T Manuel: Address to Federation of Unions of South Africa

28 November 2006

What is happening in our economy?

Good afternoon ladies and gentlemen. Thank you for inviting me to address
your gathering today. I have not prepared a detailed speech. Instead, I wish to
have a discussion on what is happening in our economy at the moment, to share
some perspectives on some of the current economic trends but also to hear from
you what your analysis is on the state of the economy.

In the decade 1983 to 1993 the economy grew by an average of 1,1 percent a
year far below the rate of population growth. Between 1994 and 2000, the
economy grew by 2,9 percent a year. Since 2001 the economy has grown by an
average of 3,8 percent a year. If I take just the past four years then the
average is above four percent. It is clear that since 2001 we've seen a step
change in the pace of economic growth. Economists are revising upwards their
view on potential Gross Domestic Product (GDP) growth, up almost every
quarter.

In our opinion there are two main reasons for this faster growth. The first
is, we believe, the management of the economy since 1994. The economy has
experienced structural change on a massive scale and we are now seeing the
benefits of those reforms. Secondly the international economic environment has
been supportive of growth through high commodity prices and substantial inflows
of foreign capital.

The second feature of the present economic environment is that the pace of
job creation has accelerated to the point where we are creating jobs faster
than new entrants are joining the labour market. Our unemployment rate is still
far too high for us to be satisfied but the present pace of job creation is
making inroads into the unemployed. This is positive but much more work is
still needed to sustain this.

The jobs that are being created are across the spectrum, not just the higher
ends of the market. In terms of a table published in the people's budget
2006/07, the number of people employed increased in 2005 and the proportion of
people earning below R1 000 a month (after adjusting for inflation) decreased,
suggesting that many of these jobs are of a decent quality. According to a
study published last week by the Department of Trade and Industry, the number
of small businesses in existence since 1995 has grown by 150 percent. These
figures suggest a fair amount of dynamism in the economy.

Tax revenue has grown by almost 15 percent a year in nominal terms for four
years even though the economy has only grown by about 10 percent a year in
nominal terms. There are three reasons for this. The first is that tax reforms
that we put in place have closed loopholes, broadened the tax base and made
compliance easier. The second reason is improved efficiency by the South
African Revenue Service (SARS). The third reason is faster economic growth and
employment creation. But even when we analyse the data in detail, tax revenue
is growing faster than we can account from all of these factors. One possible
explanation is that the economy is growing much faster than we are presently
measuring. I'll return to this later.

On the back of historically low interest rates at least until this year
significant tax relief and accelerating employment growth, consumption has been
extremely strong growing at seven percent a year for the past six quarters. In
fact consumption of durable and semi-durable goods has been growing at 16,4
percent a year for the past two years.

The number of cars purchased now stands at 43 000 a month even though the
population is growing at about 41 000 a month and the number of adults is only
increasing by about 27 000 a month. According the Mike Schussler, 78 percent of
all formal sector workers now own a vehicle yet we see no sign of a slowdown in
vehicle sales.

Investment as a share of GDP peaked at about 25 percent in the early 1980s
as the State invested in both housing and infrastructure and in State
enterprises such as Sasol, Mossgas, etc. This level then dropped to as low as
14 percent a few years ago. Since 2003 investment too has been accelerating.
Both private investment in housing and corporate investment in equipment and
machinery shows very strong growth. In the first half of this year gross fixed
capital formation reached 17,4 percent of GDP. Over the next three years the
public sector is budgeting to spend R409 billion on infrastructure, providing
further impetus on the investment side.

The story of South Africa's property boom over the past five years is a
familiar one. Property prices of medium sized houses have doubled since 2001.
However, in the past two years we have seen a boom in an area most housing
analysts didn't know existed. The residential property market in the country's
townships continues to show a higher level of activity than the traditional
metropolitan areas, according to the latest First National Bank (FNB)
residential property barometer. This barometer measures activity in the housing
market, with one to three being very poor, and 10 being very active. The index
is presently at 7,5 suggesting somewhat surprising buoyancy in the township
housing market. Investment in new township housing development is also
robust.

There are two areas that give rise for concern. The first is that despite
rising earnings, household savings continues to lag. National savings has
fallen to as low as 13 percent of GDP. This has two effects. The first is that
we have to finance some of our investments through foreign capital inflows. So
far capital has flown in at a rapid pace allowing us to finance our current
account deficit and build up reserves. Will the international environment be as
supportive forever?

The second blotch on the horizon is that a significant portion of our
imports comprise of consumer goods. Going forward we must improve the quality
of this current account deficit towards investment goods. Higher interest
rates, faster public sector infrastructure spending, the moderately weaker
currency and improved performance of our exporters should allow for a slight
easing of the current account deficit. However, if we do not improve our export
performance our economic performance would not be sustainable requiring a
forced slowdown in growth to rebalance the economy. No one wants this.

The international picture is, as pointed out earlier, supportive of faster
growth in South Africa. However, there are a few more flashing amber lights
than a year ago. Global financial imbalances in the form of high current
account deficits in the United States (US), large trade surpluses in China and
in oil exporting countries, and rising inflation globally all pose a threat to
the present pace of global growth.

