Business Confidence Index

1 Business Confidence IndexRand Merchant Bank/ Bureau for Economic ResearchFirst National Bank/ Bureau for Economic ResearchConsumer Confidence Index % Change in GDP year on yearStatistics South AfricaStatistics South AfricaACCELERATED AND SHARED GROWTH INITIATIVE SOUTH AFRICA (ASGISA)1. THE CHALLENGE BINDING INFRASTRUCTURE SECTOR EDUCATION AND SKILLS ELIMINATING THE SECOND MACRO-ECONOMIC GOVERNANCE AND INSTITUTIONAL CHALLENGEThe South African Government was mandated in2004 to halve poverty andunemployment by 2014. These objectives are feasible indeed we would hope to surpassthem because of steady improvement in the economy s performance and averaged about 3% during the first decade of freedom, from 1994 2004, aconsiderable improvement on the decade before 1994 when growth averaged 1% peryear.

2 Since 2004, growth has exceeded 4% per year, reaching about 5% in for the current strong performance to continue are high forecasts bybanks and ratings agencies generally indicate expectations of growth continuing ataround 4,5% in the medium term. Business Confidence is very high. The Rand MerchantBank/Bureau for Economic Research Business Confidence Index , with 86% of firmsexpecting the continuation of improving Business conditions, has remained at high levelsfor an extended period. Such a period of uninterrupted positive Confidence has notpreviously been recorded in the 30-year history of the Index , according to Rudolf Gouws,chief economist at the Rand Merchant Bank. Consumer Confidence has shown a of foreign capital have been exceptionally high since 2003, with an inflow of R80 billion (about US$13 billion) into the JSE share market between the beginning of2005 and the first quarter of 2006.

3 In the same period, South Africa has also had severalvery large inward foreign direct investment transactions. Good economic policies, positive domestic sentiment, and a favourable internationalenvironment have created the opportunity to consolidate these gains, and to take ourperformance to a yet higher level. With the faster growth rate has come rapidly improving employment creation. In the lastyear measured (to September 2005), around 540 000 net new jobs were created. Thoughunemployment remains high at over 26%, this is considerably better than the 32% unem -ployment rate reached a few years ago. Recent research indicates that the real incomesof the poorest 20% of South Africans rose by 30% in real terms between 1994 and 2004. Yet, the goal of reducing unemployment to below 15% and halving the poverty rate to lessthan one-sixth of households will not be achieved without sustained and strategic2economic leadership from government, and effective partnerships between governmentand stakeholders such as labour and Business .

4 ConsultationAs we explored our opportunities, government consulted with a range of AsgiSA Task Force led by the Deputy President included the Ministers of Finance;Trade and Industry; and Public Enterprises; the Premiers of Gauteng and Eastern Capeprovinces; and the Mayor of Johannesburg who represented the South African LocalGovernment Association. Many other ministers and their departments were included inthe discussions, as were organised Business and labour, religious leaders, youth, andwomen in various groupings and forums. Government also consulted with domestic andinternational experts. Consultation and discussion will continue as A s g i S A is implemented. These interactions have convinced government that South Africa is ready for AsgiSA to bea national shared growth initiative, rather than merely a government programme.

5 Targets of accelerated and shared growthGovernment s investigations, supported by some independent research, indicate that thegrowth rate needed for us to achieve our social objectives is around 5% on averagebetween 2004 and 2014. Realistically assessing the capabilities of the economy and theinternational environment, we have set a two-phase target. In the first phase, between2005 and 2009, we seek an annual growth rate that averages 4,5% or higher. In thesecond phase, between 2010 and 2014, we seek an average growth rate of at least 6%of gross domestic product (GDP). In addition to these growth rates, our social objectives require us to improve theenvironment and opportunities for more labour-absorbing economic activities. Morebroadly, we need to ensure that the fruits of growth are shared in such a way that poverty comes as close as possible to being eliminated, and that the severe inequalitiesthat still plague our country are further reduced.

6 Our vision of our development path is a vigorous and inclusive economy where productsand services are diverse, more value is added to our products and services, costs ofproduction and distribution are reduced, labour is readily absorbed into sustainableemployment, and new businesses proliferate and expand. 3 Balanced growthWe will also put our growth on a more balanced footing, in two important respects. The recent growth has been based on a combination of strong commodity prices, strongcapital inflows and strong domestic consumer demand, given impetus by anti-povertymeasures, growing employment and rising asset prices. The effect, however, of thiscombination has been to strengthen the currency which makes it difficult for exportersoutside the commodity sector or those who compete with imports to remain led to a trade deficit of 4,3% of GDP in 2005, well financed by capital inflows, butdemonstrating South Africa s challenge to compete effectively outside of the second imbalance derives from the fact that although the social grant programme hasgiven significant impetus to poverty reduction and income redistribution, there remainabout a third of South African households not yet able to benefit directly from oureconomic advances.

7 Bringing this sector of the population into the mainstream economywill considerably enhance our growth growth at around 6% requires that these two imbalances are countered. Indeveloping a strategy for accelerated and shared growth, we adopted a growth diagnos-tic analysis which seeks to identify the binding constraints on achieving our methodology holds that while all successful economies have certain characteristicsin common such as well-managed fiscal and monetary policy and competentgovernment administration each country faces specific challenges in moving frommediocre to successful. CONSTRAINTSThe list of binding constraints emerging from analysis and consultation has been keptshort enough and focused enough to allow for a coherent and consistent set of responses. Volatility and level of the currency.

8 In spite of major improvements in theadministration of fiscal and monetary policy, currency volatility deters investors intradable goods and services outside of the commodity sector. The Rand remainssomewhat volatile, though the degree of volatility has been reduced. At present, therelative volatility is accompanied by a currency that is overvalued in the sense thateconomic resources are diverted into narrow areas of investment, laying an4unsteady foundation for the future. A further area for macro-economic improvementis in expenditure management, particularly in government capital investment. The cost, efficiency and capacity of the national logistics system. Backlogs ininfrastructure and investment, and in some cases market structures that do notencourage competition, make the price of moving goods and conveying servicesover distance higher than it should be.

9 Deficiencies in logistics are keenly felt in acountry of South Africa s size, with considerable concentration of production inland,and which is some distance from the major industrial markets. Shortage of suitably skilled labour amplified by the impact of apartheid spa-tial patterns on the cost of labour. The most difficult aspects of the legacy ofapartheid to unwind arise from its deliberately inferior system of education andirrational patterns of population settlement. In a period of growth it is evident that welack sufficient skilled professionals, managers and artisans, and that the unevenquality of education remains a contributory factor. In addition, the price of labour ofthe poor is pushed up by the fact that many live a great distance from their placesof work. Barriers to entry, limits to competition and limited new investmento p p o r t u n i t i e s.

10 The South African economy remains relatively concentrated,especially in upstream production sectors such as iron and steel, paper andchemicals and inputs such as telecommunications and energy. In some cases,market structure negatively influences the possibilities of downstream production orservice industry development. Competition law and industrial policies need to bestrengthened to counteract these factors. Regulatory environment and the burden on small and medium mediocre performance of the small, medium and micro Business sector interms of contribution to GDP and employment partly arises from the sub-optimalregulatory environment. In the administration of tax, the planning system (includingEnvironmental Impact Assessment), municipal regulation, the administration oflabour lawand, in specific sectoral regulatory environments, regulationunnecessarily hampers the development of businesses.