SPEECH BY MINISTER OF FINANCE

MALUSI GIGABA

GOVERNMENT INTERVENTIONS TO STIMULATE INCLUSIVE GROWTH

There have been several economic developments in recent weeks. This statement seeks to
provide some context to these developments, and inform the public about government
interventions to stimulate inclusive growth.

On 1 June 2017, Fitch affirmed South Africas long term foreign and local currency debt
ratings at BB+ ratings with stable outlook. S&P followed on 2 June 2017 and affirmed the
long term foreign currency debt rating at BB+ and long term local currency debt rating at
BBB- with negative outlook.

As reported earlier in the week, South Africas Gross Domestic Product contracted 0.7 per
cent between the first quarter of 2017 and the fourth quarter of 2016. This followed a
contraction of 0.3 per cent between the fourth and the third quarter of 2016. This trend
unfortunately implies that our economy has entered into a recession.

In this context, our 2017 growth projection of 1.3% may not be realised. This continues the
trend of low growth over the last several years, undermining our progress in significantly
reducing inequality, unemployment and poverty which fundamentally disadvantages a large
portion of our population, and is the cause of social instability. It therefore requires all social
partners to reflect on our progress in bringing about inclusive growth and economic
transformation, and to do all that we can and more, from our respective positions.

Moodys, on 9 June 2017, downgraded South Africas long term foreign and local currency
debt ratings at Baa3 with negative outlook. Moodys rating action concluded the 90 day
review process where South Africas ratings were put on credit watch for possible
downgrade.

All three ratings agencies have raised similar issues such as: the slow pace of growth-
enhancing reforms; growing contingent liabilities amid poor governance at key SOCs; and
political risks, among other issues.

Our sovereign credit rating has huge macroeconomic impact, and affects government,
business, and ordinary South Africans alike. We are committed to restoring it to a favourable
investment grade rating with a positive outlook as quickly as possible.

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However, we should not lose sight of the fact that we need to address the issues they raise,
first and foremost for the good of our country and to advance our national development. We
need to want to do the right things for our economy and our society, not just because credit
ratings agencies are watching.

Obviously these developments are not what we would have hoped, however it is critical that
we are not despondent at this time.

I cancelled my trip to Germany this week where I was to attend the G20 Africa Partnership
Conference, because I felt it is critical to ensure that we respond appropriately to the
disappointing economic performance of Q1.

Government has been deeply engaged with the issue of the recession, analysing its impact
on our growth target, and considering an appropriate response. We discussed it in depth in
Cabinet last week.

President Zuma convened an urgent meeting with several Ministers last night where we
discussed critical interventions which need to be taken. The President has stressed the
urgency of a coordinated response, and is convening a full day meeting in two weeks, of
various economic cluster and Ministers responsible for key sectors, to address obstacles
delaying the finalization of policy processes and agree urgent timelines.

We have also met with the business sector, having held meetings with Business Unity SA
(BUSA), the Black Business Council, the Black Management Forum, the Association of
Black Securities and Investment Professionals (ABSIP), and the Black Investment Managers
Business Forum. We are meeting the Manufacturing Circle later today.

At all of these interactions we have engaged frankly on the state of the economy, how to get
it back on track, and what short and long term measures must be taken to advance our
national development.

We are at an inflection point where we can choose to be negative and pessimistic, or

positive and optimistic. As National Treasury, based on our analysis of the global and
domestic economy, we truly believe the glass is half full, not half empty. In this spirit, wed
like to convey several key messages today which I will go on to unpack.

Firstly, we have made real progress, but it will take some time for some of our interventions
to impact the real economy and result in improved growth.

Second, government is committed to maintaining the fiscal framework announced in the

Budget and the medium term strategic framework. The executive Finance leadership is also
committed to maintaining the stability of National Treasury as an institution.

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Thirdly, we have heard the call from business and investors that providing policy certainty
and stabilizing and revitalizing state owned companies are among the most important short
term steps we can take to restore confidence.

Fourth and finally, inclusive growth and economic transformation are the top priorities of
government, and are mutually reinforcing. We must and will, advance both of these.

EARLY SIGNS OF PROGRESS DESERVE PATIENCE, DESPITE RECESSION

We are seeing some progress despite the contraction over the last two quarters.

It is worth highlighting that the economy, however low, expanded by 0.6 per cent on a year
on year comparison between the first quarter of 2016 and the first quarter of 2017. We can
still work hard to ensure that this is held up for the rest of the year.