In 2005 the US current account deficit, the difference between its imports
and exports of goods and services was a staggering US$791,5 billion or 6,4
percent of GDP. In the second quarter of 2006 the deficit just for that one
quarter reached US$218 billion or 6,6 percent of GDP. This represents a country
living beyond its means at a rate never witnessed before in economic history.
At the same time many developing countries are running massive current account
surpluses. China's current account surplus in 2005 was US$161 billion and US$91
billion in the first half of 2006.

Oil exporting countries are also running huge current account surpluses with
much of this money flowing into the US and Europe. In 2005 Saudi Arabia ran a
current account surplus of 28 percent of GDP and Norway ran a surplus of 17
percent of GDP. This year the International Monetary Fund (IMF) estimates that
from the US$700 billion that oil producers would receive about US$400 billion
will be 'parked' offshore, further exacerbating these financial imbalances.

Economic theory suggests that capital should flow from developed countries,
traditionally offering lower returns to developing countries offering higher
returns due to more rapid growth. In the past eight years water has flowed
uphill. Capital has flowed in massive quantities from developing countries to
developed countries. China now has over one trillion dollars of foreign
exchange reserves. China has overtaken Japan and is now the single biggest
purchaser of US treasury bonds. India too has accumulated foreign exchange
reserves at a phenomenal pace.

What does all of this mean? To put it crudely, China buys US dollars to keep
its currency weak. US citizens take this money and buy iPods made in China
creating jobs in China. As the level of US debt rises the global economy
becomes ever more unstable increasing the chances of a crash.

There is no apparent solution to this set of problems. From the US
perspective they cannot afford to suddenly stop borrowing. Their budget deficit
is now below four percent of GDP but is still about US$400 billion. If the US
raises interest rates to slow the economy down, it could attract even more
capital further strengthening the currency. If they lower rates to weaken the
dollar to make imports more expensive, inflation could rise offsetting any real
depreciation. From a Chinese perspective they need to stimulate domestic
consumption but this may lead to lower savings and higher interest rates.
Higher rates or buying fewer dollars could lead to an appreciation of their
currency reducing their competitiveness. It is a complex web of risks that need
to be managed jointly through global action; preferably managed through
multilateral institutions.

As India and China industrialises, their hunger for resources and oil in
particular increases. In the US there is a reluctance to reduce the energy
intensity of their economy and their dependence on fossil fuels. Rising demand
for a diminishing resource is likely to further raise geopolitical tension in
the next two decades putting the lives of many more at risk.

Let me turn to growth on the African continent. Africa today is experiencing
a sustained period of rapid economic growth. In the last 20 years of the
previous century, GDP per capita on the African continent remained remarkably
flat while most other emerging regions enjoyed substantial increases in
prosperity and welfare. For the past four years, economic growth on the African
continent has averaged 4,5 percent with growth reaching 5,1 percent in 2005.
Some of this is driven by historically high commodity prices and in particular
oil. However, even net oil importers grew by 4,5 percent last year. Rising
commodity prices combined with sound macroeconomic performance has provided a
framework for strong growth in most African countries.

Macroeconomic stability is a feature of the economic environment in most
African countries today. Low inflation, manageable debt levels partly as a
consequence of debt reduction, sound fiscal policies and improved public
financial management all provide a firm foundation for rising economic growth.
In 2005, oil exporting countries ran a budget surplus of 7,6 percent of GDP and
oil importing countries ran a deficit of just 1,6 percent.

One sparrow does not a summer make. Four yours of economic growth, while
encouraging does not yet provide a sustainable platform for the reduction of
poverty and inequality. Africa needs two to three decades of rapid growth to
make a substantial dent on the level of poverty. Half of Africa is today
regarded as poor while in regions such as Asia, the number of people living in
poverty has halved in the past three decades. Just as in South Africa the
challenge on the continent is to sustain this rapid economic growth through
further acceleration of investment in physical and human capital.

In addition, the State must be able to extract a fair share of the rising
profits from the resources sectors. The ability of governments to use these
resources wisely will determine how sustainable this economic boom is and how
widespread the benefits are shared.

In conclusion, the present economic environment is extremely buoyant. What
started off as a consumer boom has been translated into rising investment.
Rising investment has led to employment growth, further contributing to rising
consumption. We are capable of accelerating growth even further. Our key
economic policy objective is to sustain the present pace of growth but also to
broaden the scope of beneficiaries. However, even as we grow new challenges
emerge. We must do more to understand these challenges and work together to
address them.

Last but not least, a few hours ago Statistics South Africa (StatsSA)
revised upwards their estimate of GDP growth going back 10 quarters. Growth in
2005 has been revised upwards from 4,9 percent to 5,1 percent making last year
the fastest growing year in about 25 years. The growth rate for 2004 was also
revised up to 4,8 percent from 4,5 percent. The data also suggests that despite
a moderate slowdown this year, the economy is still extremely strong. We are on
track to meet our growth forecast of 4,4 percent set out in the medium term
budget policy statement a few weeks ago.

On that good news let me step back and hear from you, what your thoughts on
the economy are.

Thank you!

Issued by: National Treasury
28 November 2006