MTBPS Preview: perceived positive Moody s review does not belie that debt stabilization, particularly SOE debt stabilization, is still required

Similar documents
Budget: Fiscal adjustments and higher GDP growth to reduce fiscal deficit aimed at stabilising government debt

MTBPS Review: Retreat from planned fiscal consolidation; deficit estimated to remain at 3.9% of GDP over the medium term framework

MPC update: The SARB cuts interest rates by 25bp as risks to inflation outlook seen to be reduced as SA avoids a Moody's rating downgrade

MTBPS Preview: Commitment to medium term fiscal consolidation expected to be maintained against risk of credit rating downgrades

Budget Preview: 2018 Budget must reinstate commitment to fiscal consolidation to avoid further credit rating downgrades

South African National Budget 2018/2019 a brief review

South Africa: National Budget 2009/2010 Budgeting during a global credit and economic crisis. Kevin Lings Economist 12 February 2009

Improving the Investment Climate in Sub-Saharan Africa

Southern Africa regional superpower in the making. Dr Roelof Botha

AUTOMOTIVE COMPONENTS PRODUCT / MARKET MATRIX. AIEC P O Box Arcadia 0007 Tel: Fax: Website:

Ian Kirk, Sanlam Group CEO. 28 August 2017

Africa: An Emerging World Region

World Bank Group: Indira Chand Phone:

Africa Fixed Income. Old finance on an old continent makes for new things. SAAX July 2014

Lusaka, 7 May Note: The original of the Agreement was established by the Secretary-General of the United Nations on 2 June 1982.

African Financial Markets Initiative

ide: FRANCE Appendix A Countries with Double Taxation Agreement with France

DRAFT RATES AND MONETARY AMOUNTS AND AMENDMENT OF REVENUE LAWS BILLS

Q2.18 Macro-economic outlook : Global growth strengthens, for SA structural reforms are outstanding now the politics have subsided

Argentina Bahamas Barbados Bermuda Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile

TRENDS AND MARKERS Signatories to the United Nations Convention against Transnational Organised Crime

2016 income estimates

The Changing Wealth of Nations 2018

Economic outlook. Trading South Africa 12 March 2014

Paying Taxes 2019 Global and Regional Findings: AFRICA

Fiscal Policy Responses in African Countries to the Global Financial Crisis

Why Invest In Emerging Markets? Why Now?

New Exchange Rates Apply to Agricultural Trade. 0. Halbert Goolsby. Reprint from FOREIGN AGRICULTURAL TRADE OF THE UNITED STATES April 1972

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT BOARD OF GOVERNORS. Resolution No. 612

DOMESTIC CUSTODY & TRADING SERVICES

China-Africa Investment Forum Beijing June 2013 FOCUS: MAURITIUS. A presentation by Mardemootoo Solicitors

UPDATE ON FISCAL STIMULUS AND FINANCIAL SECTOR MEASURES. April 26, 2009

Regional Economic Outlook for sub-saharan Africa. African Department International Monetary Fund November 30, 2017

South African Reserve Bank STATEMENT OF THE MONETARY POLICY COMMITTEE. Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

Why Invest In Emerging Markets? Why Now?

SA sovereign rating downgrade

Réunion de Reconstitution 14 th ADF Replenishment Meeting. Economic Outlook of ADF Countries

CNH and China QFII market: Opportunities and Challenges A Fund Custodian and Administrator's Perspective"

International Comparison Programme Main results of 2011 round

Macroeconomic outlook & Implications for Pensions

Request to accept inclusive insurance P6L or EASY Pauschal

US Business Tax Reform Would Be Healthy for the World Economy. By Duanjie Chen and Jack M. Mintz

BLACKROCK GLOBAL ETP LANDSCAPE

Tunis, Tunisia 17 June 2005

Title of presentation

Assessing Fiscal Space and Financial Sustainability for Health

SANLAM EMERGING MARKETS INVESTOR DAYS

Country Risk Analytics

Global growth fragile: The global economy is projected to grow at 3.5% in 2019 and 3.6% in 2020, 0.2% and 0.1% below October 2018 projections.

