Medium Term Budget Policy Statement: public hearings

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Meeting Summary

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Meeting report


1 November 2002


: Ms Hogan (ANC)

Relevant Documents:
JP Morgan submission
Mazwai Securities Powerpoint submission
Mazwai Securities comment
Sanlam submission

Representatives from JP Morgan, Mazwai Securities and Sanlam presented their views and opinions on the Medium Term Budget Policy Statement. This basically entailed their current view of the South African economy and their expectations for the next three years.

JP Morgan submission
Mr Robin Marshall, Managing director, Economic Research and Ms Taryn Rebeck, SA economist presented their submission to the committee [see document].

Dr Woods (IFP) commented that the submission by JP Morgan was very interesting and sobering. He added that he would like to make comments on the assumptions made by Ms Rebeck on the major macro-economic cornerstones namely GDP (Gross Domestic Product) and inflation. On the GDP side, her reasons were a little vague regarding the household consumption trends, and her predictions on the export falloff. He said that Treasury had told the committee that sectoral analysis is fundamental to their projections on GDP. He then asked Ms Rebeck to explain her assumptions based on sectoral analysis. He also noted that their view on inflation targeting is more pessimistic than that of the Treasury and asked for more clarity on their prediction that the Rand is going to slip back a bit in the future. He stated that the Rand is one of the better performing currencies over the last year and that it is generally acknowledged that the currency is undervalued. He wondered whether the Rand is not building up immunity towards the global conditions and externalities that influence it.

Ms Rebeck replied that for those forecasts they do look more at sector breakdowns and their concerns are based on the impact the various areas of the economy that benefited a lot from last year's Rand depreciation, have. She said that it was a great export incentive and on the mining side there has been a very strong gross domestic fixed investment numbers. They do believe that gross domestic fixed investment will remain stable. Those sectors will however be fading with subdued global growth. The retail and trade side has also held up well this year, in terms of consumers and house and car purchases. They are however expecting the retail and trade side to suffer next year from the latest interest rate hike, which has lessened household consumption expenditure. Ms Rebeck agreed with Dr Woods that the currency is doing very well this year. She predicted that any bad news on inflation, worsened CPIX numbers or bad news on food prices would adversely influence the currency. She added that they feel that the structural issues underpinning the currency, in terms of relatively low growth and limited foreign direct investment have not changed. Therefore they do expect the currency to further depreciate, although at a much slower pace than at the end of last year.

Mr Mnguni (ANC) asked why they contend that the Medium Term Budget Policy Statement is too conservative when it is much more expansionary than in the previous five years. He asked how they reached that conclusion.

Ms Joemat (ANC) commented that the new Medium Term Budget Policy Statement contains tax reforms and relief and increased expenditure. She said that this fact does not reconcile with JP Morgan's pessimism on growth in the economy.

Mr Marshall commented that South Africa has a history of very cautious revenue projections. He therefore believes the budget deficit projections will lead to a modest tightening in the economy and not much stimulus. On the tax reforms he commented that they have now moved to internationally accepted levels. They would have liked to see tax incentives to make the South Africa economy more appealing for foreign direct investment. He referred to other economies that have benefited from pushing tax rates, particularly on capital investment, below international norms and have been successful in attracting capital inflows. Mr Marshall stressed that the South Africa economy is currently in a window period where fiscal expansion would have been welcomed.

Ms Hogan (ANC) asked for more clarification on his point on the window period. She said that it worried her that the government may have missed an opportunity for increased investments.

Mr Marshall told her that it is an issue of institutional capacity to absorb the expenditure increases. He stressed that it is important to try and improve the institutional capacity to make increased expenditures possible. He added that the point he was making was more directed at the tax side than the expenditure side.

Mr Hanekom (ANC) said he wanted to comment on the fiscal conservatism as mentioned in their presentation. They emphasised tax reduction as the appropriate fiscal measure. He asked why they would rather go that route rather than increased spending.

Mr Marshall answered that they would want both. He added that the economic impact of tax deductions is uncertain, as it depends on the response of individuals and corporations. He then emphasised that increased expenditure must be backed up by the institutional capacity to absorb the increases, as sustainability is crucial.

Mazwai Securities submission
Mr Andile Mazwai (CEO) and Ms Mamokete Lijane (Fixed Income Analyst) presented their submission to the Committee [see document].

Mr Mnguni (ANC) asked whether Mr Mazwai thinks that debt to GDP is the correct measure for fiscal health. He also wanted to know what he meant by saying that the current inflation targeting regime should be more flexible.

