P Mlambo-Ngcuka: The Economist Group's Fifth Business Roundtable

7 November 2006

Programme Director and Editorial Director
Economist Intelligence Unit, Delia Meth-Cohn
Minister of Finance, Trevor Manuel
Minister of Trade and Industry, Mandisi Mpahlwa
Minister of Public Enterprises, Alec Erwin
Governor of the Reserve Bank, Tito Mboweni
Fellow panellists,

Chairman of China International Trust Investment Company (CITIC) Group,
China, Dan Kong
Division President of Coca-Cola South Africa, David Lyons
Managing Director of Old Mutual South Africa, Paul Hanratty
Chief Executive Officer of Sasol, Pat Davies
Distinguished guests
Ladies and gentlemen

Let me convey my appreciation to The Economist magazine, for inviting me to
this most important conference where we share ideas, interact; and for
providing this opportunity to discuss our economic progress that we have made
as a country and share the plans and interventions we are making as a
country.

We have entered an extremely exciting period of our country's economic
development and we appreciate the opportunity to discuss this with our domestic
business community and with international businesses that are already in or
planning to invest in South Africa.

Current Economic Situation

When I say extremely exciting, I don't think anyone can accuse me of
exaggerating. Last year South Africa's Gross Domestic Product (GDP) grew at a
rate of 4,9 percent. Since 2004 we have averaged over 4,5 percent growth per
year. In the past two years ending in March this year we have more than a
million net new jobs altogether. Our average wealth per person, as a country,
is rising at around three percent every year.

We are making this progress in a period when we have reduced inflation,
reduced government debt to very low levels, reduced international debt to even
lower levels, achieved a low government deficit and we have interest rates
lower than they have been for 25 years. This is not an ordinary time for South
Africa; this is indeed the 'Age of Hope.' It can materialise into a period of
sustained and shared economic growth. In fact we expect it to. The world
expects South Africa to reach new levels of economic achievement. That is why
we received record levels of both foreign direct investment and foreign equity
portfolio investment last year.

That is why foreign investment continues to flow into South Africa. The
multinationals and the equity investors have been followed more recently by the
private equity funds. Local and foreign investors have pushed the Johannesburg
Stock Exchange (JSE) to levels nearly twice as high as they have ever been.

That is why we are in this room. We want to know: is this terrific progress
going to continue? Are we really on the cusp of great things? What plans do we
have to ensure that our future is more prosperous than our past? How do we work
together to ensure not just recovery from the economic mess of apartheid, but,
in fact, a splendid, shining, brilliant economic future for South Africa.

Historical Background of the Economic Situation

To understand where we are going it is important to understand from where we
came. The advent of democracy in South Africa found an economy and the
government that were in a poor state. Before 1994, the economy was growing at
less than one percent per year and income per person, on average was falling.
Income per person, on average, fell by 15 percent from 1984 to 1993. The
government deficit was close to nine percent of GDP. Inflation had been in
double figures for 30 consecutive years. Government debt was unacceptably high,
even dangerously high. Capital was scarce and the county's foreign reserves
were perilously low.

Our first battle was to turn an insolvent country into a solvent one. We had
to reduce government's debts, support the fight against inflation and turn the
finances of the country and the government around.

Overcoming the Apartheid Economic Legacy

Looking back on the first 10 years of democracy I think it is fair to say
that we did pretty well. We did better than many expected us to do not the
people, the commentators and the chattering classes. They said we would ruin
the country, we would kill the golden goose, we would plunder the treasure and
we would pander to the needy people and the greedy new elite. Well, we
absolutely did not do that!

In fact the golden goose was sick, seemingly terminally ill. The treasure
chest was empty. We brought the golden goose to life and we started to refill
the treasure chest. We did this by being very careful, not spending money when
we weren't sure of the outcome, not borrowing money unless we knew we were
spending it on something which would increase our competitiveness, our
productivity and our output. We didn't employ new people in the civil service
unless we were sure they would add value. In fact, employment in government
fell quite sharply during the first six or seven years of democracy.