HEALTH WEALTH CAREER 2017 WORLDWIDE BENEFIT & EMPLOYMENT GUIDELINES

Perspectives on Global Development 2012 Social Cohesion in a Shifting World. OECD Development Centre

Guide to Treatment of Withholding Tax Rates. January 2018

Local currency financing: some considerations for DBSA

Olivier Blanchard Economic Counsellor and Director of the Research Department, International Monetary Fund

Attractive fundamentals in the face of ongoing market volatility

The Landscape of Microinsurance Africa The World Map of Microinsurance

T. Rowe Price Funds. Supplement to the following summary prospectuses, each as dated below (as supplemented) MARCH 1, 2018 MAY 1, 2018 JULY 1, 2018

Actuarial Supply & Demand. By i.e. muhanna. i.e. muhanna Page 1 of

Global Macro Outlook Subdued Growth, Tail Risks Diminishing ANNE VAN PRAAGH, MANAGING DIRECTOR, SOVEREIGN RATINGS

South Africa loses investment grade (IG) status on anticipated unfavourable policy shifts

Will Africa follow the Asian developmental model? Dr Martyn Davies Managing Director, Emerging Markets & Africa Deloitte

Why Invest in Africa. Senzo Hlangu. 7 June 2011

STRUCTURING INVESTMENTS INTO AFRICA THROUGH MAURITIUS/ESTATE PLANNING AND WEALTH MANAGEMENT FOR HIGH NET WORTH INDIVIDUALS IN EAST AFRICA (KENYA)

Economic activity gathers pace

Eighth UNCTAD Debt Management Conference

Setting up in Denmark

Scale of Assessment of Members' Contributions for 2008

National Monetary Policy Forum. Chris Loewald, Head: Policy Development and Research 10 April 2016 Pretoria

Standard Bank Research*

Leading global banking practices Emilio Pera, May 2013

Instruction Deadline. *Settlement Cycle

The role of subsidized health in promoting access to affordable quality health care: the case of Kwara State community health insurance (Nigeria)

Emerging Markets Debt: Outlook for the Asset Class

Capital Markets and Corporate Governance Service Line Capital Markets Practice, FPD

Investec Services PMI Ireland

Employer Social Charges 13/10/2017 EURO/USD USD 1.20 JPY/USD 0.01 AUD/USD USD 0.73 GBP/USD Charges patronales obligatoires %

Indonesia Economic Update QNB Group. October 2014

Country Update: Mauritius

Emerging Markets Outlook

Global Construction 2030 Expo EDIFICA 2017 Santiago Chile. 4-6 October 2017

Financial results presentation For the period ended 30 June External structural and cyclical impacts on results

Trends, like horses, are easier to ride in the direction they are going

A RESILIENT SOUTH AFRICA MAKING HARD CHOICES IN DIFFICULT TIMES

HSBC Fund Update. HSBC GIF Global Emerging Markets Bond. April Market overview. Portfolio strategy

Index of Financial Inclusion. (A concept note)

NEPAD-OECD AFRICA INVESTMENT INITIATIVE

TRIAX. T. Rowe Price SUMMARY PROSPECTUS. March 1, 2018

A short history of debt

PwC Tax Calendar 2016

Morocco: It s oh so quiet

Public Debt Sustainability Analysis for Market Access Countries (MACs): The IMF s Framework. S. Ali Abbas International Monetary Fund

2019 Budget predictions

INVESTMENT NOTE AN INVESTOR-FRIENDLY BUDGET AGAINST A FAVOURABLE GLOBAL BACKDROP 26 FEBRUARY 2018 DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS

Africa Business Forum, Energy Industry Session

Progress towards Strong, Sustainable and Balanced Growth. Figure 1: Recovery from Financial Crisis (100 = First Quarter of Real GDP Contraction)

GLOBAL EQUITY MARKET OUTLOOK

December Nigeria's operating landscape

Farrelly & Scully, Virginia Road, Ballyjamesduff, Co. Cavan.

