1

THE REPUBLIC OF SOUTH AFRICA

Investor Presentation

Thuto Shomang, Deputy Director General, Asset and Liability Management

Table of contents

1) Macro Economic Developments 4

Slide

3) Bond Market and Financing Trends 14

2) Public Finance 9 4) Holding of Government Bonds 23

2

Key highlights

• Broad themes

– economic environment uncertain and challenging – GDP growth revised down and global risks to the outlook high– domestic events highlight urgent need to accelerate social transformation– supportive fiscal policy with disciplined spending and debt management

• Economic growth projected to be lower than the Budget forecast

– moderate GDP growth of 2.5% this year and 3.0% in 2013– economy supported by accommodative monetary and fiscal policies

• Budget deficit to moderate from 4.8% of GDP in 2012/13 to 3.1% in 2015/16

– tax revenue revised slightly downwards by R5 billion in 2012/13– government debt is expected to peak at 39.2 per cent of GDP in 2015/16

• Real growth in expenditure averages 2.9% over the MTEF

– total expenditure of R1.15 trillion in 2013/14 rising to R1.34 trillion in 2015/16– the 2013 MTEF reprioritises approximately R40 bn of funds

3

4

1. Macro Economic Developments

Mining strikes impacting negatively on the economy

• Violent and protracted strike action impacting negatively on investor confidence

• Production lost due to strikes in platinum and gold mining estimated at R10.1 billion

• Year to date mining stoppages subtracted an estimated 0.5 percentage point from GDP

– GDP growth for 2012 would have been 3% instead of the 2.5%– the economy to created 38 500 fewer jobs in the mining, manufacturing and related services

• The total impact on tax revenue is estimated to be about R4.1 billion

– export revenues projected to be R12.5 billion lower in 2012

• The negative impact on GDP growth in 2012 and 2013 will be larger

– if strike actions is protracted and spreads further to other mines and industries

5

Export performance varies across destinations and products

6

Total

Mineral products

Chemicals

Machinery and equipment

Vehicles & transport equipment

Other

Vegetable products

Precious & semi-precious metals

Base metals

SADC

India

China

United States

European Union

Japan

-30 -20 -10 0 10 20 30

19.6

16.3

14.3

12.3

11.0

7.5

-6.0

-6.5

26.2

19.7

9.2

0.5

-4.0

-20.7

• Export volumes contracted 6.3% in the Q2 after falling 1.5% in the Q2

• Value of coal and chemicals exports robust

– while platinum (-21.9%) and base metals (-6.7%) declined

• Domestic supply constraints exacerbated pressure on exports from weaker external demand

• Disruptions to platinum output affected trade with Germany, Japan and the US

• SADC is our second largest export market with 21.8% share

– led by steel, chemical products, and machinery and appliances, especially mining equipment.

Source: Quantec

Annual growth in export values (first 8 months of 2012)

World viewpoint: Global growth outlook continue to deteriorate

7

• Growth in advanced economy subdued by:– high debt levels and banking sector

crisis

• Growth slowdown in Brazil, China and India projected this year

– robust growth projected in 2013 and 2014

• Unconventional monetary policy in advanced economies insufficient to:

– offset negative effects from front loaded fiscal consolidation and private sector deleveraging

• Euro debt crisis and US fiscal cliff significant global risks to growth outlook

IMF growth and inflation projections, 2012 - 2014

The South African Story : The macroeconomic forecast

8

• Growth expected to be 2.5% this year before picking up to 4.1% in 2015• Public sector infrastructure investment to support growth in the MTEF • Low inflation and interest rate to remain supportive to growth • Inflation to remain within the target range of 3% – 6% over MTEF• Current account deficit widens to 5.9% this year before moderating to 5.5% in the outer years

9

2. Public Finance

Outcomes of the government fiscal framework

• Tax revenue for 2012/13 revised down by R5 billion resulting in higher deficit than Budget

