are you feeling repressed?

August 2012

Are you feeling repressed?

US public debt

0

20

40

60

80

100

120

140

1791

1800

1809

1818

1827

1836

1845

1854

1863

1872

1881

1890

1899

1908

1917

1926

1935

1944

1953

1962

1971

1980

1989

1998

2007

% G

DP

Source: IMF

Great Depression

World War II

It’s HEAVY!!

Indeed growth in DM has been sliding for decades

0

2

4

6

8

10

12

0

1

2

3

4

5

6

1900-50 50s 60s 70s 80s 90s 00s

%yr

%yr

US (lhs) France (lhs) UK (lhs) Japan (rhs) Germany (rhs)

Source: HSBC

US new home sales index

200

400

600

800

1000

1200

1400

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Inde

x

Source: Bloomberg

US median house price – existing home sales

-20

-15

-10

-5

0

5

10

15

20

01 02 03 04 05 06 07 08 09 10 11 12

%yr

Median house price

Source: Bloomberg

US long-term unemployment

05

101520253035404550

Jan-

48Ja

n-50

Jan-

52Ja

n-54

Jan-

56Ja

n-58

Jan-

60Ja

n-62

Jan-

64Ja

n-66

Jan-

68Ja

n-70

Jan-

72Ja

n-74

Jan-

76Ja

n-78

Jan-

80Ja

n-82

Jan-

84Ja

n-86

Jan-

88Ja

n-90

Jan-

92Ja

n-94

Jan-

96Ja

n-98

Jan-

00Ja

n-02

Jan-

04Ja

n-06

Jan-

08Ja

n-10

Jan-

12

%

Long term unemployment rate

Source: Bureau of Labor Statistics, USA

Fiscal cliff!!

Do we need

a helicopter drop?

Why governments need growth

Debt dynamics

Change in debt/GDP =(D (t-1) ) x (r-g) – primary balance

Primary surplus required to keep debt level stable:

Primary balance = Debt (t-1) x (r-g)

Euro area is running lower budget deficits than rest of DM

-14

-12

-10

-8

-6

-4

-2

0

2007 2008 2009 2010 2011

% G

DP

Fiscal balance

United States United Kingdom Euro Area Japan

Source: IMF, January 2012

In aggregate Europe’s govt. debt ratio is lower than the US

0

50

100

150

200

250

0

20

40

60

80

100

120

2007 2008 2009 2010 2011

% G

DP

% G

DP

United States United Kingdom Euro Area Japan

Source: IMF, January 2012

Why the fiscal maths did not add up in Greece

-10

-8

-6

-4

-2

0

2

4

6

83/1

/2000

10/1

/2000

5/1

/2001

12/1

/2001

7/1

/2002

2/1

/2003

9/1

/2003

4/1

/2004

11/1

/2004

6/1

/2005

1/1

/2006

8/1

/2006

3/1

/2007

10/1

/2007

5/1

/2008

12/1

/2008

7/1

/2009

2/1

/2010

9/1

/2010

%yr

Source: Bloomberg

Greece real GDP

Lack of competitiveness requires economic restructuring

Source: Bloomberg

80

90

100

110

120

130

140

150

00 01 02 03 04 05 06 07 08 09 10 11

Unit labour cost

France Greece Germany Italy Spain Ireland

Debt in the UK and Spain

0

10

20

30

40

50

60

70

80

90

1001980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

% G

DP

Spain public debt UK public debt

Source: Bloomberg

Spain’s austerity plans no less stringent than the UK

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2006 2007 2008 2009 2010 2011 2012 2013

GD

P

United Kingdom Spain

Cyclically adjusted primary balance

Source: Bloomberg

10yr bond yields – UK and Spain

0

2

4

6

8

10

12

14

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

%Spain UK

Source: Bloomberg

The difference between Spain and UK

Sterling less likely to break up

Bank of England is the gilts buyer of last resort

Spain waits on the ECB

The UK and US can tax companies and households It’s harder to make this argument when it comes to

Europe’s periphery

What did the French monarchs do in the 16th -19th centuries

when they could not pay their debts?