Volume III. After the Gold Standard,

Global Economic Briefing: Global Liquidity

Transcription:

Figure 1: Expenditure continues to outpace revenue vs revenue performance and projections Revenue vs expenditure vs deficit 40 1 Revenue actual and projected 17 10 % GDP 1 30 8 7-3 -8 1989/90 1997/98 005/06 013/14 Budget Balance (Deficit-/Surplus+) Tax Revenue as % GDP Expenditure % GDP 0 10 0 6 4 0 003/04 007/08 011/1 015/16 019/0 Personal income tax VAT Corporate income tax Customs duties Sources: SARB, National Treasury With a new Finance Minister, October s mini-budget will be keenly watched, but will likely deliver a very similar path to the Budget released at the start of the year. This fiscal year the fiscal deficit as a % of GDP will likely widen (vs. projected), with above budgeted civil servant wage increases, while revenues are weak and previous tax buoyancy expectations were likely overly optimistic. Looking forward, reprioritisation of spending and the infrastructure fund are also on the cards, while revenue underperformance will likely spur some further debate on tax increases. Any actual material tax increases are not expected, occurring instead at the 019 budget. SA continues to face higher taxation, both indirectly and directly, but has failed to scale back real expenditure growth. Higher taxes and utility costs have contributed to slowing economic growth, and this partial procyclical fiscal policy stance (substantial tax increases) is likely to continue in the medium-term. Indeed, personal income taxes and the super wealthy (gross income of R7m plus) are likely to be discussed (but not hiked in the MTBPS), with the new Minister a wealth tax proponent. The rating agencies will look for fiscal slippage (widening deficit or higher debt projections as a % of GDP), and should the MTBPS deliver materially higher public sector debt (and indicate higher SOE contingent liabilities) projections, the credit rating agencies would see this as credit negative. This year the Medium-Term Budget Policy Statement (MTBPS) takes place on 4 th October 018, and revisions to SA s fiscal deficit, inflation, GDP and net debt projections are all expected, as well as information on potential future tax changes and funding for SOEs. Details (particularly finances) of the Economic Stimulus and Recovery Plan, with its objectives to ignite economic activity, restore investor confidence, create jobs, aid the vulnerable and repair municipalities, are also expected. Figure : National revenue, expenditure and borrowings: R million unless otherwise stated Aug 018 Fiscal year to 018/19 % of Last year: % date budget budget budget Revenue: 115 684 489 18 1 31 146 37.0 36.8 Expenditure: 13 550 60 645 1 51 00 41.0 41.4 Deficit/borrowings: 7 866 131 47 191 054 68.7 67.5 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 1

Figure 3: Financing R million August 018 August 017 Domestic short-term loans (3 681) 8 66 Domestic long-term loans 15 50 14 679 Foreign Loans - - Change in cash and other balances1 (3 704) (10 690) Total financing (net) 7 866 1 614 1) A negative value indicates an increase in cash and other balances. A positive value indicates that cash is used to finance part of the borrowing requirement Figure 4: Main Budget Balances 011/ 01/ 013/ 014/ 015/ 016/ 017/ 018/ 019/ 00/ 1 13 14 15 16 17 18 19 0 1 Budget 010-5.0% -4.1% MTBPS 010-4.6% -3.9% -3.% Budget 011-5.3% -4.8% -3.8% MTBPS 011-5.5% -5.% -4.5% -3.3% Budget 01-4.8% -4.6% -4.0% -3.0% MTBPS 01-4.% -4.8% -4.5% -3.7% -3.1% Budget 013-3.9% -5.% -4.6% -3.9% -3.1% MTBPS 013-3.6% -4.% -4.% -4.1% -3.8% -3.0% Budget 014-3.7% -4.3% -4.0% -4.0% -3.6% -.8% MTBPS 014-3.7% -4.3% -3.9% -4.1% -3.6% -.6% -.5% Budget 015-3.6% -4.1% -3.8% -3.9% -3.9% -.6% -.5% MTBPS 016-3.6% -4.1% -3.8% -3.6% -3.8% -3.3% -3.% \ -3.0% Budget 017-4.7% -5.0% -4.4% -4.3% -4.1% -3.9% -3.5% -3.3% -3.3% MTBPS 017-4.3% -4.1% -3.8% -4.7% -4.5% -4.6% -4.6% Budget 018-4.7% -5.0% -4.4% -4.3% -4.1% -3.8% -4.6% -3.8% -3.8% -3.7% Figure 5: Expenditure ceiling 1 R billion/percentage change 015/16 016/17 017/18 018/19 019/0 00/1 016 Budget Review 1 076 705 1 15 833 1 40 086 1 339 4 016 MTBPS 1 074 99 1 144 353 1 9 74 1 33 465 1 435 314 017 Budget Review 1 074 970 1 144 5 1 9 83 1 33 553 1 45 408 017 MTBPS 1 074 970 1 141 978 1 33 7 1 316 553 1 40 408 1 54 018 Budget Review 1 074 970 1 141 978 1 3 678 1 315 00 1 416 597 1 53 76 1) Non-interest spending financed from the National Revenue Fund excluding skills development levy, special appropriations in 015/16 for Eskom and the New Development Bank, debt management and Gold and Foreign Exchange Contingency Reserve Account transactions and the International Oil Pollution Compensation Fund Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za

