GS Report On SA 'New Deal'

4 May 2018 | 11:16AM BST
CEEMEA Economics Analyst
Cyril Ramaphosa’s ‘New Deal’ for South Africa
n President Ramaphosa has prepared an economic policy platform that he calls a Andrew Matheny
+44(20)7051-6069 |
‘New Deal’ for South Africa, designed to correct policy missteps and leadership andrew.matheny@gs.com
Goldman Sachs International
failures of the past decade, reverse the deterioration of institutions, and support
business and consumer confidence. Its priorities include boosting private
investment by removing policy uncertainty, restoring fiscal discipline and
financial health to SOEs, and combating corruption and ‘state capture’.
n Our interpretation of these policy proposals is that they are intended to: a) boost
For the exclusive use of MATTHEW.NEWTON@GS.COM
confidence in the short term; b) support growth in the medium term; and c)
address underlying structural issues in the longer term. In our assessment, the
programme does not represent a significant philosophical departure from stated
objectives in the existing National Development Plan (NDP). That said, while it
envisages incremental rather than radical policy change, Mr. Ramaphosa’s focus
on economic stewardship and reform does appear to mark a political inflection
point for South Africa.
n While market participants have welcomed the recent change of leadership, as
reflected in the strengthening of the Rand, they remain collectively somewhat
cautious on prospects for implementation of reforms, given potential pressure
from vested interests, political risks and the magnitude of social and economic
challenges. Thus, the market does not yet appear to be pricing in meaningful
structural reforms and we see scope for a significant further re-rating higher of
growth expectations (our own growth forecast for 2018 stands above consensus
at 2.4%, with risks tilted to the upside).
n Four key areas warrant monitoring for indications of reform progress in the
coming months: 1) the mining sector; 2) land reform; 3) SOE policy, in particular
with respect to Eskom; and 4) public wage negotiations. We expect greater
clarity on 1) and 2), and the announcement of a credible restructuring plan on 3)
in the near term. Our conviction in outcomes for 4) is comparatively lower, given
current political sensitivities. Nonetheless, the interplay between politics and
reform remains complex and, thus, elections (scheduled for Q2 2019, but with a
possibility that they could be brought forward) may be a prerequisite for greater
clarity on reforms.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
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Goldman Sachs CEEMEA Economics Analyst
Cyril Ramaphosa’s ‘New Deal’ for South Africa
A post-apartheid history of economic reform initiatives…

There has been no shortage of proposals and analysis of the reforms needed to improve
South Africa’s relatively poor economic performance (Exhibit 1). While Jacob Zuma’s
presidency (2009-2018) saw a lack of political impetus to undertake structural reform,
following Cyril Ramaphosa’s ascendancy to the ANC leadership in December 2017 and
to the Presidency in February on a reformist programme, attention is now shifting to his
policy priorities and what he intends to implement in practice.
In the past 25 years, the country’s leadership has undertaken at least four large-scale
economic reform initiatives: 1) the Reconstruction and Development Programme (RDP)
in 1994; 2) the Growth, Employment and Redistribution (GEAR) programme in 1996; 3)
the Accelerated and Shared Growth Initiative for South Africa (AGSISA) in 2006; and 4)
the National Development Plan (NDP) in 2011. The 1990s also saw the elaboration and
implementation of Black Economic Empowerment (BEE) policies, superseded in the

early 2000s by Broad-Based Black Economic Empowerment (BBBEE).
In addition to government sponsorship, these initiatives and accompanying policy