Our people were patient. They could see that we were being responsible. They
knew we were attentive to their needs, but we could not address all of them at
once. They could see steady progress, even though it was slow at first. In
those first ten years we did restore the golden goose to health and we began to
fill the treasure chest. Inflation fell to very low levels, the government
deficit fell and government debt shrank rapidly. Even during this tough period
the economy started growing faster. We grew at an annual rate of about three
percent on average between 1994 and 2003.

We delivered houses, electricity connections, water and sanitation,
sewerage, schools and clinics to all parts of the country. We introduced free
provision of a minimum amount of water and electricity. In the later part of
this period, especially from the year 2000 onwards, we started to create a
significant number of new jobs; we also began to have a real impact in rolling
back poverty. We proved that we could manage a country and an economy
effectively. We proved that we could roll back government debt, reduce
inflation, reduce taxes and improve the living conditions of the people at the
same time. This was good, but it was not enough.

When the African National Congress (ANC) began the campaign for the third
democratic national elections in 2004 we knew that, even though conditions had
begun to improve, unemployment and poverty were still very high. We inherited a
very unequal country with a real weakness in its ability to create jobs.
Unemployment was at about 30 percent when we began the campaign. Poverty, we
estimated, still held at least a third of South African households in its
grip.

We had to set our sights higher now. Low inflation and steady growth were
not enough. We knew we had to commit ourselves to a more ambitious path. We had
to stretch ourselves. We had to set clear national targets and set out clear
national strategies for getting there.

We set out clear targets; we aimed to halve poverty and unemployment by
2014. Unemployment should come down to 15 percent or lower and poverty should
hold no more than one-sixth of our households in its grip. To do this we had to
grow faster, but we also had to make sure that the fruits of our faster growth
were effectively distributed to the poorest amongst us.

Bringing the marginalised poor into the mainstream was our election mandate,
but it was also a condition for sustained growth. We could not grow fast enough
if one third of our households were not contributing to growth.

The translation of the 2004 election mandate into a programme of government
became what we now call the Accelerated and Shared Growth Initiative for South
Africa, (AsgiSA) in short.

Role of AsgiSA in Economic Recovery

Having set our targets, we focused on how to get there. We realised that,
taking the responsiveness of employment to the rate of growth into account that
we would have to grow at five percent or slightly higher over the ten year
period to achieve our employment and poverty objectives.

We knew that there were factors that constrained the rate of increase in our
growth. Most importantly, we had to invest more in both human resources and
physical infrastructure to create the capacity we needed for sufficiently fast
growth. We felt that it would be reasonable to break up our growth target into
two periods. During the first period from 2004 to 2009 we aimed to grow at
least 4,5 percent per year, on average. For the second period, from 2010 to
2014 we aimed to grow at an average of around six percent.

But how would we get there? Our strategic approach for AsgiSA was to
identify the key constraints on growth that if we removed them would free us to
grow even faster. After discussion with social partners and experts we agreed
that there were six binding constraints that we had to address:

* still greater macro-economic stability
* better and more competitive logistic and infrastructure services such as road
and rail, ports and airports, electricity, communications and water
* a better skilled labour force from operators and artisans to professionals
and managers
* industrial and sector development initiatives in the context of a more
competitive environment
* a more better regulatory environment for small and medium businesses
* a better capacitated state - government services of all kinds needed to be
improved.

So far we are very happy with our progress. We have made progress towards
reducing the volatility of the exchange rate with our steady accumulation of
foreign reserves.

Infrastructure investment

We have made significant progress in our infrastructure investment
programmes; we have refurbished three Eskom power stations, we have another
major modern coal-fired power station in the pipeline; we have issued tenders
for two gas-turbine power stations to be run by independent producers; have
issued major orders for new locomotives for our coal and iron ore lines and for
our general freight lines; we are soon to issue new orders for our commuter
rail lines; we have huge expansions to our airports in Cape Town and
Johannesburg and we have approved the construction of a new airport for Durban.
We are proceeding with the De Hoop Dam, which will open the way for extensive
investment and job creation in south-eastern Limpopo.

We have approved plans and set aside the funds for building and rebuilding
stadiums for the 2010 FIFA World Cup and for the surrounding infrastructure.
Overall, we have committed nearly R410 billion for infrastructure investment in
the 2007 to 2010 period.