Figure 6: Gross debt-to GDP outlook and Budget deficit projection slightly wider 65 Gross debt to GDP outlook 6.4 6.8 63.3 % of GDP Budget deficit projection 59.7 60.861.6 0 % of GDP 60-1 58. -1 57.0 55.3 56. 56.1-55.3 55 54. 53.3 55.1 56.0 56. 5.35.9 5.4 55.7-3 51.9 50.5-4 50 5. 51.3 49.0 50.7-4.1-3.8-3.6-3.7-3.5-3.6-3.6-3.5-5 49. 46.5-5.3-4.8-4.3-6 45 43.8-7 40 41.1-8 -7.3 01/13 015/16 018/19 01/ 04/5 008/09 011/1 014/15 017/18 00/1 017 MTBPS 017 Budget 018 Budget Consolidated budget deficit Moody s recently released a regular update on its credit opinion of South Africa, warning of a rating downgrade if South Africa fails to stabilize its debt, lift economic growth or/and sees an increase in the likelihood that SOE contingent liabilities will lift its sovereign debt burden. The agency recognises the socio political issues in SA which has led to populist spending pressure in a low growth, high unemployment environment, as poverty levels are substantial. However, it is also reported to highlight, as it did in its March review, that the change in political leadership in SA this year is expected to bolster institutional strength, strengthen government s resolve to fiscal consolidation, and improved financial governance of the SOEs, as well as strengthening the outlook for GDP growth. Indeed such a positive outcome above, if it occurs, is signalled as supportive of a credit rating upgrade. Figure 7: Share of total tax expenditure per tax type and tax expenditure as a share of tax revenues and nominal GDP Share of total tax expenditure per tax type % Tax expenditure as a share of tax revenues and % nominal GDP 15. 3.9 015/16 37 5 35 3 15.0 3.8 01/13 4 3 38 17 14.8 14.6 3.7 14.4 % 0 0 40 60 80 100 Personal income tax Corporate income tax Value-added tax Customs and excise duties 3.6 01/13 013/14 014/15 015/16 Tax expenditure/gross tax revenue Tax expenditure/nominal GDP (right axis), Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 3

Figure 8: Consolidated government fiscal framework, 015/16-00/1 015/16 016/17 017/18 018/19 019/0 00/1 R billion/percentage of GDP Outcome Revised Medium-term estimates Revenue 1 15.3 1 85.7 1 353.6 1 490.7 1 609.7 1 736.9 9.5% 9.% 8.8% 9.7% 9.9% 9.9% Expenditure 1 366.3 1 441.8 1 558.0 1 671. 1 803.0 1 941.9 33.1% 3.7% 33.% 33.3% 33.4% 33.4% Budget balance -151.0-156.1-04.3-180.5-193.3-05.0-3.7% -3.5% -4.3% -3.6% -3.6% -3.5% Primary Balance -13. -5.9 5.5 0.3 45.7 60.6-0.3% -0.1% 0.1% 0.4% 0.9% 1.1% Figure 9: Main budget revenue and non-interest spending 8 Per cent of GDP 6 4 0 005/06 006/07 007/08 008/09 009/10 010/11 011/1 Revenue 01/13 013/14 014/15 015/16 016/17 017/18 Non-interest spending 018/19 019/0 00/1 Figure 10: Macro-economic forecasts, National Treasury vs. Investec 017 018 019 00 Final household consumption 1.3 1.7 1.9.3 Investec. 1. 1.9.5 Gross fixed capital formation 0.3 1.9 3.3 3.7 Investec 0.4-0.1 1.6 3.5 Exports 1.5 3.8 3.4 3.5 Investec -0.1.6 4.1 6.0 Imports.7 4.4 4.6 4.5 Investec 1.6 3.0 4. 6.3 Real GDP 1.0 1.5 1.8.1 Investec 1.3 0.7 1.9.3 CPI Inflation 5.3 5.3 5.4 5.5 Investec 5.3 4.6 5. 5.0 Current account deficit (% GDP) -. -.3 -.7-3. Investec -.4-3.6-3.3-3., Investec Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 4