frameworks enjoyed varying degrees of support and involvement from business, labour,
civil society and the international community. In terms of content, they have ranged
from being diagnostic to prescriptive, radical or experimental to relatively orthodox, and
widely accepted to controversial. While many of the diagnoses, language and objectives
have been common to all of these initiatives, policy prescriptions have ranged in their
proposed degree of intervention and departure from existing policies.
Exhibit 1: Real GDP growth has been consistently lower than its Exhibit 2: The Rand has been consistently more volatile than other
EM peers in South Africa, moving below the 25th percentile since EM currencies, increasing considerably above the 75th percentile
2013 since 2015
Real GDP growth (yoy) versus a sample of 95 EM economies 24 month rolling standard deviation of monthly returns (against the
USD), versus a sample of 72 floating-rate currencies
12% 7
24m rolling st. dev of monthly EM interquartile range
returns against the USD
10% EM Median
6
8% ZAR realised volatility
5
6%
4% 4
2%
3
0%
-2% 2
EM interquartile range
-4% EM Median
1
-6% South Africa real GDP growth (yoy)
-8% 0
91 93 95 97 99 01 03 05 07 09 11 13 15 17 97 99 01 03 05 07 09 11 13 15 17
Source: Haver Analytics, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research
4 May 2018 2
…that have identified ‘binding constraints’ to growth and key policy

failures
Of the two most recent (and most currently relevant) initiatives, AGSISA – elaborated in
the later years of the Mbeki presidency (1999-2008) – focused on identifying six ‘binding
constraints’ on growth, with accompanying policy proposals aimed at easing these
constraints. These constraints were the level and volatility of the Rand (Exhibit 2),
infrastructure bottlenecks, skills shortages, a weak competitive landscape, the burden of
the regulatory environment, and deficient administrative capacity and public leadership.
The international panel of AGSISA, led by Harvard University’s Center for International
Development, identified weak investment and export growth in the tradeable and
manufacturing sectors, as well as pre-crisis growth that it viewed as being overly reliant
on consumption and having led to an overvalued currency and, therefore, unsustainable
from an external balance standpoint. The underperformance of exports and investment
has accelerated in recent years (Exhibits 3 and 4), with private sector investment drying
up and the share of the agricultural and manufacturing sectors in the capital stock falling
precipitously (Exhibits 5 and 6). Meanwhile, external sustainability concerns have
diminished thanks to the Rand adjustment and growth slowdown in recent years, and
the current account balance has narrowed to around 2.5% of GDP (down from a peak of
nearly 7% of GDP reached in 2007). The Harvard team’s recommendations were to
address the following issues via policy interventions: real exchange rate volatility, the
skills mismatch, labour market rigidities, a lack of competition and elements of the BEE
that act as a tax.
The NDP – led by former Finance Minister Trevor Manuel in conjunction with Cyril
Ramaphosa (as a political sponsor) in the early years of Mr. Zuma’s presidency – took a
broader approach to development policy (encompassing social, demographic,
environmental and health policy aspects), as well as a longer-run perspective (proposing
a 2030 vision), arguing that much could be achieved within the current policy framework
by improving service delivery and policy implementation, and effectively “getting the
basics right”. Its objective is to eliminate poverty and reduce inequality by 2030, raise
living standards, create jobs, broaden ownership and control of the economy, and
capitalise on what it describes as the “demographic dividend”. Its key proposals include
active labour market policies (including incentivising high-skilled immigration), public
investment and jobs programmes, education reform and introducing policy certainty.
4 May 2018 3
Exhibit 3: South African real export growth has persistently been Exhibit 4: Investment as a share of GDP in South Africa has been
below the median EM economy, again moving below the 25th consistently weaker than its EM peers
percentile in recent years South Africa investment (Gross Fixed Capital Investment % of GDP),
South Africa real export growth (yoy, 4QMA) against a sample of 95 EM versus 95 EM economies
economies
25% 35%
20%
30%
15%
25%
10%
5% 20%
0% 15%
-5%
10% EM interquartile range
EM interquartile range
-10% EM Median
EM Median
5%
-15% South Africa real export growth (yoy) South Africa (GFCF as a percent of GDP)
-20% 0%
91 93 95 97 99 01 03 05 07 09 11 13 15 17 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Source: Haver Analytics, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research
Exhibit 5: Particularly since the crisis, Agricultural and Exhibit 6: Since 2008, private sector investment has been declining
Manufacturing investment has been declining relative to other relative to public investment
parts of the economy Private sector capital (% of total capital stock)
Agricultural and Manufacturing capital stock (% of total capital stock)
12%
64%
10% 62%
60%
8%
58%
6%
56%
4% Private sector capital (% of