• Expenditure remains contained, growing by 2.9% over the MTEF

• Debt costs projected to rise to R114.8 billion by 2015/16

Table 3.2 Consolidated fiscal framework, 2010/11 – 2015/16

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

R billion / percentage of GDP Outcome Estimate Medium-term estimates

Revenue 757.4 837.0 900.6 986.1 1 092.1 1 205.0 27.5% 27.7% 27.5% 27.5% 27.6% 27.6%

Expenditure 874.4 964.4 1 057.1 1 147.4 1 238.1 1 339.0 31.8% 32.0% 32.3% 32.0% 31.3% 30.7%

Non-interest expenditure 808.2 887.9 968.3 1 048.8 1 131.3 1 224.2 29.4% 29.4% 29.6% 29.2% 28.6% 28.0%

State debt cost 66.2 76.5 88.8 98.6 106.8 114.8 2.4% 2.5% 2.7% 2.7% 2.7% 2.6%

Budget balance -117.0 -127.4 -156.5 -161.3 -146.0 -134.0-4.3% -4.2% -4.8% -4.5% -3.7% -3.1%

Primary balance (percentage of GDP) -1.8% -1.7% -2.1% -1.7% -1.0% -0.4%

10

Source: National Treasury

Trends in expenditure growth

11

• Non-interest expenditure grew rapidly in the past decade but moderates over the MTEF

• Growth in the budget for compensation of employees will be contained

• Capital budgets grow strongly, the main challenge is to ensure that allocations are spent – and spent effectively

Source: National Treasury

Real growth in non-interest expenditure Real growth of expenditure components

The medium-term financing and debt levels

• Government debt peaks at 39.2% of GDP in 2015/16

• Domestic bond markets will remain the main funding source

• Debt issuance will be maintained at sustainable levels through

– drawing on cash balances– exchanging debt maturing – borrowing in global capital markets

• Public-sector borrowing requirement remains at 7.1 per cent of GDP

– expected to moderate in the medium term

12

Source: National Treasury

Stock of government debt, 2005/06 – 2016/17

Public-sector infrastructure investment

• Bulk of infrastructure spending to be financed from the balance sheets of SOCs

– Costs will be recovered by charges levied on users

• The fiscus will fund social and community infrastructure projects

– such as schools, health facilities and

secondary roads

• Over the MTEF, R250 billion will finance “shovel ready” projects

• Other cost-effective projects that provide optimal long-term benefits will be eligible for support from the fiscus

13

* Financed jointly by SOEs and government** National, provincial and local government projects financed from the budget

Source: National Treasury

Major infrastructure projects by phase and implementing agent

14

4. Bond Market and Financing Trends

National budget net borrowing requirement and financing, 2011/12 – 2015/16• Current debt issuance levels maintained by drawing on cash balances and switch programme

• Domestic markets remain the primary source of financing

• Foreign borrowing to maintain benchmarks in major currencies and partially finance government’s foreign currency commitments

• Domestic switch programme will continue and foreign switch programme introduced