Joint Initiative for Priority Skills Acquisition (JIPSA)

On the skills front, we have set up a Joint Initiative for Priority Skills
Acquisition (JIPSA) with business, the unions and education leaders. We have
injected R2 billion into upgrading the Further Education Training (FET)
colleges. This has seen the improvement to the conditions of employment for
lecturers and we have allocated new funds for bursaries and loans to support
attendance at the Further Education Training (FET) Colleges.

We have committed additional funds for bursary and scholarship programmes
for students acquiring key skills sets in the universities too.

The universities have agreed to increase their output of engineers by about
40 percent, beginning immediately. Our new tax incentive for research and
development will also help grow our skills endowment.

At the base, targeted programmes to improve the quality of school education
are already beginning to take effect, and have received additional funding, for
example, a new model of funding for teacher training.

A new immigration law was passed last year to facilitate the immigration of
skilled people in key areas and another bill to strengthen this aspect of the
immigration law further, is currently before Parliament.

Industrial reforms

On the industrial front, we are improving the quality of regulation, have
introduced several strategies and a new law to bring down the price of
telecommunications and make access more universal.

We have reduced tariffs in some key areas such as steel, where they are down
to zero and we have developed and are implementing sector strategies for three
selected areas: Business Process Outsourcing (BPO) and off-shoring, Tourism and
Biofuels.

Companies like IBM and JP Morgan Chase, amongst others, already have major
investments in back-office operations in South Africa. The Biofuels strategy is
about to come to Cabinet for approval and implementation. The tourism marketing
budget has already been significantly boosted. We will soon announce a new
aviation policy that will still allow greater air access to South Africa.

With regards to the regulatory environment for small businesses, our major
initiative so far has been reducing the tax burden and the administrative
burden of taxation for small businesses. The National Treasury also has a
moratorium for small business tax offenders to encourage them to come into the
system by May next year.

The burden of contributing to the skills levy was removed for small
business; and to the regional services levy for all businesses. On the labour
regulations front, the Minister of Labour has been engaged in intensive
discussions with business and unions; they are discussing policy papers, which
propose some important improvements in the way labour laws are
administered.
With regards to the capacity of government, we have a range of initiatives at
many levels, including a bureau based at the Development Bank of Southern
Africa (DBSA) called Siyenza Manje from which technical experts are deployed to
selected municipalities to help them develop infrastructure investment and
maintenance programmes.

We also have a programme to help upgrade the skills of weaker municipalities
in general, and we have a task team currently at work to improve the operation
of the Department of Home Affairs. There are many other initiatives under way
in the six binding constraints areas. We certainly don't have time to list them
all here. Yet the proof of the pudding is in the eating. Are we making
progress?

Conclusion

We certainly think we are. The rate of economic growth has definitely
stepped up to a new level. From an average of three percent per year in the
first ten years, we are now definitely achieving a higher rate of growth;
currently we are on target to meet or beat our 4,5 percent average growth rate
target for 2004-2009. Investment has risen from 14 percent of GDP to 18,5
percent of GDP. Last year, we received record levels of both direct and
indirect foreign investment.

Our macroeconomic models show this performance improving in 2009 to a growth
rate over five percent per year. I believe that the Bureau for Economic
Research at the University of Stellenbosch is forecasting GDP growth of over
five percent for all three years 2009, 2010 and 2011, the last year of its long
term forecast period.

What about the shared aspect of growth? According to our measurements we are
currently producing jobs at over 500 000 net new jobs per year. This is a four
percent growth in employment per year. Unemployment has fallen from a peak of
31 percent in 2003 to 25 percent in March this year. It is still very high -
but moving quite rapidly in the right direction. At this rate we will meet our
objective of reducing unemployment to 15 percent or lower by 2014. We will also
meet and hopefully considerably exceed our poverty targets.

We are no longer just a political miracle; we are now serious contenders in
the economic growth stakes. We compare ourselves with China, the India, the
Russia and the Brazils of this world. These are our benchmarks. We do not think
we are naive or excessively optimistic.

I thank you.

Issued by: The Presidency
7 November 2006