54% total capital stock)
Agricultural capital (% of total capital stock)
2% 52%
Manufacturing capital (% of total capital stock)
50%
0% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Goldman Sachs Global Investment Research, Haver Analytics Source: Goldman Sachs Global Investment Research, Haver Analytics
Weak private investment, uncertain property rights, unfavourable market

structure
The Harvard team’s study identifies weak private sector investment, especially in the
tradeable and manufacturing sectors, and (related to this) poor export performance, as
two key economic issues facing South Africa. In the ten years since the Harvard study
was published, these trends have accelerated and disinvestment by the private sector in
general – and in the manufacturing and agricultural sectors in particular – has continued.
We point to several factors that, in our view, have led to weak fixed investment: a)
uncertainty over property rights, especially in the agricultural and mining sectors; b) an
uncompetitive market structure in which barriers to entry discourage investment; c)
additional elements that have increased risk in recent years (including fiscal concerns,
currency volatility (Exhibit 7), and a high cost structure owing to infrastructure
bottlenecks and education system deficiencies).
4 May 2018 4
Exhibit 7: Political and Fiscal risk has been a primary driver of ZAR volatility in the last 3 years
ZAR TWI Index, 2010=100 (LHS); ZAR/USD (RHS, inverted)
80 8
Ramaphosa wins ANC
leadership contest
Moody’s shifts 9
Gordhan removed
75 from Finance outlook to stable
Ministry 10
Nene removed from Zuma exit
2017 MTBPS and
Finance Ministry and S&P
70 Budget 11
downgrade Speech
12
65
13
60
14
55 15
16
50 ZAR TWI Index (LHS)
17
ZAR/USD (RHS, inverted)
45 18
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
Source: Goldman Sachs Global Investment Research, Haver Analytics
The first factor (property rights) must be understood in its historical context, taking into
account the legacy of apartheid. According to the World Bank, the distribution of income
and assets in South Africa is among the most unequal in the world, and levels of
disenfranchisement remain elevated. As a result, policy has explicitly sought to broaden
ownership and control of the economy, via redistributive programmes such as the BEE.
Given that the distribution of land ownership, in particular, remains highly skewed and a
politically charged issue, policy discussions have focused on this sector, along with the
mining sector. In our view, uncertainty surrounding property rights will continue to act
as a constraint on investment unless the issue of inequality is addressed. We therefore
expect a proactive approach to redistributive policies on the part of President
Ramaphosa to reassure the market. The second and third factors highlighted above – an
uncompetitive market structure and other risks – in our view, are relatively more
self-explanatory.
President Ramaphosa’s ‘New Deal’ draws on past reform initiatives

