Are you feeling repressed 2 september 2012 e

August 2012

Are you feeling repressed?

US public debt

0

20

40

60

80

100

120

140

1791

1800

1809

1818

1827

1836

1845

1854

1863

1872

1881

1890

1899

1908

1917

1926

1935

1944

1953

1962

1971

1980

1989

1998

2007

% G

DP

Source: IMF

Great Depression

World War II

It’s HEAVY!!

Indeed growth in DM has been sliding for decades

0

2

4

6

8

10

12

0

1

2

3

4

5

6

1900-50 50s 60s 70s 80s 90s 00s

%yr

%yr

US (lhs) France (lhs) UK (lhs) Japan (rhs) Germany (rhs)

Source: HSBC

US new home sales index

200

400

600

800

1000

1200

1400

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Inde

x

Source: Bloomberg

US median house price – existing home sales

-20

-15

-10

-5

0

5

10

15

20

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

%yr

Median house price

Source: Bloomberg

US long-term unemployment

05

101520253035404550

Jan-

48Ja

n-50

Jan-

52Ja

n-54

Jan-

56Ja

n-58

Jan-

60Ja

n-62

Jan-

64Ja

n-66

Jan-

68Ja

n-70

Jan-

72Ja

n-74

Jan-

76Ja

n-78

Jan-

80Ja

n-82

Jan-

84Ja

n-86

Jan-

88Ja

n-90

Jan-

92Ja

n-94

Jan-

96Ja

n-98

Jan-

00Ja

n-02

Jan-

04Ja

n-06

Jan-

08Ja

n-10

Jan-

12

%

Long term unemployment rate

Source: Bureau of Labor Statistics, USA

Fiscal cliff!!

Do we need

a helicopter drop?

Why governments need growth

Debt dynamics

Change in debt/GDP =(D (t-1) ) x (r-g) – primary balance

Primary surplus required to keep debt level stable:

Primary balance = Debt (t-1) x (r-g)

Euro area is running lower budget deficits than rest of DM

-14

-12

-10

-8

-6

-4

-2

0

2007 2008 2009 2010 2011

% G

DP

Fiscal balance

United States United Kingdom Euro Area Japan

Source: IMF, January 2012

In aggregate Europe’s govt. debt ratio is lower than the US

0

50

100

150

200

250

0

20

40

60

80

100

120

2007 2008 2009 2010 2011

% G

DP

% G

DP

United States United Kingdom Euro Area Japan

Source: IMF, January 2012

Why the fiscal maths did not add up in Greece

-10

-8-6

-4

-2

0

2

4

6

83/

1/20

0010

/1/2

000

5/1/

2001

12/1

/200

17/

1/20

022/

1/20

039/

1/20

034/

1/20

0411

/1/2

004

6/1/

2005

1/1/

2006

8/1/

2006

3/1/

2007

10/1

/200

75/

1/20

0812

/1/2

008

7/1/

2009

2/1/

2010

9/1/

2010

%yr

Source: Bloomberg

Greece real GDP

Lack of competitiveness requires economic restructuring

Source: Bloomberg

80

90

100

110

120

130

140

150

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

Unit labour cost

France Greece Germany Italy Spain Ireland

Debt in the UK and Spain

0

10

20

30

40

50

60

70

80

90

10019

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

12

% G

DP

Spain public debt UK public debt

Source: Bloomberg

Spain’s austerity plans no less stringent than the UK

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2006 2007 2008 2009 2010 2011 2012 2013

GD

P

United Kingdom Spain

Cyclically adjusted primary balance

Source: Bloomberg

10yr bond yields – UK and Spain

0

2

4

6

8

10

12

14

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

%Spain UK

Source: Bloomberg

The difference between Spain and UK

Sterling less likely to break up

Bank of England is the gilts buyer of last resort

Spain waits on the ECB

The UK and US can tax companies and households It’s harder to make this argument when it comes to

Europe’s periphery

What did the French monarchs do in the 16th -19th centuries

when they could not pay their debts?

1. Reduce excessive debt

… BUT, growth is weak

2. Default

3. Live with it!

The choice for governments today

Living with high government debt levels

Divert supply of funds to public sector

AND / OR

Keep borrowing rates low

It’s not different this time…. it’s the same

Anchoring policy rates at extraordinarily low levels

0

2

4

6

8

10

12

14

16

18

1694

1847

1855

1859

1862

1864

18

66

1870

18

72

1873

18

76

1879

18

84

1888

18

91

1893

19

00

1906

19

10

1921

19

31

1960

19

72

1975

19

77

1979

19

82

1983

19

86

1989

19

96

2003

%UK policy rate

Source: IMF

Central bank claims on gross debt (% GDP)

Close interaction of central banks and the state in a repression scenario

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011

% G

DP

United States United Kingdom Japan Euro area

Source: NBER

What can go wrong?