1. Reduce excessive debt

… BUT, growth is weak

2. Default

3. Live with it!

The choice for governments today

Living with high government debt levels

Divert supply of funds to public sector

AND / OR

Keep borrowing rates low

It’s not different this time…. it’s the same

Anchoring policy rates at extraordinarily low levels

0

2

4

6

8

10

12

14

16

18

1694

1847

1855

1859

1862

1864

1866

1870

1872

1873

1876

1879

1884

1888

1891

1893

1900

1906

1910

1921

1931

1960

1972

1975

1977

1979

1982

1983

1986

1989

1996

2003

%

UK policy rate

Source: IMF

Central bank claims on gross debt (% GDP)

Close interaction of central banks and the state in a repression scenario

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011

% G

DP

United States United Kingdom Japan Euro area

Source: NBER

What can go wrong?

2

7

12

17

22

27

32

37

42Jan-

07

Mar-0

7M

ay-

07

Jul-0

7S

ep-

07

No

v-07

Jan-

08

Mar-0

8M

ay-

08

Jul-0

8S

ep-

08

No

v-08

Jan-

09

Mar-0

9M

ay-

09

Jul-0

9S

ep-

09

No

v-09

Jan-

10

Mar-1

0M

ay-

10

Jul-1

0S

ep-

10

No

v-10

Jan-

11

Mar-1

1M

ay-

11

Jul-1

1S

ep-

11

No

v-11

Jan-

12

Mar-1

2M

ay-

12

%

Source: Bloomberg

Greece 10yr bond yield

Primary budget balance and gross govt. debt

Source: South African National Treasury

-5

-4

-3

-2

-1

0

1

2

3

4

5

20

25

30

35

40

45

50

55

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

% G

DP

% G

DP

Gross debt (lhs) Primary budget balance (rhs)

Consumer price inflation

-7

-2

3

8

13

18

1923

1927

1931

1935

1939

1943

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

%yr

Source: SA Reserve Bank

Corporate tax rate

25

30

35

40

45

50

55

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

%

Source: JP Morgan, National Treasury

Investment boom mid-1990s to mid-2000s

5

7

9

11

13

15

17

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

% G

DP

Private investment/GDP

Source: SA Reserve Bank

August 2012

Sou

thA

frica

Terms of trade highest in decades, but peaking

Source: Reserve Bank

70

80

90

100

110

120

130

140

Mar

-60

Mar

-63

Mar

-66

Mar

-69

Mar

-72

Mar

-75

Mar

-78

Mar

-81

Mar

-84

Mar

-87

Mar

-90

Mar

-93

Mar

-96

Mar

-99

Mar

-02

Mar

-05

Mar

-08

Mar

-11

Ind

ex 2

005

= 1

00

Terms of trade

Mining and quarrying profits boomGross operating surplus

2.5

3

3.5

4

4.5

5

5.5

6

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

4Q

199

33Q

199

42Q

199

51Q

199

64Q

199

63Q

199

72Q

199

81Q

199

94Q

199

93Q

200

02Q

200

11Q

200

24Q

200

23Q

200

32Q

200

41Q

200

54Q

200

53Q

200

62Q

200

71Q

200

84Q

200

83Q

200

92Q

201

01Q

201

14Q

201

1

4Q

movi

ng a

vera

ge

4Q

movi

ng a

vera

ge

Rm (lhs) % GDP (rhs)

Current account adjustment to larger deficit in 2011 mainly reflected savings decline

Source: Reserve Bank

10

12

14

16

18

20

22M

ar-

90

Ma

r-9

2

Ma

r-9

4

Ma

r-9

6

Ma

r-9

8

Ma

r-0

0

Ma

r-0

2

Ma

r-0

4

Ma

r-0

6

Ma

r-0

8

Ma

r-1

0

Ma

r-1

2

% G

DP

Savings ratio Investment ratio

Household wealth and debt

40

45

50

55

60

65

70

75

80

85

250

270

290

310

330

350

370

390

81 84 87 90 93 96 99 02 05 08 11

%p

ers

onal d

isp

osab

le in

co

me

%p

ers

onal d

isp

osab

le in

co

me Household net wealth/disposable income(lhs)

Household debt/personal disposable income (rhs)

Source: Reserve Bank

Household net wealth versus savings

200

220

240

260

280

300

320

340

360

380

-3

-2

-1

0

1

2

3

4

5

6

7

90 93 96 99 02 05 08 11

%p

ers

onal d

isp

osab

le in

co

me

%p

ers

onal d

isp

osab

le in

co

me Household savings ratio (lhs)