President Cyril Ramaphosa played an important role in the elaboration of BEE policies
and the NDP (he was deputy chairperson of the NDP and later chair of the National
Planning Commission). It is, thus, unsurprising that these initiatives and sets of
proposals, policies and longer-term objectives feature prominently in his economic
reform platform, and in particular the framework laid out in the NDP.
We consider the diagnoses and policy proposals stemming from AGSISA and the NDP,
and analyse President Ramaphosa’s economic policy and structural reform agenda in the
context of these development frameworks. In doing this, we consider two key speeches
that President Ramaphosa has delivered on economic policy – in Soweto in November
2017 and on the occasion of the 106th anniversary of the ANC in January 2018 (following
4 May 2018 5
his election as ANC president) – as well as more recent comments and policy decisions
from the President and his cabinet members, as a basis for his reform agenda.
During his campaign for the ANC presidency, Mr. Ramaphosa laid out what he described
as a ‘New Deal’ for South Africa, designed to correct what he sees as policy missteps
and failures of leadership of the past decade, reverse the deterioration of institutions
and restore confidence. Mr. Ramaphosa has laid out ten policy priorities that he believes
will address these issues (Exhibit 8). These include instilling policy certainty (in particular
in the mining sector) and improving institutional stability and credibility, restoring fiscal
discipline, boosting private sector investment and supporting the manufacturing sector,
returning SOEs to financial health (leaving open the possibility of private sector
participation), promoting competition and reducing barriers to entry in monopolised
sectors, and combating corruption and ‘state capture’. Mr. Ramaphosa’s policy platform
also includes land redistribution and a de-concentration of ownership and control of the
economy, as well as a commitment to free higher education for the poor.
In his second speech, ANC president-elect Ramaphosa reiterated his policy proposals,
with several qualifications to his agenda reflecting resolutions from the ANC’s 54th
National Conference. More specifically, Mr. Ramaphosa included a policy of land
expropriation without compensation as it had become official party policy, but stressed
that this must take place within the contours of the constitution and must also promote
economic development, agricultural production and food security. He also included in his
platform the ANC’s newly proclaimed policy of free higher education, although subject
to means-testing.
4 May 2018 6
Exhibit 8:
President Ramaphosa’s ’New Deal’ - 10 Priorities (as laid out in November 2017)
- Provide further support to the mining industry / expand the renewable energy programme
1. Place job creation first - Provide 1m internships to young people, through the Youth Employment Service programme
- Increase the minimum wage
- Target 3% growth in 2018, rising to 5% by 2023
2. Focus on growth and
- Increase investment from 20% to NDP target of 30%
investment
- Restore confidence by improving policy certainty
3. Pursue economic participation - Launch a buy and build campaign to rejuvenate local investment and develop SMEs
for the poor and the - Create 1m new jobs by 2030 within the Agricultural sector (as in the NDP)
marginalised - Review all regulatory requirements on start-ups to reduce the cost of doing business
4. Implement macro policy that - Maintain fiscal discipline

promotes growth and secures - Avoid external creditors ’imposing conditions and limiting our policy options’
economic sovereignty
5. Accelerate the ownership and - Decentralise control of the economy

control of the economy for black
- Increase the proportion of SMEs
South Africans
- A comprehensive agenda to improve the quality of education, esp. in rural schools
6. Improve access to quality

- Make maths and science compulsory to Grade 12
education for all
- "Move with urgency" to provide free higher education for the poor
- Targeted import substitution policies
7. Revitalise and expand
- Reduce Manufacturing costs by improving Eskom’s operational performace
manufacturing capacity
- Increasing investment in rail and road infrastructure
8. Maximise the impact of new - Boost infrastructure investment to ZAR1.5trn over the next 5 years
infrastructure - Introduce private sector expertise
- Introduce private capital on a strategic partnership basis, to strengthen SOE balance sheets
9. Restore SOEs as drivers of
- Introduce new boards and executives to manage SOEs
growth and development
- Form an ’SOE investment company’ to oversee government investments in SOEs
- Pursue corruption and establish a judicial commission of inquiry
10. Confront corruption and
- Establish an ’anti-corruption appropriation fund’ to channel proceeds to employment intiatives
state capture
- Ensure adequate vetting of new appointments / consider ’rationalising’ the size of Cabinet
Source: Goldman Sachs Global Investment Research
‘New Deal’ likely to support investor confidence and growth

While Mr. Ramaphosa’s platform includes some compromises on land and education
policy resulting from ANC conference resolutions, we conclude that the design of the
Ramaphosa administration’s economic policy programme is by and large intended to: a)
boost confidence in the short term; b) implement policies that support growth via
incentivising investment in the medium term; and c) address underlying structural
issues in the longer run, including institutional deterioration, governance and financial
sustainability at SOEs, and corruption. In our view, the programme does not represent a
significant philosophical departure from stated objectives in the NDP and existing ANC
policy, and envisages incremental rather than radical policy change in most spheres,
including as it pertains to the labour market.
As stated in the NDP and in previous economic reform platforms, de-racialising (and
therefore changing and broadening) ownership and control of the economy – ultimately
implying a redistribution of land and capital – remains a key longer-term policy objective.
While some investors would likely not welcome such measures, we remain persuaded
4 May 2018 7
that a) President Ramaphosa is mindful of maintaining investor confidence and is