Figure 11: Borrowings: R million unless otherwise stated 016/17 017/18 018/19 019/0 00/1 Outcome Budget Revised Medium-term Estimates Domestic short-term loans 40 507 1 000 33 000 14 00 700 30 000 Domestic long-term loans 174 034 191 500 193 800 191 000 00 500 08 900 Foreign loans 5 070 9 600 33 895 38 040 39 10 40 650 Change in cash and other -5 98-1 4-14 65-18 994 39 137 77 balances Total borrowing 40 69 0 876 46 043 4 46 301 547 8 77 A positive /negative change indicates a decrease/increase in cash balances. The previous core factors underpinning the rating remains the strength of the judiciary, sophistication and depth of SA s financial markets, the health of the banking system and low levels of foreign debt. Moody s continues to believe that SA will achieve fiscal consolidation over its medium-term framework. The October MTBPS (Medium-Term Budget Policy Statement) will consequently remain key to Moody s ongoing assessment, the last of the three key agencies to have South Africa rated investment grade. The rating is on a dual basis (both foreign and local currency long-term sovereign debt) on Baa3, and loss of this investment grade rating is estimated to result in higher borrowing costs, marked currency weakness and upward pressure on short-term interest rates. Historically, countries which have seen their ratings from the key agencies migrate from investment to sub-investment grade have had a significant market impact. Indeed, Russia, Turkey, Brazil and Hungary saw their ten year government bond yields rise by about 130bp on average at the time of downgrade, versus three months before. The historic average in a migration from investment to subinvestment grade for these four countries shows about a 0bp rise in short-term interest rates. The SARB previously estimated up to a 75bp rise in the repo rate, which could temper the money market interest rate moves somewhat in comparison, to closer to 100bp, or likely less. In addition, South Figure 1: Total public-service employment; Average cost-of living adjustments and inflation Total public-service employment Millions 1 % Average cost-of-living adjustments and (full-time equivalants) inflation 10 1.3 8 1. 6 1.1 1.0 4 Salary level 1-1 Management (level 13-16) CPI inflation, Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 5

Figure 13: Contribution to gross tax revenue and comparative standard VAT rates by country* Contribution to gross tax revenue by tax Comparative standard VAT rates by country* % instrument, 016/17 1 Persons and individuals Value-added tax Companies Fuel levy Customs duties Specific excise duties Dividend withholding tax Skills development levy Electricity levy Transfer duties 0 10 0 30 40 % of gross tax revenue *Rates are for 017 and 018. The OECD rate refers to an unweighted average 14 7 0 Argentina United Kingdom Madagascar Morocco Cameroon OECD India Russia Turkey Ivory Coast Rwanda Tanzania Uganda Brazil China Mozambique Malawi Mexico Kenya Ghana Mauritius Namibia Zimbabwe South Africa Botswana Indonesia South Korea Japan Nigeria Saudi Arabia, Figure 14: Corporate income tax as a share of GDP* and nominal spending growth by function over MTEF % Corporate income tax as a share of GDP* Nominal spending growth by function over 7 MTEF 6 5 Post-school education and training Debt-service costs Social protection 7.9 9.4 13.7 4 3 Health Economic development Community development 7.8 7.4 7.4 Basic education Peace and security 5. 1 General public services 000 003 006 009 01 015 % 4.3 OECD Africa South Africa 0 4 6 8 10 1 14, *Average corporate income tax to GDP ratios for OECD and 16 African countries (Cape Verde, Cameroon, Democratic Republic of the Congo, Ivory Coast, Ghana, Kenya, Mauritius, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Togo, Tunisia and Uganda) 6.8 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 6