Household wealth (rhs)

Source: Reserve Bank

GFCF lags FCE households

Source: Reserve Bank

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

-25

-20

-15

-10

-5

0

5

10

15

20

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

% y

r

%yr

GFCF (lhs) Household FCE (rhs)

Marginal rate of return on capital relative to real interest rate Consistent with moderate growth only

Source: Reserve Bank

-25

-15

-5

5

15

25

85 87 89 91 93 95 97 99 01 03 05 07 09 11

GFCF - private (%yr)

Marginal rate of return on capital less real after tax interest rate (%)

SA GDP and global growth

-3

-2

-1

0

1

2

3

4

5

6

7

8

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

%yr

World SA

Source: IMF, Reserve Bank, SIM

August 2012

SAVER

What about SAin a

low real interest rateworld?

Bond yields

Source: Bloomberg, INet

3456789

101112

Jan-

08M

ar-

08

Ma

y-0

8Ju

l-08

Sep

-08

No

v-08

Jan-

09M

ar-

09

Ma

y-0

9Ju

l-09

Sep

-09

No

v-09

Jan-

10M

ar-

10

Ma

y-1

0Ju

l-10

Sep

-10

No

v-10

Jan-

11M

ar-

11

Ma

y-1

1Ju

l-11

Sep

-11

No

v-11

Jan-

12M

ar-

12

Ma

y-1

2Ju

l-12

%

Spain (rhs) SA (rhs)

Rand underpins domestic final demand recovery

EUR

Rand actual and fair value

0

2

4

6

8

10

12

14Ja

n-80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

US

DZ

AR

USDZAR PPP USDZAR actual

Source: I Net, SIM PPP calculation

Food inflation

-30

-20

-10

0

10

20

30

40Ja

n/01

Jul/0

1Ja

n/02

Jul/0

2Ja

n/03

Jul/0

3Ja

n/04

Jul/0

4Ja

n/05

Jul/0

5Ja

n/06

Jul/0

6Ja

n/07

Jul/0

7Ja

n/08

Jul/0

8Ja

n/09

Jul/0

9Ja

n/10

Jul/1

0Ja

n/11

Jul/1

1Ja

n/12

Jul/1

2

%yr

Food at agriculture Food at manufacturing CPI food

Source: Statistics SA

Global and domestic food prices

-5

0

5

10

15

20

25

-40

-20

0

20

40

60

80

10095/0

8/0

1

96/0

5/0

1

97/0

2/0

1

97/1

1/0

1

98/0

8/0

1

99/0

5/0

1

00/0

2/0

1

00/1

1/0

1

01/0

8/0

1

02/0

5/0

1

03/0

2/0

1

03/1

1/0

1

04/0

8/0

1

05/0

5/0

1

06/0

2/0

1

06/1

1/0

1

07/0

8/0

1

08/0

5/0

1

09/0

2/0

1

09/1

1/0

1

10/0

8/0

1

11/0

5/0

1

12/0

2/0

1

y/r

%

Global -food index in ZAR(lhs) lagged 3 months CPI- food(rhs)