therefore unlikely to take any steps that would undermine property rights; and b) a more
equal distribution of ownership and control in the economy and a reduction in levels of
inequality would improve the quality and social sustainability of economic growth in the
longer run. In addition, South African macroeconomic policies for the most part have had
a track record of consistency, and macroeconomic policy decisions have demonstrated
sensitivity to concerns of the marketplace.
The market has welcomed Mr. Ramaphosa, but has yet to price in
structural reforms
Nonetheless, based on our conversations with market participants, our assessment is
that investors collectively remain somewhat cautious on the prospects for significant
economic policy overhaul on several counts, and would like to see greater evidence of
the following:
1. Maintaining reform momentum, with focus shifting to swift policy implementation

and execution, as well as resolving uncertainty in key sectors (e.g., land, mining).
2. A stronger reiteration of a commitment to fiscal consolidation (given that fiscal
pressures and downgrade risks have now eased) and specification of medium-term
fiscal parameters/objectives.
3. Articulation of a specific strategy to boost growth and reduce unemployment that is
more concrete than that contained in the NDP, so as to enhance the longer-term
credibility of the economic policy narrative and trajectory (in light of concerns over
social cohesion).
4. The largest investor concern remains political risks, and many observers will likely
be looking for Mr. Ramaphosa to unify his party and secure a popular mandate via
elections scheduled for Q2 2019. In this sense, the prospect of elections being
brought forward and evidence that Ramaphosa is solidifying his grip on the party
and demonstrating decisive leadership vis-à-vis the unions would likely be viewed as
welcome developments.
We see further upside to asset prices upon reform implementation

This suggests to us that, while investor sentiment has clearly improved since late 2017 –
as evidenced by the outperformance of the Rand and by the repricing of credit risk – the
market likely expects some stumbling blocks in economic policy execution and potential
political interference in the reform process to feature in the upcoming year. These views
are consistent with the concerns raised over the course of our extensive conversations
with market participants.
More specifically, the market has responded positively to policy decisions addressing
fiscal concerns, with the Rand appreciating after the 2018 Budget Speech; however, the
Ramaphosa administration may have enacted these policies under market and rating
agency pressure to do so. The key test, in our view, will be if the ‘New Deal’ policies
that are more structural and fundamental are enacted, now that market pressure has
decreased. If this happens, it would indicate a fundamental policy rethink rather than a
4 May 2018 8
reaction to market pressures, and would justify a significant further positive repricing of
asset prices. On the mining sector specifically, we would expect policy certainty to lead
to a decrease in capital outflows (especially in the income balance, thereby supporting
the current account), support investment and the Rand, and expand capacity (therefore
not adding to demand pressures). The same argument may also apply in the agricultural
sector, and would likely act as an incentive to South African corporates to discontinue
their pattern in recent years of sending capital offshore (sitting on large cash balances)
and disinvesting.
In addition, while the market has re-rated growth expectations higher by around 0.5pp
from 1.4% to 1.9% for 2018 since the December 2017 ANC National Conference, in our
view there remains further upside potential for the growth outlook. We forecast growth
of 2.4% in 2018 (revised higher from 1.5% prior to the conclusion of the conference) and
so, taking as a baseline the magnitude of our forecast revision and our assumptions on
the reform outlook, the market re-rating of growth expectations may be only halfway
complete. We also see risks to our growth forecast as being tilted to the upside.
Four key areas of reform to monitor in the coming months

