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Master of Ceremonies,
Ladies and Gentlemen:
Thank you very much for giving me this opportunity to talk about the South African economy to this important gathering of investors and prospective investors. I would like to thank you most sincerely for responding to the invitation by Investec to attend the Conference.
As you will remember, just over eight-and-a-half years ago, South Africa held its first-ever democratic elections. Many in our country and elsewhere in the world had a sense of foreboding that because of the long period of racial and apartheid domination, there was a distinct possibility of the country collapsing as a result of a terrible racial conflagration.
But as we all know, thanks to the wisdom, ingenuity and tolerance of the people of South Africa as a whole, eight years on, there are still some people everywhere on our globe who do not tire to remark what they describe as a miracle. We are proud to say that contrary to what some expected, South Africa is today one of the most stable countries in the world, with an entrenched and properly functioning democratic system.
Central to this achievement has been the understanding among all our people, both black and white, that South Africa belongs to all of us and that we have a common commitment to build it into a winning nation. You have some leading South Africans with you. I am certain that, if need be, they will explain the determined and conscious effort that has gone into sustaining the miracle of 1994.
I mention this short history because, to some extent, the successes we have scored convey the incorrect message that all the problems of the past have been resolved. The reality however is that we inherited an economy that had been badly managed and was in crisis.
This was an economy characterised by major structural problems, which include gross disparities in the distribution of wealth, income and opportunity and terrible levels of poverty.
As South Africans we understood that the restructuring, revitalisation and modernisation of our economy had to be one of the central tasks of the new democracy.
I am pleased to say that, thanks to the cohesion that our people maintained to achieve the political miracle, great progress has been made with regard to the task of rebuilding our economy, ensuring that we both grow this economy and incrementally address the challenges of poverty and inequality.
Early today, South Africa's economic growth figures were released indicating that our economy grew by 3% in the third quarter. The figure for the second quarter was revised to 3.8%. This is an important development and demonstrates that our economy will continue with its steady growth this year amidst the general global economic stagnation.
Clearly, we are finally beginning to reap the rewards of eight years of tough restructuring. The first phase of this restructuring was more on economic reform, which focused on restructuring and stabilisation. We are now moving into a second phase, which focuses on growth and employment creation.
One of the priorities of our reconstruction work was to ensure that government finances are in order. When the first democratically elected government took office in 1994, we inherited a treasury in crisis. The
fiscal deficit was over 9 percent of GDP, and rising, and government debt was reaching unacceptably dangerous levels.
Because of the work that we have done, this year's budget deficit will not be higher than 1.7 percent of GDP. Not only has national government been brought into a rgime of fiscal discipline, but the provincial governments too are now performing reliably and effectively, with regard to both budget planning and the execution of plans. In part, this has also led to a steady improvement in our ratings made by the international rating agencies.
As a result of these positive developments, government has been able to reduce significantly its overall borrowing commitments, which has led to a significant decline in real interest rates in the South African economy over several years.
We now believe that we have government finances sufficiently under control to begin to think more expansively. We plan to increase government expenditure in real terms by about 4.7 percent per year for the next three years. That will take the deficit up to 2.2 percent next year, but it will come back to 2 percent in subsequent years.
Our main areas of increased expenditure are in economic infrastructure, including local economic development handled in partnership with the municipal governments. As a result, local government grants will grow by 12 percent per year for the next three years. These economic expenditures are aimed at reducing the cost of doing business in our country, expanding the material base we need significantly to raise our growth rate, and improving the conditions for the growth of small and medium business.
The other area of significantly increased expenditure is the health services, where our expenditure is increasing by about 11 percent per year for the three year period, and in the integrated justice system - police, prisons, and the courts - where expenditure will increase by about 9.4 percent per year, for three years.
Due to the challenges of safety and security, at the end of the three-year period we will have increased the number of active police personnel by more than 10 percent. These are our priorities, and we are pleased that we are now able to increase our commitments to these important activities without in any way endangering our fiscal stability.