y/r%

Source: Statistics SA

Fertilizer and diesel - PPI

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Jan-

01

Aug

-01

Ma

r-0

2

Oct

-02

Ma

y-0

3

De

c-03

Jul-0

4

Feb

-05

Sep

-05

Apr

-06

No

v-06

Jun-

07

Jan-

08

Aug

-08

Ma

r-0

9

Oct

-09

Ma

y-1

0

De

c-10

Jul-1

1

Feb

-12

yr%

Chemicals Basic: fertilizers Diesel

Source: Statistics SA

Electricity prices - CPI

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

yr%

Electricity

Source: Statistics SA

Rents CPI

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan-

09

May

-09

Sep-0

9

Jan-

10

May

-10

Sep-1

0

Jan-

11

May

-11

Sep-1

1

Jan-

12

May

-12

yr%

Actual rentals

Actual rentals-Houses

Actual rentals-Flats

Actual rentals-Town houses

Source: Statistics SA

Inflation – back to the 60s

Source: SA Reserve Bank

-10

-5

0

5

10

15

20

25

Jan-

23F

eb-2

7M

ar-

31

Apr

-35

Ma

y-3

9Ju

n-43

Jul-4

7A

ug-5

1S

ep-5

5O

ct-5

9N

ov-

63D

ec-

67Ja

n-72

Feb

-76

Ma

r-8

0A

pr-8

4M

ay-

88

Jun-

92Ju

l-96

Aug

-00

Sep

-04

Oct

-08

%yr

Headline CPI Mean 5.73

Mean 5.7%

Recessions and subsequent recoveries: PSCENot your run of the mill credit cycle

90

100

110

120

130

140

150

160

170

180

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12Q13 Q14Q15 Q16

4Q1974 4Q1976 1Q1982

1Q1985 2Q1990 4Q2008

Currentrecovery

Source: Reserve Bank

Residential mortgages / total household credit

56

58

60

62

64

66

68

70

72

Jan-

1999

Sep

-19

99

Ma

y-2

000

Jan-

2001

Sep

-20

01

Ma

y-2

002

Jan-

2003

Sep

-20

03

Ma

y-2

004

Jan-

2005

Sep

-20

05

Ma

y-2

006

Jan-

2007

Sep

-20

07

Ma

y-2

008

Jan-

2009

Sep

-20

09

Ma

y-2

010

Jan-

2011

Sep

-20

11

Ma

y-2

012

%

Source: SA Reserve Bank

Is housing affordable? Probably not

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

4Q

1969

1Q

1971

2Q

1972

3Q

1973

4Q

1974

1Q

1976

2Q

1977

3Q

1978

4Q

1979

1Q

1981

2Q

1982

3Q

1983

4Q

1984

1Q

1986

2Q

1987

3Q

1988

4Q

1989

1Q

1991

2Q

1992

3Q

1993

4Q

1994

1Q

1996

2Q

1997

3Q

1998

4Q

1999

1Q

2001

2Q

2002

3Q

2003

4Q

2004

1Q

2006

2Q

2007

3Q

2008

4Q

2009

1Q

2011

Loan amortisation / PDY per capita

Ratio

Source: I Net, SIM

Unsecured lending

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

4000000

4500000

5000000

5500000

6000000

6500000

7000000

7500000

8000000D

ec-

07

Apr

-08

Aug

-08

De

c-08

Apr

-09

Aug

-09

De

c-09

Apr

-10

Aug

-10

De

c-10

Apr

-11

Aug

-11

De

c-11

R'm

Number of accounts (lhs)

Gross debtors Book - Unsecured Credit (rhs)

Source: National Credit Regulator

Households’ unsecured credit

0

10

20

30

40

50

60

De

c-07

Ma

r-0

8

Jun-

08

Sep

-08

De

c-08

Ma

r-0

9

Jun-

09

Sep

-09

De

c-09

Ma

r-1

0

Jun-

10

Sep

-10

De

c-10

Ma

r-1

1

Jun-

11

Sep

-11

De

c-11

Ma

r-1

2

% o

f to

tal n

ew lo

ans

Mortgages Short term Unsecured

Credit facilities Secured

Source: National Credit Regulator

SA real long bond yield

-6

-4

-2

0

2

4

6

8

10

12

14

1968/01/0

1

1970/01/0

1

1972/01/0

1

1974/01/0

1

1976/01/0

1

1978/01/0

1

1980/01/0

1

1982/01/0

1

1984/01/0

1

1986/01/0

1

1988/01/0

1

1990/01/0

1

1992/01/0

1

1994/01/0

1

1996/01/0

1

1998/01/0

1

2000/01/0

1

2002/01/0

1

2004/01/0

1

2006/01/0

1

2008/01/0

1

2010/01/0

1%

Source: I Net

Credit ceilings 1965-721976-80

1980 Interest rate controls removed Credit ceilings removedReserve requirements lowered

Foreign exchange and investmentcontrolled by government in 1970s

Capital controlstightened in 1985

Registrar of Co-operation(limited bank competition)removed in 1983

1990s• Trade liberalisation,

lower inflation and removal of controls on FDI

• Forex controls easing• Capital account

liberalised from 1991• Exchange controls on

non-residents eliminated in 1995

Financial Crisis

Bank crisis

Reinhart

Rogoff

AusterityThis tim

e it’s

different

THANK-YOU!!