Given economic policy proposals and announcements from President Ramaphosa and
members of his cabinet, we think that it is reasonable to expect reform-related news in
the coming months in the areas of mining sector policy, land reform, SOE policy (and
Eskom in particular) and public wage negotiations.
Mining sector
Mines minister Gwede Mantashe – a political heavyweight and close ally of Mr.
Ramaphosa – has indicated that he will finalise a draft of the mining industry charter in
the month of May. This is likely to specify targets for black ownership, lay out a clear
framework for licensing and taxation, and resolve policy uncertainty. The mining sector –
a key contributor to the South African economy and exports – has seen a decline in the
past two decades on the back of policy uncertainty and disinvestment, reducing
production, shedding jobs and has been a significant factor behind the erosion of the
country’s export growth. In our view, both symbolically and in terms of its importance to
the economy, restoring a stable policy framework that incentivises investment is critical
in the mining sector and the Ramaphosa administration is likely to take steps in this
direction by mid-year.
That said, clarification of the mining charter is unlikely on its own to resolve
uncertainties entirely. The recent announcement by Minister Mantashe that the ANC will
appeal the “once empowered, always empowered” decision by the North Gauteng High
Court (which ruled that companies that had reached 26% black ownership but
subsequently fell below did not need to top up their ownership and would not be
penalised) raises the prospect that lingering legal uncertainties will remain in the courts
for years to come, even with a clarified mining charter.
4 May 2018 9
Land reform
Mr. Ramaphosa has included in his platform a policy of land ‘expropriation without
compensation’ following the National Conference’s resolution to this effect, although he
has emphasised that this must take place within constitutional constraints and without
damaging the economy. Given the scope for infringing on property rights, this policy
has raised concerns among investors and landowners, not least because the ANC has
supported a motion tabled by the EFF in parliament to investigate constitutional
amendments to the section of the bill of rights that deals with the conditions under
which the government may expropriate land.
Our understanding of South African law suggests that in certain limited circumstances
South African courts would likely view expropriation without compensation as both
technically and conceptually possible within the contours of the current constitution.
Moreover, that this is likely possible and that there is therefore no need for
constitutional amendments is consistent with statements made by Mr. Ramaphosa and
his cabinet members and relatively widely accepted within the ANC. Moreover, as
Ramaphosa has mentioned in recent press statements, there is significant scope for
redistribution and repurposing of land that is already in the hands of the state or SOEs,
without requiring any expropriation. The public debate around land-related issues also
largely centres on agricultural land, while in the view of many experts the most pressing
policy challenges are in urban areas, and therefore a focus on urban land may serve to a)
address pressing issues and b) depoliticise the policy, at least to some extent. Thus, we
expect that the ANC will opt to clarify its position that no constitutional changes are
required in order for it to enact its policy in limited circumstances, and we anticipate that
the Ramaphosa administration will clarify the conditions under which it foresees
pursuing land expropriations. If addressed pragmatically and in ways that work to
dismantle the negative spatial legacies of apartheid, we see scope for land reform to
contribute positively to economic activity.
SOE policy
Contingent liabilities on SOE balance sheets arguably represent the greatest threat to
South Africa’s fiscal position, in particular those at Eskom – which is highly levered and
faces short-term cash flow pressures. In January, the government announced board and
management changes at Eskom and Minister of Public Enterprises Pravin Gordhan has
recently guided that further changes and announcement of a restructuring plan are in
the offing in the near term.
Eskom faces cost pressures, a revenue shortfall, short-term liquidity needs and
longer-term solvency concerns. With debt (including government guarantees) amounting
to 8-9% of GDP, this clearly raises fiscal concerns. In our view, a mix of cost-efficiency
measures, higher tariff increases, financial engineering and recapitalisation is likely
needed to restore financial health to Eskom. Some degree of asset unbundling and
private sector participation may also be involved. We expect credible announcements to
this effect in the coming months, likely enabling Eskom to access international debt
markets.
4 May 2018 10
Public wage negotiations