Figure 15: Bond yields before and after a downgrade from investment grade to sub-investment grade y prior 1y prior 6m prior 3m prior downgrade 3m post 6m post 1y post y post Brazil 1.79 1.43 15.08 15.58 16.08 1.59 11.99 10.5 018 Russia 6.69 8.33 9.45 1.03 13.41 11.17 11.75 9.8 8. Turkey 6.85 10.54 9.51 9.85 11.04 10.3 10.35 018 Hungary - - 7.30 8.1 10.1 8.86 7.75 6.1 Average 8.78 10.43 10.34 11.4 1.69 10.71 10.46 Currencies before and after a downgrade from investment grade to sub-investment grade y prior 1y prior 6m prior 3m prior downgrade 3m post 6m post 1y post y post Brazil.34.86 3.58 3.84 3.96 3.61 3.6 3.11 018 Russia 30.36 35.48 36.94 50.6 61.66 49.97 69.11 76.34 58.41 Turkey 3.35.95.99 3.11 3.88 3.55 3.53 018 Hungary 40.7 180.4 6.5 15.1 44.9 5.7 16.4 7.8 Average 69. 55.4 67.5 68.1 78.6 70.7 73.08 Source: Rating Agencies, IRESS, IHS, Bloomberg s, Investec Africa has a sophisticated financial market, and the impact of the downgrades could be less severe than Russia, Turkey, Brazil and Hungary experienced. A significant downgrade is partially priced in for South Africa, while investors may also see higher yields as a buying opportunity. The market period, i.e. risk-on or risk-off, also will have a material impact, particularly on the rand effect. The revisions to South Africa s key fiscal projections in the MTBPS versus the Budget, namely the fiscal deficit and debt as a % of GDP, along with projected expenditure versus the expenditure ceiling, are not expected to be substantial. The fiscal deficit projection in the Budget for 018/19 is likely to widen Figure 16: Estimates of individual tax payers and taxable income, 018/19 Income tax Registered Taxable payable Taxable bracket individuals income before relief Income tax relief Income tax from medical Income tax payable after proposals Number % R bn % R bn % Rbn % R bn % R bn % 0 R70 000 1 6 557 45 170. R70 001 R150 000 50 678 33.4 6.0 10.8 11.1. -0.9 1.5 0.04 5.0 10..0 R150 001 R50 000 1 790 80 3.9 351.8 14.5 34.3 6.7-1.3 17.3 0.16 3.1 33. 6.6 R50 001 R350 000 1 178 901 15.7 349.8 14.4 51.6 10.1-1.3 18.4 0.15.1 50.5 10.0 R350 001 R500 000 934 615 1.5 386.8 15.9 74. 14.5-1.6 1.5 0.15 1.9 7.7 14.4 R500 001 R750 000 576 469 7.7 348.4 14.3 85.6 16.7-1. 16.1 0.10 14.3 84.5 16.7 R750 001 R1 000 000 33 65 3.1 00.7 8.3 58.4 11.4-0.5 6.5 0.04 6.1 58.0 11.5 R1 000 001 R1 500 000 161 014. 19.3 7.9 6.4 1. -0.3 4.5 0.03 4.4 6.1 1.3 R1 500 001+ 109 783 1.5 339.4 14.0 134.8 6.3-0. 3.1 0.0 3. 134.6 6.6 Total 7 487 39 100 431 100 51.5 100-7.3 100 0.70 100 505.8 100 Grand total 14 044 637 601 51.5-7.3 0.70 505.8 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 7