The worst contractions were seen in trade; electricity, gas and water; and manufacturing.

Weaker trade activity reflects strained domestic demand, as consumer and business
confidence have not improved and credit extension remains weak and potentially
exacerbated by the impact of tighter banking regulation, as well as high unemployment.

Yet within the cloud of the overall recession, there is a silver lining to be encouraged about.

Encouragingly, growth in investments as reflected in gross fixed capital formation, expanded

by 1.0% between the quarters, following a 1.7% per cent expansion between the fourth
quarter and the third quarter of 2016. Private sector investment rose for the first time since
the third quarter of 2015.

Mining and agriculture are among our economys traditional strengths, and weakness in
these sectors in recent years have been among the major drivers of our low growth.

Therefore we are encouraged to see a recovery in agriculture after a very long period of
drought. The agriculture, forestry and fishing sector grew by 22.2% q/q. The growth was due
mainly to higher production of summer grains, oil seeds, and horticulture products, as
climatic conditions have improved in many parts of the country.

Growth in mining and quarrying also rebounded to 12.8% q/q, driven by higher production of
gold and other metal ores, including platinum.

The improvement in the mining sector in particular, can be partly attributed to improved
labour relations, which has been one of the successful outcomes of governments intense
engagement with the social partners over the last two years.

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Other successful government interventions include having moved from electricity shortage to
surplus, and launching Invest SA, making it easy to open a business and invest in South
Africa.

These interventions have resolved issues which until very recently has been seen as major
binding constraints on growth.

The rebound however, will not be immediate. Production capacity which was lost due to
electricity unavailability or bitter labour disagreements will take time to be reconstituted.

The low growth environment also reflects the extent of low business and consumer
confidence. Growth and confidence are mutually reinforcing.

We cant say how much growth can be restored if all social partners begin to talk up what is
working in the economy, but we know for sure that fixating on our challenges will not help us.

So we call on everyone in South Africa, business and all social partners, across all political
affiliations, to focus on working together to drive inclusive growth.

Our analysis of the economy in Q1 indicates several trends which require focus going
forward:

1. We need to leverage on improved conditions in agriculture to advance agro

processing and increase support for small and large scale farmers.

2. Finalization of key policy in mining in critical to unlock investment and leverage on

improved commodity prices and favourable exchange rate effects.

3. We need to speedily finalize review of incentives in the manufacturing sector to better

expose areas of slack and low value for our resources, and scale up support for industries
with the largest potential. We will explore funding for a new economic competiveness
support package. The DTIs Agro-Processing Support Scheme is a welcome development, it
is critical that we build on our strength in agriculture by capturing more of the value chain
through processing. Work is underway between the National Treasury and the Department
of Small Business Development to explore additional mechanisms to support small
business. This has become an urgent matter.

4. Some business stakeholders are complaining about tightness in the credit market.
We will engage the finance sector and our colleagues at the South African Reserve Bank for
a better understanding of possible interventions, within our regulatory framework. This is
critical for supporting business investment and general credit to households.

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MAINTAINING THE FISCAL FRAMEWORK AND STABILITY OF NATIONAL TREASURY

Over the last two and a half months, the Deputy Minister and I have had numerous candid
discussions with domestic and global investors, as well as the credit ratings agencies. One
of the major worries that has been consistently raised is whether we are committed to
maintaining the fiscal framework set in the medium term strategic framework and the 2017
budget.

We continue to reiterate that the fiscal framework is the policy of government; we support it,
we are bound to it, we will implement it. South Africa has a world class, transparent and
predictable budgeting process. Not only myself and the Deputy Minister, but Cabinet and the
ruling party, have committed to implement it as outlined. In this regard we hope that these
worries will diminish quickly as we approach the medium term budget statement in October.

A related concern was around the stability and leadership of National Treasury, following the
departure of former Director General, Lungisa Fuzile. We promised to quickly appoint a
capable leader for Treasury who could ensure stability and continuity. We are pleased to
report that we have delivered on that promise, with the appointment of new Director General,
Dondo Mogajane last week. Mr Mogajane has a wealth of experience having spent the
better part of 18 years at National Treasury, while bringing laudable energy and passion to
the role. We have the utmost confidence that he will serve the institution and the country well
going forward. We will give him a better welcome internally in the coming days.