The most challenging issue in the current pipeline is arguably the ongoing round of
public wage negotiations, with wages due to be set for a three-year period (following
expiry of the prior settlement in March 2018). In our view, the market has likely formed
expectations for the outcome of the ongoing round of public wage negotiations based
on the assumptions stated in the 2018 budget, i.e., a nominal annual increase in the
public wage bill (encompassing both salary and headcount changes) of some 7% or
slightly less than 2pp in excess of projected inflation.
If this outcome transpires, on many counts from a fiscal perspective it would be

somewhat disappointing (despite being in line with budgetary assumptions). This is for
several reasons. First, the public wage bill is the single largest expenditure item and it is
bloated as compared to those in peer countries, having expanded at an above-inflation
pace for many years (Exhibits 9 and 10). Second, the ongoing negotiations are an early
trial for Mr. Ramaphosa’s negotiations with organised labour, and therefore their
outcome is likely to be interpreted as something of a litmus test for the President’s
ability and willingness to undertake difficult structural reforms that involve reaching
agreement with unions down the line. Third, the elite within South Africa’s civil service
itself represents a formidable vested interest, and so an inability to negotiate
successfully with this constituency should be interpreted negatively.
Exhibit 9: A high percentage of the government budget is dedicated Exhibit 10: Public wages have outpaced both private sector wages
to employee compensation and inflation since 2015
Employee compensation (% of primary government balance) Public-sector and private-sector wage growth (yoy, 4QMA)
12.0 Total
40% wage growth, Public
%yoy (4qma) Private
11.0
39% Inflation
10.0
38% 9.0
8.0
37%
7.0
36%
6.0
35% 5.0
Employee compensation (% of 4.0
34% primary government balance)
3.0
33% 2.0
08 09 10 11 12 13 14 15 16 17 18 12 13 14 15 16 17 18
Source: Goldman Sachs Global Investment Research, Haver Analytics Source: Goldman Sachs Global Investment Research, Haver Analytics
Not only is this issue symbolically important, but it is particularly challenging given its
importance to public opinion and the fact that Mr. Ramaphosa – a former trade union
leader – derives significant support from the unions and the left wing of his party. While
we are confident that the new administration will push to achieve positive outcomes for
the above three policy items, our conviction in a fiscally beneficial outcome for public
wages is relatively lower. Given the interplay between politics and reform, getting past
general elections (scheduled for Q2 2019, but with a possibility that they could be
brought forward) may also be a prerequisite for further clarification of President
Ramaphosa’s reform priorities.
Andrew Matheny
4 May 2018 11
Kevin Daly Clemens Grafe

+44 20 7774-5908 +7 495 645-4198
kevin.daly@gs.com clemens.grafe@gs.com
Goldman Sachs International OOO Goldman Sachs Bank
Andrew Matheny Erik Meyersson

+44 20 7051-6069 +44 20 7552-5596
andrew.matheny@gs.com erik.meyersson@gs.com
Goldman Sachs International Goldman Sachs International
Murat Unur
+44 20 7552-0457
murat.unur@gs.com
Goldman Sachs International
4 May 2018 12
Conviction Macro Views
Turkey: Rates to rise further

Based on our analysis of the reaction functions of other EM central banks, we think
Turkish interest rates will need to be between 175bp and 350bp higher than current
rates for inflation to return to the official target of 5+/-2%. Given our neutral rate
estimate of 300bp in Turkey and end-year inflation forecast of +10.5%yoy, we think that
rates will have to rise by at least another 50-100bp to be safely above neutral and,
hence, inflation to slowly decline, assuming there are no further shocks.
We do not expect the TCMB to proactively hike rates as the willingness to reduce
inflation to the 5%+/-2% inflation target in the near term is falling. We think that the
stability of the TRY will become increasingly important in the run-up to the elections and
that the TCMB will do just enough to attain it, which is why see risks to our 75bp hike
forecast in 2018Q3 skewed towards an earlier date. Following the recent rate decision,
the market pricing is roughly in line with our forecast, which nevertheless remains above
Bloomberg consensus forecasts. Considering the underlying dynamics and that risks are
skewed towards more hikes being needed, and coupled with tightening global financial
conditions and the likely increase in the uncertainty in the run-up to the elections, we
maintain our conviction view to pay rates.
Israel: Positive on bonds (receive Israel rates)

