27TH INFORUM WORLD CONFERENCE 2019SOCHI, RUSSIA FEDERATION

DETAILED PROJECTION OF THE SOUTH AFRICAN ECONOMY – TWO STAGE APPROACH BASED ON THE SOUTH AFRICAN INFORUM MODEL (SAFRIM)

David Mullins, Zanele Kayumba

Date: 3rd September 2019

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TWO STAGE APPROACH:

A. Standard Projections of the Economy with SAFRIM

B. Disaggregation of SAFRIM Projections through an Input – Output Approach

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UPDATE OF SAFRIM MODEL New Base Year: – Original Model 2005 Constant prices- New Model 2010 Constant Prices Reduction of Sectors: - Original Model 46 sectors in Total- New Model 26 sectors in Total Reduction in Manufacturing sectors Reason for Reduction in sectors- Stabilising forecasts- Import intensity of certain commodities is too high (exploding of model, when production becomes negative)

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Step 1: Disaggregation of SAFRIM Projections through an Input – Output Approach A. Construction of an Input – Output table

B. Constructing a NAM (Control total, Supply and Demand figures)

C. Calculating commodity detail for the various final domestic demand components, using the supply and Use (S&U) tables from Stats SA (base Year 2017)

D. Calculate imports and exports for the various commodities from the South African Reserve bank (SARB) and Calculating Value Added for the Various sectors

E. Use a RAS to calculate intermediate demand5

STEP 2:Calculation detailed Exports, Imports and Production for Base year

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VALUE RAND MILLIONS

2018 (BASE YEAR) EXPORTS OF GOODS AND SERVICES

IMPORTS OF GOODS AND

SERVICESPRODUCTION

AGRICULTURE Barley 3 54 1 44626 COMMODITIES Grain Sorghum 19 79 505

Grapes 8 805 232 16 521MINING Coal Mining

Exports68 306 - 68 306

32 COMMODITIES Coal Mining Domestic

- 1 401 12 804

Iron Ore Exports

46 782 - 46 782

Magnetite 7 697 - 9 088

Step 2 Continued….MANUFACTURING Processed food 26 303 16 300 256 269

40 COMMODITIES Petrol 9 170 15 222 75 427

Slaughtered animal meat

(incl. broilers)10 103 10 578 87 426

Chemicals 58 354 54 483 118 806

SERVICES Electricity Distribution

3 058 7 94 567

11 SECTORS Building Construction

1 354 381 306 910

Business services

15 486 38 979 530 962

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STEP 3: FORECASTING OF FINAL DEMAND COMPONENTS BASIS: INFORUM MODEL

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Final Consumption Expenditure by Households: Durable Goods R ‘m (long – term)

-

50,000

100,000

150,000

200,000

250,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Final consumption expenditure by households: Durable goods R'm

GROWTH RATE: 2018 - 2049LIKELY = 3.7%LOW = 2.7%HIGH = 4.7%

6,0%2,9%

2,5%

LONG TERM GROWTH = 4.7%

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Final Consumption Expenditure by Households: Semi-Durable Goods R’m

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Final consumption expenditure by households: Semi-durable goods R'm

3,4%

6,3%

6,4%

LONG TERM GROWTH = 6,0%

GROWTH RATE: 2018 - 2049LIKELY - 3.8%LOW - 3.0%HIGH - 4.5%

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Final Consumption Expenditure by Households: Non-Durable Goods R’m

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Final consumption expenditure by households: Non-durable goods R'm

1,1%

1,6%

2,1%

LONG TERM GROWTH = 1,9%

GROWTH RATE: 2018 - 2049LIKELY - 2,2%LOW - 1,7%HIGH - 2,7%

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Final Consumption Expenditure by Households: Services R’m

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Final consumption expenditure by households: Services R'm

1,5%

3,8%

4,9%

LONG TERM GROWTH = 3,7%

GROWTH RATE: 2018 - 2049LIKELY - 2,1%LOW - 3,1%HIGH - 3,6%

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General Government Consumption Expenditure R’m

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

General government consumption expenditure R'm

GROWTH RATE: 2018 - 2049LIKELY - 2,9%LOW - 2,3%HIGH - 3,4%

4,2%

1,0%

1,5%

LONG TERM GROWTH = 2,5%

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Gross Fixed Capital Formation: Buildings & Construction R’m

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross Fixed Capital formation: Buildings & Construction R'm

GROWTH RATE: 2018 - 2049LIKELY - 2,2%LOW - 1,7%HIGH - 2,7%

LONG TERM GROWTH = 4,4%

0,5%

10,6%

1,1%

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Gross Fixed Capital Formation: Transport Equipment R’m

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross Fixed Capital formation: Transport Equipment R'm

GROWTH RATE: 2018 - 2049LIKELY - 2,2%LOW - 1,7%HIGH - 2,7%

2,7%

2,1%

7,5%

LONG TERM GROWTH = 5,0%

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Gross Fixed Capital Formation: Machinery & Other Equipment R’m

-

50,000

100,000

150,000

200,000

250,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross Fixed Capital formation: Machinery & Other Equipment R'm

GROWTH RATE: 2018 - 2049LIKELY - 2,2%LOW - 1,7%HIGH - 2,7%

0,4%

3,1%

8,1%

LONG TERM GROWTH = 4,4%

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Exports of Goods and Services R’m

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Exports of Goods & Services R'm

GROWTH RATE: 2018 - 2049LIKELY - 2,3%LOW - 2,0%HIGH - 2,7%

1,8%

4,9%1,7%

LONG TERM GROWTH = 3,0%

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Imports of Goods and Services

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Imports of Goods & Services R'm

GROWTH RATE: 2018 - 2049LIKELY - 3,1%LOW - 2,3%HIGH - 3,7%

4,2%

5,9%

1,8%

LONG TERM GROWTH = 4,7%

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Step 4: Forecasting of individual commodities: Exports

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60,000

65,000

70,000

75,000

80,000

85,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Coal Mining Exports

0.4%

1.7%

0.9%

Long - term Growth Rate - 0.6%

Step 4:Continued…..