As far as the currency is concerned, we have had an excessively exciting year or two. As most of you will know, a constellation of causes led to a rather precipitous fall in the external value of the Rand in the last few months of last year. Since the beginning of the year, however, the currency has recovered much of its losses.
Despite the problems experienced last year, the Rand has been the best performing currency against the US dollar this year. We believe that we are on track to return to a stable, competitive exchange rate, which has been a key monetary policy objective of government since 1996.
Unfortunately, the combination of the sudden depreciation of the currency and high commodity prices, especially oil and food products, led to a considerable increase in the rate of inflation in the current year.
Inflation was particularly severe in food prices, which had behaved quite favourably for several years. Because of the effects of the food price escalation on the poor, the government took urgent remedial action by arranging for low cost maize meal supplies to the poorest parts of the country, and by an extraordinary increase in social transfer payments directed to the poor. We have also instituted some medium and longer-term strategies to address this problem.
In order not to place an excessive burden on the monetary authorities, the government has now adjusted its inflation targets. Government accepts that the target for 2003 will be missed, and the target for 2004 has been eased from a range of 2-5 percent, to a range of 3-6 percent.
The reaction of the money markets to these decisions has given us great satisfaction. The Rand has continued to strengthen, and longer-term interest rates have declined. This means that government's macro-economic policy has demonstrated its correctness and credibility.
I believe that we have established a convincing track record over the past eight years. We have set ourselves realistic targets which have generally been achieved. Our improved ratings by international ratings agencies constitute an acknowledgement of all this. I am sure that everyone who knows something about our country, including the important audience listening to me, recognises that our long-term commitment to macro-economic stability remains firm.
Part of the challenge in achieving stability and predictability is the need to spread the gains of economic growth. We are building a society with strong non-racial, non-sexist and democratic values. Clearly, to underpin these values, we have to show how an open, democratic society serves the needs of all its people.
Some of the key elements in this process are our programmes for black economic empowerment. These include procurement arrangements, employment equity targets, skills development programmes as well as measures aimed at increasing the full participation in and ownership of the South African economy by black South Africans.
The recently adopted Mining Charter is an example of the commitment of South Africans to find common ground and our preparedness to overcome what seems like insurmountable obstacles for the good of our country, our people and our future. In this Charter, we believe that we have arrived at an excellent agreement for the mining sector, which will contribute to the realisation of our common determination that mining in our country should position itself as a sunrise industry.
You have, with you, some of the leading architects of the Charter, leaders of our mining industry. They share the determination with the government and the trade unions to ensure that the mining sector occupies the front ranks in the national effort to build a vibrant and internationally competitive economy.
I am certain that all the Conference participants are aware that it is not only in the macro economic sphere that we have achieved significant successes. Our real economy has made really significant strides in recent years. For example, exports of goods and services have grown considerably since the early 1990s, growing every year, at about 6 percent per annum in real terms.
Of importance, is the change in the composition and direction of exports. Medium and high technology products such as motor vehicles and parts are making up a rapidly growing proportion of our exports. Exports of fully built up motor vehicles have grown from practically zero ten years ago, to well over 100 000 this year. There are predictions that within two to three years, South Africa will be exporting 250 000 motor vehicles annually.
At the same time, exports of motor vehicle components are growing equally fast. Though our motor industry development programme has played a significant part in the success of the industry, we believe that the main
driver of the expansion of the motor industry is the competitiveness of this sector and the economy as a whole.
Accordingly, we are very pleased that over the last two years, when many of the major automobile assemblers world-wide were cutting back on production and productive facilities, investments in the industry in South Africa continued to grow.
With the success of the motor industry, our petrochemicals industry and other sectors, many investors familiar with our country now see South Africa as a serious prospect for global sourcing. Because of our competitiveness, we have seen an increasing number of investors looking at South Africa as a site for high-quality, moderate-cost production and service provision.
As a result, we have had, for example, a lot of interest in our ability to provide call centre facilities, back-office operations, and third party administration, a sector in which we have overtaken Ireland in terms of the number of people employed. We are expecting significant investments of this kind in the short to medium term.