15

2011/12 2012/13 2013/14 2014/15 2015/16

R million Outcome Budget Revised Medium-term estimates

Main budget balance -147,962 -170,025 -173,031 -177,292 -165,776 -154,747

Extraordinary receipts 5,209 1,200 10,650 4,400 3,300 3,200

Extraordinary payments -1,388 -24 -3,152 -850 – –

Borrowing requirement (-) -144,141 -168,849 -165,533 -173,742 -162,476 -151,547

Domestic short-term loans (net) 18,725 22,000 22,000 23,000 22,000 21,000

Treasury bills 19,009 22,000 22,000 23,000 22,000 21,000

Corporation for public deposits -284 – – – – –

Domestic long-term loans (net) 138,501 119,998 126,319 135,923 118,275 117,115

Market loans 154,108 151,367 157,767 157,039 150,879 144,755

Redemptions1 -15,607 -31,369 -31,448 -21,116 -32,604 -27,640

Foreign loans (net) 9,135 -7,492 -7,114 -3,553 3,701 9,044

Market loans 12,025 4,035 4,055 11,610 11,535 11,430

Arms procurement loan agreements 569 183 183 25 – –

Redemptions (including revaluation of loans)2

-3,459 -11,710 -11,352 -15,188 -7,834 -2,386

Change in cash and other balances 3 -22,219 34,343 24,328 18,372 18,500 4,388

Cash balances -21,270 30,743 15,828 13,872 14,000 -112

Other balances4 -949 3,600 8,500 4,500 4,500 4,500

Financing 144,141 168,849 165,533 173,742 162,476 151,547 1. Domestic loan redemption figures are net of switches2. Foreign loan redemptions in 2014/15 are net of anticipated switches3. A positive change indicates a decrease in cash balances4. Mainly surrenders of unspent money requested in previous financial years and late requests with regard to expenditure committed in previous years

Change in cash balances, 2011/12 – 2015/16

16

2011/12 2013/14 2014/15 2015/16

R million Outcome Budget Revised

Rand currency

Opening balance 111,413 129,425 130,450 111,837 111,157 97,157

Cash utilised for domestic funding 19,037 -20,365 -18,613 -680 -14,000 -

Closing balance 130,450 -109,060 111,837 111,157 97,157 97,157

Of which:

Tax and loan accounts 63,293 41,903 44,680 44,000 30,000 30,000

Sterilisation deposits 67,157 67,157 67,157 67,157 67,157 67,157

Change in cash balance1

(opening less closing balance)-19,037 20,365 18,613 680 14,000 -

Foreign currency2

Opening balance 62,143 65,287 64,376 67,161 53,969 53,969

Domestic foreign exchange purchases3 2,444 8,352 19,488 - 5,075 -

International borrow ing 12,594 4,218 4,238 11,635 11,535 11,430

Cash utilised for foreign funding -12,805 -22,948 -20,941 -24,827 -16,610 -11,318

Closing balance 64,376 54,909 67,161 53,969 53,969 54,081

US$ equivalent 8,804 7,624 9,160 7,500 7,500 7,514

Change in cash balance1

(opening less closing balance)-2,233 10,378 -2,785 13,192 - -112

Total change in cash balances1 -21,270 30,743 15,828 13,872 14,000 -112

Total closing cash balance 194,826 163,969 178,998 165,126 151,126 151,238 1. A negative value indicates an increase in cash balances and a positive value indicates that cash is utilised to finance part of the borrowing requirement2. Rand values at which foreign currency was purchased or borrowed3. Foreign currency purchased in the spot market and obtained from the settlement of forward exchange contracts entered into by the South African Reserve Bank to sterilise sizable foreign direct investment flows

Medium-term estimates

2012/13

Non-residents continue to support the local currency bond market

• Cumulative net purchases of bonds by non-residents since 2010 amounts to R193 bn

• Year-to-date net purchases of bonds totaled R83 bn

– surpassing net purchases of R42 bn recorded in 2011

– since the WGBI announcement net purchases amounted to R59 bn

• Net inflows by non-residents fairly spread across the yield curve

Source: JSE , Bloomberg , SA National Treasury

Net purchases by non-residents per instrument , Jan 2012- Oct 2012

Cumulative net purchases of bonds and equities , Jan 2010 – Oct 2012

-50,000

0

50,000

100,000

150,000

200,000

250,000

6.06.57.07.58.08.59.09.510.0

Bonds Equities R208(6.75%,2021)[right aixs]

R m

illi

on

s

per

cen

t

-2,000,000,0000

2,000,000,0004,000,000,0006,000,000,0008,000,000,000

10,000,000,00012,000,000,00014,000,000,00016,000,000,00018,000,000,000

17

Falling borrowing costs despite high volatility

• Government borrowings costs continue to trend down

– falling by 70 basis points since April 2012– underpinned largely by strong demand

from non-residents – short-end of the yield curve anchored by

accommodative monetary policy

• The yield curve remain steep due to – issuance levels at the long-end of the

curve – interest rate cut speculations

• Yields of inflation-linked bonds at historical lows

– rallying by 51 basis points since Apr 2012 (excluding the R189 bond)