2

7

12

17

22

27

32

37

42Ja

n-07

Mar

-07

May

-07

Jul-0

7S

ep-0

7N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8S

ep-0

8N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9S

ep-0

9N

ov-0

9Ja

n-10

Mar

-10

May

-10

Jul-1

0S

ep-1

0N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1S

ep-1

1N

ov-1

1Ja

n-12

Mar

-12

May

-12

%

Source: Bloomberg

Greece 10yr bond yield

Primary budget balance and gross govt. debt

Source: South African National Treasury

-5

-4

-3

-2

-1

0

1

2

3

4

5

20

25

30

35

40

45

50

55

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

% G

DP

% G

DP

Gross debt (lhs) Primary budget balance (rhs)

Consumer price inflation

-7

-2

3

8

13

18

19231927193119351939194319471951195519591963196719711975197919831987199119951999200320072011

%yr

Source: SA Reserve Bank

Corporate tax rate

25

30

35

40

45

50

55

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

%

Source: JP Morgan, National Treasury

Investment boom mid-1990s to mid-2000s

5

7

9

11

13

15

17

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

% G

DP

Private investment/GDP

Source: SA Reserve Bank

August 2012

Sout

hAfrica

Terms of trade highest in decades, but peaking

Source: Reserve Bank

70

80

90

100

110

120

130

140

Mar

-60

Mar

-63

Mar

-66

Mar

-69

Mar

-72

Mar

-75

Mar

-78

Mar

-81

Mar

-84

Mar

-87

Mar

-90

Mar

-93

Mar

-96

Mar

-99

Mar

-02

Mar

-05

Mar

-08

Mar

-11

Inde

x 20

05 =

100

Terms of trade

Mining and quarrying profits boomGross operating surplus

2.5

3

3.5

4

4.5

5

5.5

6

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

4Q19

933Q

1994

2Q19

951Q

1996

4Q19

963Q

1997

2Q19

981Q

1999

4Q19

993Q

2000

2Q20

011Q

2002

4Q20

023Q

2003

2Q20

041Q

2005

4Q20

053Q

2006

2Q20

071Q

2008

4Q20

083Q

2009

2Q20

101Q

2011

4Q20

11

4Q m

ovin

g av

erag

e

4Q m

ovin

g av

erag

e

Rm (lhs) % GDP (rhs)

Current account adjustment to larger deficit in 2011 mainly reflected savings decline

Source: Reserve Bank

10

12

14

16

18

20

22M

ar-9

0

Mar

-92

Mar

-94

Mar

-96

Mar

-98

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

Mar

-12

% G

DP

Savings ratio Investment ratio

Household wealth and debt

40

45

50

55

60

65

70

75

80

85

250

270

290

310

330

350

370

390

81 84 87 90 93 96 99 02 05 08 11

%pe

rson

al d

ispo

sabl

e in

com

e

%pe

rson

al d

ispo

sabl

e in

com

e Household net wealth/disposable income(lhs)Household debt/personal disposable income (rhs)

Source: Reserve Bank

Household net wealth versus savings

200

220

240

260

280

300

320

340

360

380

-3-2-101234567

90 93 96 99 02 05 08 11

%pe

rson

al d

ispo

sabl

e in

com

e

%pe

rson

al d

ispo

sabl

e in

com

e Household savings ratio (lhs)

Household wealth (rhs)

Source: Reserve Bank

GFCF lags FCE households

Source: Reserve Bank

-10.0-7.5-5.0-2.50.02.55.07.510.012.5

-25-20-15-10-505

101520

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

% y

r

%yrGFCF (lhs) Household FCE (rhs)

Marginal rate of return on capital relative to real interest rate Consistent with moderate growth only

Source: Reserve Bank

-25

-15

-5

5

15

25

85 87 89 91 93 95 97 99 01 03 05 07 09 11

GFCF - private (%yr)

Marginal rate of return on capital less real after tax interest rate (%)

SA GDP and global growth

-3

-2

-1

0

1

2

3

4

5

6

7

8

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012%

yr

World SA

Source: IMF, Reserve Bank, SIM

August 2012

SAVER

What about SAin a

low real interest rateworld?

Bond yields

Source: Bloomberg, INet

3456789

101112

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep

-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep

-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

%

Spain (rhs) SA (rhs)

