Africa’s credit rating outlook to
stable confirm that external balance
sheet dynamics remain manageable
South Africa benefiting handsomely from rising interest in EM assets
19
Cumulative inflows into bond and equity markets support rand
Source: Bloomberg
South African equity market outperforms the EM asset class
Source: Bloomberg
50
58
66
74
82
90
-8
-4
0
4
8
12
2007 2008 2009 2010
USD bn, cumulative from 2008
Net foreign purchases: bonds Net foreign purchases: equities
Nominal effective exchange rate (RHS)
U Index
0
40
80
120
160
2000 2002 2004 2006 2008 2010MSCI World MSCI EM MSCI South Africa
Index (Jan 2008 = 100)
• Coordinated fiscal and monetary
policy response to building reserves
have contributed to lowering rand
volatility
• Rising import cover assist in
reducing external vulnerability
Reserves accumulation assist in reducing rand volatility
20
Reserves accumulation assist in limiting rand volatility
Source: Bloomberg, SARB
External Vulnerability Index
* (Short-term external debt + currently maturing long-term external debt+ total non-resident deposits over one year)/Official foreign exchange reservesSource: Moody’s Ratings Agency
0
1
2
3
4
5
6
0
0.2
0.4
0.6
0.8
1
1.2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Standard deviation of the rand exchange rateImports covered by reserves (months - RHS)
Cents Months
0
50
100
150
200
250
2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F
External Vulnerability Indicator*
Index
21
5. Banking System Stability
Ample banking liquidity
22
• The South African banking system is
highly concentrated with the top four
banks holding a 85% market share
• Banks are comfortably exceeding
the minimum capital adequacy
requirements of 9.75%
• The current banking sector Tier 1
capital to risk-weighted assets
ratio is over 11%, exceeding the
target Basel III requirements for
2018
• Global perceptions of South African
Banks consistently among best in
the world. South Africa ranked 6th
out of 139 countries in terms of
soundness of banks (World
Economic Forum Executive
Opinion Survey)
Funding structure of SA banks
Source: SARB, June 2010
Professional/wholesale deposits 30.5%
Household deposits 20.5%
Corporate sector deposits 19.7%
Government, local government and public enterprises deposits
8.6%
Interbank & intragroup deposits 6.6%
Non-resident deposits 2.7%
Other borrowed funds 4.9%
Foreign currency funding 2.3%
Subordinated debt 4.0%
Capital adequacy
Source: Company data
0%
3%
6%
9%
12%
15%
Dec-08 Dec-09 Jun-10
ABSA FirstRand Nedbank Standard Bank
• Banks account for 33% of the total
primary market issuance over the
last five years
• Cost of bank funding in the local
market increased during the crisis,
but spreads have contracted
significantly
Banking system remains systemically sound
23
Credit spread of bank vs. public sector entities
Source: JSE
Robust primary issuance volumes in the local capital markets
Source: JSE
0
40
80
120
2006 2007 2008 2009 2010
Rbn
Banks / Financials Securitisations Corporates Public Sector Municipal
-
100
200
300
400
2003 2004 2005 2006 2007 2008 2009 2010 2011
bp
Bank Senior Bank Subordinated Public Sector Entities
24
6. Conclusion
• The macroeconomic landscape reflects sustained improvements in both internal and global demand
• The positive regional backdrop and low domestic debt levels are structural tailwinds
• Stimulatory fiscal and monetary policy have lessened the impact on South Africa from the global
slowdown.
• Prudent fiscal management and automatic stabilisers have ensured that the fiscal position should
return to pre-crisis levels without requiring extraordinary fiscal austerity
• External debt remains low and manageable
• The banking system remains on a solid footing
Concluding thoughts
25
26
7. Appendix
• R392.6bn (49%) of spending by non-
financial public enterprises
• Guarantees for SOEs
increase from R63bn in
2008/09 to R194bn in
2013/14 to reduce their cost
of borrowing
• Provinces and municipalities remain
significant drivers of infrastructure
spending, despite the completion of
many large projects related to the
2010 FIFA World Cup
Public-sector infrastructure spending
27
Major state-owned entities’ capital expenditure programmes, 2009/10 – 2014/15
Source: SA National Treasury
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
R billion Outcome Budget Revised Medium-term estimate
Total public sector capital expenditure
235.2 261.9 260.1 252.9 269.3 286.4 252.9
SOE capital expenditure 88.6 149.5 136.2 136.5 122.7 104.3 123.9
Of which:
Eskom 48.4 96.3 86.8 93.7 85.2 67.0 88.9
Transnet 18.4 19.4 22.8 21.9 17.1 16.2 15.2
Central Energy Fund 1.4 5.8 6.8 4.3 8.2 10.1 5.5
South African National Roads Agency Limited 11.6 13.5 8.4 2.6 2.0 1.5 1.5
Trans-Caledon Tunnel Authority 0.4 7.1 5.0 9.0 4.8 4.8 2.9
Airports Company of South Africa Limited 5.2 1.6 1.3 0.8 1.1 – –
Disclaimer
28
The Republic has filed a registration statement (including a prospectus) with the SEC for the offering to which this presentation relates. This presentation does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of the Republic in any jurisdiction or an inducement to enter into investment activity in any jurisdiction. Neither this presentation nor any part thereof, nor the fact of its distribution, shall form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. Any decision to purchase any securities in any offering should be made solely on the basis of the information to be contained in the prospectus. Before you invest, you should read the prospectus supplement and related prospectus in that registration statement and other documents the Republic has filed with the SEC for more complete information about the Republic and the offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the Republic or any underwriter participating in the offering will arrange to send you the prospectus if you request it by calling:
Deutsche Bank Securities Inc.: +1-800-503-4611
This presentation contains certain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933. Statements that are not historical facts, including statements with respect to certain of the expectations, plans and objectives of South Africa and the economic, monetary and financial conditions of the Republic, are forward-looking in nature. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date that they are made, and South Africa undertakes no obligation to publicly update any of them in light of new information or future events.Forward-looking statements involve inherent risks and uncertainties. South Africa cautions you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to (i) external factors, such as interest rates in financial markets outside South Africa and social and economic conditions in South Africa’s neighbors and major export markets; and (ii) internal factors, such as general economic and business conditions in South Africa, present and future exchange rates of the rand, foreign currency reserves, the ability of the South African government to enact key reforms, the level of domestic debt, domestic inflation, the level of foreign direct and portfolio investment and the level of South African domestic interest rates.
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