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-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Tons

Wheat Exports

1,5%

15,5% -6,5%

Long - term Growth Rate 4,5%

Step 5: Forecasting of Individual Commodities: Imports

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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Coal Mining Imports

20,0% -15,4% 24,6%

Long - term Growth Rate 10,8%

Step 5: Continued…

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-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Grapes

8,1% 19,2% 12,2%

Long - term Growth Rate 14%

Step 6: Assumptions on Exogenous Variables

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Assumptions for the baseline projection (Likely Growth Scenario)

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Input Variable Parameter Value Source and Explanation

1 South African population 1.7% Conningarth’s Long Term Forecast

Current (2019) 1.55% StatsSA Mid-Year Population Estimates, 2019

Long-term projection by NDP, declining to 0.5% by 2030

1% p.a on short and medium term, declining to 0.5%

by 2030.

National Development Plan 2030. Due to the significant improvement in mortality rates attributed to HIV/Aids

and TB treatment programmes, the population projections of the NDP are too pessimistic.

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South African inflation targets (SARB objectives between 3.0% and 6.0%)

6.0% Conningarth Economists. Applies to the short to medium term.

Continued…..

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3

World prices/inflation: (2019 –2023)

3.5%Overview of the world economic outlook projections. World Economic outlook (IMF) July 2018

Major Advanced Economies(2018 – 2023)

2.0%Overview of the world economic outlook projections. World Economic outlook (IMF) July 2018

Emerging market develoment economies(2018 – 2023)

4.6%

Overview of the world economic outlook projections. World Economic outlook (IMF) July 2018

Continued…

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Final consumption expenditure by government

3.0%Conningarth Economists: The role of government in the South African economy should be in line with economic growth. This applies to the full 31 years. The NDP is slightly higher.

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Growth cycle deviation from the Mean

2.5% Conningarth Economists

2018 to 2019below

average

2020 to 2026above

averageall other

yearsstandard

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Assumptions for the baseline projection (Likely growth scenario) Continued

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Exchange rate per annum (depreciation of the real effective Rand exchange rate for the weighted basket)

-0.9% p.a.

A Manual for Cost Benefit Analysis in South Africa with Specific Reference to Water Resource Development (WRC Report Number: TT598/14). This real 0.9% is over and above the purchasing power parity theory which means that the Rand will depreciate against its trading partners with this real percentage plus the difference between South African inflation and the inflation of its main trading partners. Applies to the full 31 years.

7World economic growth

2018 to 2023 3.6% Overview of the world economic outlook projections. World Economic outlook (IMF). (July 2018)

2024 to 2034 3.5% Conningarth Economists

2035 to 2045 3.0% Conningarth Economists

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Current account of balance of payments as percentage of GDP

4.0%

Conningarth Economists. Assumption is based on 18 years average of SARB bulletin. As a rule of thumb, this ratio

should be in the order of Net Capital Formation as percentage of GDP, which has been 6.1 % on average over the last 18 years. Applies to the full 31 years Projection.

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Step 7: Results

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South African and Global Economic Growth

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Final Demand & GDP Projections (2018 Base Year, constant 2010 prices)

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GDP and Final Demand Components

Compound Annual Growth Rate per annum over Period

2019-2049 2019 2020

Likely High Low Likely High Low Likely High LowFinal Consumption

Expenditure by Households:

2,9% 3,5% 2,3% 1,4% 1,5% 1,0% 1,9% 2,1% 1,4%

Final Consumption Expenditure by Government:

2,9% 3,4% 2,3% 1,6% 1,7% 1,1% 2,0% 2,3% 1,5%

Gross Capital Formation (Investment): 4,0% 5,4% 2,6% -0,4% -0,2% -0,7% 1,3% 1,9% 0,5%

Exports of Goods and Services

2,3% 2,7% 2,0% 1,2% 1,6% 1,0% 1,6% 1,9% 1,3%

Imports of Goods and Services

3,1% 3,5% 2,3% 1,7% 2,2% 1,4% 2,3% 2,7% 1,8%

Gross Domestic Product 2,9% 3,8% 2,3% 0,7% 0,9% 0,4% 1,5% 1,8% 1,0%

STEP 7: Continued…Local Production Growths

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MAIZEForecasted CAGR for Local Production

Scenarios 2019-2049 2019 2020 2021Likely 2,1 1,2 1,4 1,9High 2,6 1,3 1,7 2,2Low 1,6 0,8 1,1 1,4

Forecasted Index Levels for Local ProductionScenarios 2018

(Base Year) 2019 2020 2021

Likely 100 101 103 105High 100 101 103 105Low 100 101 102 103

Local Production Growths

MOTOR VEHICLES AND TRUCKSForecasted CAGR for Local Production

Scenarios 2019 - 2049 2019 2020 2021Likely 4,0 0,2 3,5 3,2High 5,2 1,0 4,3 3,9Low 2,9 0,2 1,9 1,7

Forecasted Index Levels for Local ProductionScenarios 2018

(Base Year)2019 2020 2021

Likely 100 100 104 107High 100 101 105 110Low 100 100,2 102 10432

THE END

THANK YOU!!!

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