Rand underpins domestic final demand recovery

EUR

Rand actual and fair value

0

2

4

6

8

10

12

14Ja

n-80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

US

DZA

R

USDZAR PPP USDZAR actual

Source: I Net, SIM PPP calculation

Food inflation

-30

-20

-10

0

10

20

30

40Ja

n/01

Jul/0

1Ja

n/02

Jul/0

2Ja

n/03

Jul/0

3Ja

n/04

Jul/0

4Ja

n/05

Jul/0

5Ja

n/06

Jul/0

6Ja

n/07

Jul/0

7Ja

n/08

Jul/0

8Ja

n/09

Jul/0

9Ja

n/10

Jul/1

0Ja

n/11

Jul/1

1Ja

n/12

Jul/1

2

%yr

Food at agriculture Food at manufacturing CPI food

Source: Statistics SA

Global and domestic food prices

-5

0

5

10

15

20

25

-40

-20

0

20

40

60

80

10095

/08/

0196

/05/

0197

/02/

0197

/11/

0198

/08/

0199

/05/

0100

/02/

0100

/11/

0101

/08/

0102

/05/

0103

/02/

0103

/11/

0104

/08/

0105

/05/

0106

/02/

0106

/11/

0107

/08/

0108

/05/

0109

/02/

0109

/11/

0110

/08/

0111

/05/

0112

/02/

01

y/r%

Global -food index in ZAR(lhs) lagged 3 months CPI- food(rhs)

y/r%

Source: Statistics SA

Fertilizer and diesel - PPI

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Jan-

01A

ug-0

1M

ar-0

2O

ct-0

2M

ay-0

3D

ec-0

3Ju

l-04

Feb-

05S

ep-0

5A

pr-0

6N

ov-0

6Ju

n-07

Jan-

08A

ug-0

8M

ar-0

9O

ct-0

9M

ay-1

0D

ec-1

0Ju

l-11

Feb-

12

yr%

Chemicals Basic: fertilizers Diesel

Source: Statistics SA

Electricity prices - CPI

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

yr%

Electricity

Source: Statistics SA

Rents CPI

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

yr%

Actual rentals

Actual rentals-Houses

Actual rentals-Flats

Actual rentals-Town houses

Source: Statistics SA

Inflation – back to the 60s

Source: SA Reserve Bank

-10

-5

0

5

10

15

20

25

Jan-

23Fe

b-27

Mar

-31

Apr

-35

May

-39

Jun-

43Ju

l-47

Aug

-51

Sep

-55

Oct

-59

Nov

-63

Dec

-67

Jan-

72Fe

b-76

Mar

-80

Apr

-84

May

-88

Jun-

92Ju

l-96

Aug

-00

Sep

-04

Oct

-08

%yr

Headline CPI Mean 5.73

Mean 5.7%

Recessions and subsequent recoveries: PSCENot your run of the mill credit cycle

90100110120130140150160170180

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10Q11 Q12Q13Q14Q15 Q16

4Q1974 4Q1976 1Q1982

1Q1985 2Q1990 4Q2008

Currentrecovery

Source: Reserve Bank

Residential mortgages / total household credit

56

58

60

62

64

66

68

70

72

Jan-

1999

Sep

-199

9M

ay-2

000

Jan-

2001

Sep

-200

1M

ay-2

002

Jan-

2003

Sep

-200

3M

ay-2

004

Jan-

2005

Sep

-200

5M

ay-2

006

Jan-

2007

Sep

-200

7M

ay-2

008

Jan-

2009

Sep

-200

9M

ay-2

010

Jan-

2011

Sep

-201

1M

ay-2

012

%

Source: SA Reserve Bank

Is housing affordable? Probably not

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

4Q19

691Q

1971

2Q19

723Q

1973

4Q19

741Q

1976

2Q19

773Q

1978

4Q19

791Q

1981

2Q19

823Q

1983

4Q19

841Q

1986

2Q19

873Q

1988

4Q19

891Q

1991

2Q19

923Q

1993

4Q19

941Q

1996

2Q19

973Q

1998

4Q19

991Q

2001

2Q20

023Q

2003

4Q20

041Q

2006

2Q20

073Q

2008

4Q20

091Q

2011

Loan amortisation / PDY per capita

Ratio

Source: I Net, SIM

Unsecured lending

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

400000045000005000000550000060000006500000700000075000008000000D

ec-0

7

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

R'm

Number of accounts (lhs)

Gross debtors Book - Unsecured Credit (rhs)

Source: National Credit Regulator

Households’ unsecured credit

0

10

20

30

40

50

60

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

% o

f tot

al n

ew lo

ans

Mortgages Short term Unsecured

Credit facilities Secured

Source: National Credit Regulator

SA real long bond yield

-6-4-202468

101214

1968/01/011970/01/011972/01/011974/01/011976/01/011978/01/011980/01/011982/01/011984/01/011986/01/011988/01/011990/01/011992/01/011994/01/011996/01/011998/01/012000/01/012002/01/012004/01/012006/01/012008/01/012010/01/01

%

Source: I Net

Credit ceilings 1965-721976-80

1980 Interest rate controls removed Credit ceilings removedReserve requirements lowered

Foreign exchange and investmentcontrolled by government in 1970s

Capital controlstightened in 1985

Registrar of Co-operation(limited bank competition)removed in 1983

1990s• Trade liberalisation,

lower inflation and removal of controls on FDI

• Forex controls easing• Capital account

liberalised from 1991• Exchange controls on

non-residents eliminated in 1995

Financial Crisis

Bank crisis

Reinhart

Rogoff

AusterityThis time it’s

different

THANK-YOU!!