– supported by robust demand from local Pension funds

Fixed-rate bond yield curve

Inflation-linked bond yield curve

0 5 10 15 20 25 30 354.04.55.05.56.06.57.07.58.08.59.0

Apr-12Sept-12Oct -12

per c

ent

Years

R206 R201R157

R203R204

R207R208

R2023R186

R213R209 R214 R2048

0 4 9 11 12 16 21 25 38

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0 Apr-12Sep-12Oct-12

Per

cent

R211

R212R197 I2025

R210 R202 I2038 I2050

Years

R189

18

Government bond auctions well subscribed

Average bid to cover ratio of fixed rate bond auctions

Average bid to cover of inflation linked bond auctions

• The fixed rate bond auctions over-subscribed

– the 14 year R186 has the highest subscription rates

– followed by 6 year area with subscription rates of 4 times

• On average, all fixed rate auctions cleared at the mark-to-market rates

• Unprecedented subscription rates on inflation linked bonds

– the subscription rates in June and July were over 4 times

– the clearing levels were 2 basis points below the market-to-market rates

R203(

5yr)

R204(

6yr)

R208(

9yr)

R2023

(10y

r)

R186(

14yr

)

R213(

18yr

)

R209(

24yr

)

R214(

28yr

)

R2048

(35y

r)0.00.51.01.52.02.53.03.54.04.55.0

3.2

4.03.5 3.5

4.3

3.12.6 2.6 2.7

Per

cen

t

Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-121.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

3.1

1.8

4.3 4.4

3.1

2.0

1.3

Per

ce

nt

19

Non-competitive auctions well taken-up

Non-competitive actions performance per funding instrument

Monthly take-up of non-competitive auctions

Apr-12 May-12 June-12 July-12 Aug-12 Sept-12 Oct-120

500

1000

1500

2000

2500

3000

3500

4000

4500

R m

illi

on

s

• Non-competitive auction an incentive to PD’s

• Year-to-date R15 bn was raised through non-competitive auctions

– Of which R4 bn was issued on the R2023

• The 30 per cent limit increased to 50 per cent in August 2012

– to accommodate anticipated inflows from WGBI inclusion

• In October 2012 R3.9 bn was raised through non-competitive auctions

0500000000

10000000001500000000200000000025000000003000000000350000000040000000004500000000

20

Refinancing risk in the medium term addressed through switch auctions

Source: SA National Treasury

Government debt maturity profile, as 25th October 2012

• The plan is to switch R49 billion over the medium term – R15 bn of R206(7.50%, Jan-2014) – R34 bn of R201( 8.75%, Dec-2014)

• A remarkable progress has been made, R34.4 bn switched this fiscal year – R12.3 bn switched from the R206 bond – R22.1 bn switched from the R201 bond

2012

/13

2014

/15

2016

/17

2018

/19

2020

/21

2022

/23

2024

/25

2026

/27

2028

/29

2030

/31

2032

/33

2034

/35

2036

/37

2038

/39

2040

/41

2042

/43

2044

/45

2046

/47

2048

/49

0

30,000

60,000

90,000

120,000

150,000

180,000

Fixed rate bonds TB's Foreign bonds Inflation linked bond

R m

illi

on

s

R12.3bn switched

R22.1bn switched

21

Destination bonds for the switch auction programme

Destination bonds of the R206(7.50%,2014) fixed rate bond Destination bonds of the R201(8.75%,2014) fixed rate bond

• Appetite is mostly on the 3-legged bonds destination bonds – R186 and R157

R208; 8%

R186; 70%

R214; 9%

R213; 9%R209; 2% R2023; 2%

R157; 83%

R186; 17%

22

23

4. Holdings of Government Bonds

Non-residents holdings of government bonds continue to rise

• Holdings by non-residents tripled since 2007

– reaching a record high of 33.3% in Sept 2012

• Non-residents confidence underpinned by history of prudent fiscal policy

• Pensions funds holdings decline by 17.0 percentage points since 2007

– Pension funds still buying bonds but the pace has subsided over the years

• Holdings by Monetary institutions remained steady

• Insurers holding declined marginally relative to 2007 levels

Holders of domestic government bonds (%) , 2007 – Sep 2012

Source: Share Transaction Totally Electronic LTD(Strate)