Mr Mazwai told him that you get what you measure. He added that there are other priorities with regard to the South Africa economy. He mentioned that these are policies inherited from developed nations with a fiscal capacity. South Africa as an emerging market does not have the same capacity. He added that issues like price control and inflation targeting are perhaps better suited to fully developed economies. Unfortunately people who are interested in investing in South Africa look at these indicators, so there is no option of changing it. On inflation targeting he explained that the current regime is appropriate for the current state of the economy but that there are other options that should be explored. He added that by flexibility he meant that perhaps the inflation target ought to be pegged to something else.

The Chair asked Mr Mazwai whether it is possible to look at inflation targeting indexed to another index. She said that JP Morgan, in their earlier submission, expressed their concern that in the inflation targeting regime, at the moment, there is no reference to output. Was Mr Mazwai suggesting that the inflation targeting regime should look towards establishing a loose relationship with output; have a flexible relationship to output figures.

Mr Mazwai replied that he is certainly sympathetic to that point. He commented that the way monetary policy has been set out is with a single mandate and perhaps it would be appropriate to have it with a dual mandate to make it easier to then balance the priorities of how one is trying to steer the growth and what the inflation response is going to be for that.

Dr Rabie asked Mr Mazwai why he blames the R8.1bn revenue overrun largely on inflation. Dr Rabie said that his contention was that it was due to conservative budgeting.

Mr Nene (ANC) mentioned that in the presentation under omissions, Mr Mazwai stated that there remains uncertainty as to the mechanics of absorbing future shocks. He asked for clarification on these mechanisms as well as about their prediction that household expenditure is likely to fall.

Ms Lijane said that when we look at the R8.1bn to see where the increases have come from one sees the biggest increase are coming from tax on income profits and individuals and groups account for R2.6bn of that. The next big contributor is value added tax and service tax. That contributes about R3.8bn. These are areas where you find the effect of inflation filtering through the most. If inflation is high your sales and revenues are high and that means taxes are going to be higher. Therefore she believes that the increased tax revenue is largely due to inflation.
On household expenditures she said that there have been four interest rate increases in the past year. On a R200.000 house bond it translates to an extra R700 that that person has to pay every month. It takes a while for people to adjust their expenditure to the contracted incomes. Due to the interest rate hikes, people will feel the effect in their pockets and expenditure is going to go down.

On the mechanics for absorbing shocks Mr Mazwai said he would like to see a move away from a fixed number, rather not targeting on the average at the end of the year but perhaps looking at a mean average.

Mr Mnguni commented that JP Morgan said that inflation has been influenced by endogenous factors.

Ms Lijane said that they do believe in inflation targeting as a principle. External shocks influence the economy and the subsequent factors influencing inflation after the shock must be controlled. She affirmed that inflation currently is being driven by endogenous factors, which were initially caused by earlier shocks.

Sanlam submission
Mr Jac Laubscher (Chief Economist) presented Sanlam's submission [see document].

Dr Rabie (NNP) enquired about the taxation of retirement funds in the present tax regime. He asked whether it was comparable with those in other emerging markets.

Mr Laubscher answered that he cannot compare because he does not have full information on other emerging markets.

Ms Hogan asked the National Treasury to comment on tax reliefs for savings.

Mr Maselela (Treasury) replied that a broad response would be the best one. He stated that there are a number of areas being looked at to encourage savings, tax being one of them. He emphasised that tax cuts cannot guarantee higher savings and that savings is influenced by a combination of factors.

Ms Hogan then commented on the issue of infrastructure investment, which is at the heart of sustainable expansionary fiscal policy. She asked Mr Laubscher whether the increased income grants would have any macro-economic impact on savings or spending.

Mr Laubscher answered that increases in income grants lead directly to higher consumption. He added that the impact of the increases is not large enough to really impact on the macro-economic side.

The Chair stated that they need more information on this kind of incremental spending. She asked whether the Treasury has any recent research on this matter.

Mr Maselela told her that theory shows that the lower income group will consume the grant while the middle-income group will save it. He added that this has a positive macro-economic impact but that the fiscal impact is still uncertain.

Ms Botha (DP) enquired about what to expect from the food prices and its role to combat inflation.

Mr Laubscher replied that when you look at history, in general, previous sharp rises in food prices were followed by a sharp fall. He added that SA's food prices are, more than ever before, determined by global factors. The situation could become worse over the next six months but he emphasised that there is a possibility that food prices will fall, like in previous years, and then one would see a positive surprise in the inflation rate. He added that "we just might see a decrease in the oil price, which would also have a positive influence".

The Chairperson thanked Mr Laubscher for his time and convened the meeting.


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