Figure 17: Rating Agency and Market Views Moody s Standard & Poor s Fitch Ratings Long-term Foreign Currency Debt Long-term Foreign Currency debt Long-term Foreign Currency Debt Baa3 BB BB+ Stable Stable Stable Long-term Domestic Currency Debt Long-term Domestic Currency Long-term Domestic Currency Debt Debt Baa3 BB+ BB+ Stable Stable Stable Source: Moody s, Standard & Poor s, Fitch Figure 18: Consolidated fiscal framework, 017/18 00/1 (Rbn and %) MTBPS 017 017/ 18 Budget 018 017/ 18 MTBPS 017 018/ 19 Budget 018 018/ 19 MTBPS 017 019/ 0 Budget 018 019/ 0 MTBPS 017 00/ 1 Budget 018 00/ 1 Revenue 1 363.6 1 353.6 1 477.5 1 490.7 1 594. 1 609.7 1 709.3 1 736.9 % of GDP 9.% 8.8% 9.7% 9.7% 30.0% 9.9% 9.9% 9.9% Expenditure 1 566.6 1 558.0 1 670.6 1 671. 1 80.3 1 803.0 1 935.1 1 941.9 % of GDP 33.5% 33.% 33.6% 33.3% 33.9% 33.4% 33.9% 33.4% Non-interest expenditure 1 49.8 1387.6 1 333.5 1 483.4 1 438.7 1 596.9 1 544.1 1 718.0 % of GDP 6.7% 9.5% 6.8% 9.5% 7.1% 9.6% 7.0% 9.6% Budget balance -03.0-04.3-193.1-180.5-08.1-193.3-5.8-05.0 Percentage of GDP -4.3% -4.3% -3.9% -3.6% -3.9% -3.6% -3.9% -3.5% Gross domestic product 4 67. 4 699.4 4 968.1 5 05.4 5 315.5 5 390.1 5 716.7 5 808.3 Figure 19: Public-sector infrastructure spending R billion 50 00 150 100 50 % of GDP 0 0 1998/99 000/01 00/03 004/05 006/07 008/09 010/11 01/13 014/15 016/17 State-owned companies Provincial departments Local government Public entities Public-private partnerships National departments Total as a share of GDP (right axis), Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 8 6 4 8

Table 0: Selected government guarantee exposure 015/16 016/17 017/18 R billion Guarantee Exposure Guarantee Exposure Guarantee Exposure Public institutions: 469.9 55.8 475.7 90.4 466.0 300.4 Eskom 350.0 174.6 350.0 0.8 350.0 0.8 SANRAL 38.9 7. 38.9 9.4 38.9 30.1 Trans-Caledon Tunnel Authority 5.8 1. 5.6 0.9 5.7 18.7 South African Airways 14.4 14.4 19.1 17.8 19.1 11.8 Land and Agricultural Bank of South Africa 6.6 5.3 11.1 3.8 9.6 6.6 Development Bank of Southern Africa 13.9 4.4 1.5 4.1 1.3 4. South African Post Office 4.4 1.3 4.4 4.0 0.4 0.4 Transnet 3.5 3.8 3.5 3.8 3.5 3.8 Denel 1.9 1.9 1.9 1.9.4.3 South African Express 1.1 0.5 1.1 0.8 0.8 0.8 Industrial Development Corporation.0 0. 0.4 0. 0.5 0.1 South African Reserve Bank 3.0 3.0 Independent power producers 00. 114.0 00. 15.8 00. 1. Public-private partnerships 3 10.3 10.3 10.0 10.0 9.6 9.6 Total amount of borrowing and accrued interest for the period under review. 3 These amounts only include National and provincial PPP agreements. to -3.8% of GDP from -3.6% of GDP in the Budget, while in 019/0 it is likely to be unchanged from -3.6% of GDP, and 00/1 lowered to -3.4% of GDP (-3.5% previously), with 01/ added in, at -3.4% of GDP. Government s gross loan debt was projected to peak at 56.% of GDP by 01/ in the February 018 Budget, and realistically cannot rise much further without concerning rating Figure 1: Revisions to main budget revenue and expenditure estimates 017/18 018/19 019/0 017 018 017 018 017 018 R billion/% of GDP Budget Budget Budget Budget Budget Budget Current payments 38.8 384.4 413.3 409.8 445.0 443.5 Compensation of employees 154.7 155.7 163. 163.6 175. 175.8 Goods and services 65.7 65.4 69.3 65.9 7.3 69.9 Debt-service costs 16.4 163. 180.7 180.1 197.3 197.7 Transfers and subsidies 999.1 993. 1 079.6 1 069.5 1 153.0 1 159.7 Payments for capital assets 15.8 15.1 14.1 14.3 14.5 14.3 Payments for financial assets 5.4 19. 5.0 4.6 5. 4.7 Contingency/ unallocated reserve 6.0-10.0 8.0 0.0 8.0 Total 1 409. 1 411.9 1 5. 1 51. 1 65. 1 63.6 % of GDP 9.7% 30.0% 9.7% 30.1% 9.8% 30.3% Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 9