  2007 2008 2009 2010 2011 Sept-12

Pension funds 47.2 43.9 39.9 36.5 33.0 30.2

Foreign investors 10.6 12.8 13.8 21.8 29.1 33.3

Monetary institutions 16.5 18.0 18.3 17.7 16.3 17.4

Insurers 11.6 13.7 12.4 14.1 11.6 10.3

Other financial 12.2 10.2 13.2 8.1 8.0 6.5

Other 1.9 1.4 2.4 1.8 2.0 2.3

Holders of RSA government bonds as at Sept 2012

Pension funds ; 30.2%

Foreign investors; 33.3%

Monetary institu-tions ; 17.4%

Insurers; 10.3%

Other financial; 6.5%Other; 2.3%

24

Holdings of fixed-rate government bonds

Holdings of fixed-rate bonds by maturity area

Source: STRATE, SA National Treasury

Holdings of fixed-rate bonds by sector, Sept 2012 • Non-residents hold largest portion of fixed-rate bonds accounting for 40%

• Holdings of fixed-rate bonds by non-residents is fairly spread across the curve

– non-residents also buying at the back end of the yield curve

– holding 35% of the 28-year and 26% of 35-year bonds

• Official pension funds underweight in the 24-year to 35-year area

• Local long-term issuers overweight at the long end of the curve

Foreign sector; 40%

Monetary authorities; 16%Long-term insures; 10%

Short-term insures; 1%

Private self-administered funds; 3%

Official pension funds ; 21%

Other financial institutions; 6% Other sector ; 3%

0%

20%

40%

60%

80%

100%

120%

Foreign sector Monetary authoritiesLong-term insures Short-term insuresPrivate self-administered funds Official pension funds Other financial institutions Other sector

25

Holdings of inflation-linked government bonds

• Inflation linked bonds dominated by pension funds and monetary institutions– accounting for combined share of 80 per

cent – Pension funds hold linkers to protect

assets against rising inflation– Banks hold linkers to replicate their

inflation-linked liabilities

• Non-residents starting to buy inflation linked bonds – non-residents now hold 5.3 per cent of

Inflation linked bonds

• Pension funds holding fairly spread all across maturities

0%

20%

40%

60%

80%

100%

120%

Foreign sector Monetary authoritiesLong-term insures Short-term insuresPrivate self-administered funds Official pension funds

Holdings of inflation-linked bonds by maturity area

Holdings of inflation-linked bonds , Sep 2012

Foreign sector; 5.3%

Monetary authorities; 24.2%

Long-term insures; 5.2%

Short-term insures; 0.6%

Private self-adminis-tered funds; 16.6%

Official pension funds ; 39.0%

Other financial institutions; 8.7% Other sector ; 0.4%

Source: STRATE, SA National Treasury

26

Retail bonds growing in significance

Gender distribution of retail bonds investor base,31 March 2012

Age distribution of retail bonds investor base,31 March 2012

Source: National Treasury

• The number of retail investors has grown by 15% to 44 163 from March 2011 to March 2012

• Investments average R4 bn a year

• Current investments at over R11 bn

• Investors aged 50 years and older invest most

• The current market strategy is to diversify the investor base and attract investors younger than 50 years

• In terms of gender, the female investors surpass the male investors

54%

46%

Female Male

27

Conclusion

28

• Global Economic environment uncertain and challenging

• Fiscal and monetary policies supportive of economic growth

• Government committed to fiscal consolidation in the MTEF

• Quick resolution of the labour unrest in the mining sector imperative

• Non-residents continue to support the local currency bond market

• The R49 billion switch program to continue in the MTEF