POLICY CERTAINTY AND STABILIZING STATE-OWNED COMPANIES

In our stakeholder engagements, one of the key messages we have heard is that the two
most important things government can do in the short term is to provide policy certainty, and
to stabilize and revitalize our state-owned companies (SOCs).

Cabinet has resolved that we need to conclude some unfinished policy discussions and
execute with speed to unlock investment which will spur growth, job creation and economic
transformation. We need to create policy certainty and fast track the following:

The Mining Charter and the Mineral and Petroleum Resources Development Act

Rollout of broadband, or high-speed internet, to all communities

Allocation of telecommunications spectrum

Conclusion of Independent Power Producer agreements

Land and agrarian reform

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 Finalizing processes to improve governance and financial strength of SOCs.

For its part, the ANC also stressed on Saturday that it will contribute to policy certainty
through its policy and national conferences in June and December respectively, which will
outline ANC policy for the next 5 years.

With respect to SOCs, National Treasury is the shareholder representative for SAA. We are
also committed to strengthening the board, by filling two vacancies, including by appointing a
person with deep aviation experience and expertise. As you know, Cabinet appointed the
Board Chair for a final term. At the upcoming AGM, we will attend to the matter of appointing
her successor. We will be recommending a Chief Executive to Cabinet in the coming weeks.

One of the other major concerns for all economic stakeholders has been Eskom. We are
confident that the Minister Brown will fill vacancies in the board and executive leadership of
Eskom, with leaders who will instil confidence. We look forward to further positive
developments there.

WE MUST ADVANCE BOTH INCLUSIVE GROWTH AND ECONOMIC

TRANSFORMATION

In our engagements with business, particularly representatives of black business, it became

clear that it would be a mistake to react to the recession by focusing only on the growth of
established business, and letting economic transformation fall by the wayside.

We need to advance inclusive growth and economic transformation.

The NDP argues that we need to do both. You cannot do one, without the other. They are
mutually reinforcing.

It is time that individuals and groups who supported the NDP when we adopted it, who say
now that they support it, stop supporting only the parts of it which are convenient for them.

Yes we want the economy to grow. We want big businesses to expand, we want small
businesses to expand, we want new businesses to start and expand.

And, we also want industries to transform, to include black people and women in ownership,
in top management, in professional work. It is not optional or a nice to have. It is a core
aspect of our nations development.

We need both.

Wealth creation by the previously disadvantaged in SA will have more of an impact than the
currently wealthy getting 5% wealthier. We want to see our top listed companies record

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double digit annual revenue growth. We would also like to see black owned businesses who
currently have single digit market share in industries like financial services, auditing, and
construction double their market share. That will create new wealth and new economic
players.

Accordingly, we have heard the call from black business to be more proactive.

There are at least three measures the Finance family will take in this regard.

We will work with the financial sector and our colleagues at DTI to adopt and implement a
new Financial Services Charter. ABSIP has stressed that the Black Business Growth Fund
proposed in the Charter a potential R100bn fund dedicated to funding black businesses
could be a potential game changer. We must do all within our power to bring bold initiatives
like this to fruition.

We will fast track public consultation and finalization of the Public Procurement Bill. It must
enable a modernized public procurement regime which will have economic transformation as
its core mandate, and maximize the developmental impact of the more than R500bn
government entities spend every year procuring goods and services, by targeting and
increasing access for black, women and youth owned businesses, township entrepreneurs
and others. Economic transformation must not be an afterthought, but at the centre of
procurement strategy, reporting and performance management.

We will develop proposals to increase the amount of assets the Public Investment
Corporation and other state entities gives to black asset managers to manage. Asset
managers play a major role in the economy, in influencing corporate strategy, the character
and pace of transformation, and the scale and nature of investments. We must grow the
share of assets under management of black asset managers with proven track records and
experience.

CONCLUSION

We are all frustrated by the lack of growth which if sustained, will compromise our ability to
rapidly reduce unemployment, poverty and inequality.

The NDP set our nation the task of driving inclusive growth and economic transformation as
two necessary, mutually reinforcing and overarching objectives which enable us to resolve
our national challenges.

Nowhere in the NDP does it say it would be easy.

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Achieving Vision 2030 requires all of us to find common cause, and ask ourselves how we
can contribute as government, as business, as labour, as civil society to inclusive growth
and economic transformation.

Let us remain optimistic about the possibilities of South Africa, and work together to realize a
better future for all.

I thank you.

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