Figure : Consolidated government expenditure, Investec agencies. Similarly the expenditure ceiling is not expected to be breached in the projections, at least not for a sustained period, and may be lowered in the later years. The reprioritization of government expenditure to accommodate the R50bn identified in the Economic Stimulus Recovery Plan (ESRP) will be announced in the MTBPS, and much will likely come from unspent funds, with diversion in future funding from underperforming areas to the government initiatives. The ESRP has a range of measures, both financial and non-financial, aimed at igniting economic activity, restoring investor confidence, creating new jobs, aiding the vulnerable and embarking on a number of interventions into municipalities. Reprioritization of public spending within the current budget will occur (not a higher level of expenditure then budgeted) towards five areas to create jobs, the implementation of growth enhancing reforms, to establish an infrastructure fund, address health and education and invest in municipal social infrastructure improvement. Additionally, township industrial parks are planned. Davis Tax Committee has concluded its work, and the MTBPS may see the announcement of a new tax commission or committee to investigate sources of government revenue. The new Finance Minister, Tito Mboweni, will deliver the MTBPS, and has previously indicated his keen support for wealth taxes in SA. However, with much of the work on the MTBPS likely competed by National Treasury before the appointment of the new Minister of Finance, and with the Minister coming into a very large body of work to contend with, the MTBPS is not expected to show any marked deviations from February s Budget. Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 10

Disclaimer The information and materials presented in this report are provided to you for information purposes only and are not to be considered as an offer or solicitation of an offer to sell, buy or subscribe to any financial instruments. This report is intended for use by professional and business investors only. This report may not be reproduced in whole or in part or otherwise, without the consent of Investec. The information and opinions expressed in this report have been compiled from sources believed to be reliable, but neither Investec, nor any of its directors, officers, or employees accepts liability for any loss arising from the use hereof or makes any representation as to its accuracy and completeness. Investec, and any company or individual connected to it including its directors and employees may to the extent permitted by law, have a position or interest in any investment or service recommended in this report. Investec may, to the extent permitted by law, act upon or use the information or opinions presented herein, or research or analysis on which they are based before the material is published. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by Investec and are subject to change. Investec is not agreeing to nor required to update research commentary and data. Therefore, information may not reflect events occurring after the date of publication. The value of any securities or financial instruments mentioned in this report can fall as well as rise. Foreign currency denominated securities and financial instruments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such securities or financial instruments. Certain transactions, including those involving futures and options, can give rise to substantial risk and are not suitable for all investors. Investec may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them. This report is disseminated in South Africa by Investec Bank Limited, a firm regulated by the South African Reserve Bank. To our readers in South Africa this does not constitute and is not intended to constitute financial product advice for the purposes of the Financial Advisory and Intermediary Services Act. This report is disseminated in Switzerland by Investec Bank (Switzerland) AG. To our readers in Australia this does not constitute and is not intended to constitute financial product advice for the purposes of the Corporations Act. To our readers in the United Kingdom: This report has been issued and approved by Investec Bank (UK) Limited, a firm regulated by the Financial Conduct Authority and is not for distribution in the United Kingdom to private customers as defined by the rules of the Financial Conduct Authority. To our readers in the Republic of Ireland, this report is issued in the Republic of Ireland by Investec Bank (UK) Limited (Irish Branch), a firm regulated by the Central Bank of Ireland This report is not intended for use or distribution in the United States or for use by any citizen or resident of the United States. Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 11