One of the underlying indicators of our improved competitiveness is the extraordinary improvement we have seen in labour productivity. Labour productivity has improved by over 4 percent per annum since 1995, which is an outstanding performance in world comparative terms.
What this shows is that the very challenging restructuring process we have gone through has borne fruit. South Africa is rapidly becoming a cost competitive location for a range of production and service activities, not only for domestic and regional markets, but also for the world market.
While our major trading partner remains the European Union, absorbing about 35 percent of our exports, a very significant proportion of our exports goes to other major markets. Over 12 percent of our exports go to the North American Free Trade Area (NAFTA), and more than 17 percent to the Asia-Pacific market.
Furthermore, the conclusion of the EU/South Africa Free Trade Agreement, and the coming into force of the US Africa Growth and Opportunities Act, have added considerably to our export opportunities, leading to higher levels of investments in our economy.
We are currently engaged in free trade talks with MERCOSUR, and have been approached by India and the United States for trade agreements. In all these processes, our main objective is to give certainty to investors and expose the international business people to the real South Africa with its extraordinary opportunities.
The macro and micro reforms have led to a positive and promising growth performance for the South African economy as a whole. We have grown in real terms every year since 1994, though the level of growth has not been to our satisfaction, being mostly between 2 and 4 percent per annum.
As I have indicated earlier, with growth figures of the last two quarters, one of the exciting developments has been the relatively healthy growth of the South African economy during this year, despite the global slow down. Even at 2.6 percent this year, our growth rate will be much higher than the G-7 average rate of 1.4 percent. Next year we are expecting a minimum growth rate of 3.5%.
We are acutely conscious of the effect on us of what I believe is sometimes called the neighbourhood effect.
We are therefore centrally involved in the continental efforts to ensure the success of the African Union and the New Partnership for Africa's Development, NEPAD. These critically important initiatives aim to ensure that we transform our continent into one of peace and stability, democracy, human rights and good governance, prosperity, social progress and human dignity.
We are therefore currently engaged in serious efforts in various parts of Africa to promote the goals of peace and democracy, among others. This includes the resolution of the conflicts in the Democratic Republic of Congo, Burundi and the Cote d'Ivoire, as well as the problems that have afflicted Zimbabwe for some time.
With regard to the latter, I would like to reiterate what we have said in the past, that we are unequivocally committed to do everything we can to assist the people of Zimbabwe successfully to address all their challenges.
These include issues of democracy, the rule of law, human rights, social stability, the resolution of the land question, economic recovery, and the current food shortages.
We will continue to work together with the Governments of Zimbabwe and the UK, and other interested parties, to ensure the speediest possible resolution of these matters. We are very hopeful that our ongoing interactions with the Government of Zimbabwe and our contacts with the Government of the UK will help to lay all these matters to rest, and take off the international agenda a contentious issue that is not of our making, but which we seem to have inherited because the principal players found it impossible to achieve a commonly acceptable solution.
Thank you for giving us the opportunity to address you this evening. I am sure you would like to explore our offerings further and you are very welcome to visit us. Do your costing models; test the quality of our labour and services.
Come and see for yourselves some of our success stories, such as the highest quality BMW plant in the Europe Africa region, and one of the highest quality Coca Cola bottling plants in the world. Add to these the high quality products of Mercedes Benz, Ford, Toyota and Volkswagen, the products we manufacture for Boeing and Rolls Royce, and many others, and the new manufacturing facilities that are being established by investors from South Africa and various parts of the world who have cared to inform themselves about what is really happening in our country, refusing to take serious business decisions on the basis of perceptions.
Those of you who have not been to South Africa before will be pleasantly surprised. Those of you who know South Africa will see that we are continuing to improve our performance.
I must thank Investec most sincerely for organising the Conference you are attending and convey our sincere hope that everybody attending the Conference will join us in the exciting journey of giving birth to a new South Africa that will make a significant contribution to the solution of many global problems, including the construction of a social order of democracy, peace and prosperity in a multi-racial, multi-ethnic and multi-faith country.
Thank you.