The Shekel appreciated over the course of 2017, and we expect this to continue this
year. We view this as a structural, long-term phenomenon, reflecting strong balance of
payments flows, which appear relatively insensitive to interest rate differentials. In
response to the stronger Shekel and other one-off factors, inflation in Israel remains
weak (well below the Bank of Israel’s 1%-3% target range). We expect the pace of
reflation to remain slow, and do not expect inflation to reach the Bank of Israel’s target
range before 2019.
Reflecting our inflation forecast, and the Bank of Israel’s forward guidance that it will not
increase its policy rate before inflation is “entrenched” within the target range, we
expect the Bank of Israel to keep rates on hold until 2019, and expect a very gradual
pace of rate hikes thereafter. Moreover, we estimate that the Bank of Israel will continue
to intervene in the FX market this year, to slow the trend of Shekel appreciation. Despite
weak inflation and the Bank of Israel’s clear forward guidance, the market is pricing
interest rate hikes in Israel in 2018. We think the market is overestimating the potential
pace of monetary tightening in Israel, and hence we hold a conviction view to receive
Israeli rates, especially in the longer end of the Curve, which remains steep.
4 May 2018 13
South Africa: Bullish on duration

While South Africa has already seen inflation decline sharply in 2017, we expect
disinflation to continue further in 2018, given fading supply shocks, below-potential
output and the stronger Rand. We forecast that headline and core inflation will decline,
to 4.2%yoy and 4.5%yoy by year-end, respectively, and remain below the mid-point of
the SARB’s 3%-6% inflation target in 2018. With the recent FX strength following the
victory of President Ramaphosa, we once again see rate cuts coming into play after the
February budget and Moody’s ratings review. Following a 25bp rate cut in March, we are
forecasting a further 50bp of rate cuts in 2018 (the market is currently pricing around
5bp of rate cuts in the next 6 months). Thus, we remain bullish on duration and expect
the curve to bull-flatten, where the yield curve offers significant value owing to its
steepness and high yields in real terms.
South Africa: 10-year treasury bond yield Ukraine: 19s vs. 27s
10 10 % yield 3
% pp difference in
9 yields
2
9 8
7 1
8 6
0
5
-1
7 4
3 -2
6 2y - 10y difference (rhs)
2
10y treasury bond mid yield 2y (lhs) -3
1
10y (lhs)
5 0 -4
11 12 13 14 15 16 17 18 May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18
Source: Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
Ukraine: Further bull steepening, further out the Curve

Despite likely delays to the planned upcoming IMF review until later this year, private
capital inflows and Ukraine’s recent return to bond markets imply that total net capital
inflows this year should stand at some US$7bn. As a result, we expect international
reserves to have risen to US$23bn at end-2018 (NBU forecast: US$21.6bn). Given
capital inflows supporting reserves, improving cyclical dynamics, and our more positive
assessment of political risk than market pricing, we remain constructive on front-end
bonds, which we see as ‘money-good’.
We have argued previously that the curve should steepen on an absence of external
liquidity risks, a theme that has largely played out and which has seen front-end
steepening of the yield curve by more than 200bp. While we see scope for front-end
bonds to continue to rally, we now see greater value further out the Curve, preferring
the 5-10 year segment. In our view, the economic recovery and rebuilding of external
buffers should ultimately cause this segment of the Curve to outperform, leading to a
steepening of the term structure relative to the longer end of the Curve.
4 May 2018 14
Macroeconomic forecasts
CEEMEA Main Macro Forecasts
*We use year-end CPI forecasts for Russia
GDP (%yoy) Consumer Prices (%yoy, avg)
2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
Czech Republic 2.5 4.6 3.8 3.2 3.0 3.0 0.7 2.5 1.6 1.9 2.0 2.0
Hungary 2.1 4.2 4.1 3.3 3.1 3.1 0.4 2.4 2.3 2.6 3.0 3.0
Israel 4.0 3.3 3.3 3.3 3.2 3.0 -0.5 0.2 0.4 1.0 2.1 2.3
Poland 3.0 4.7 4.2 3.6 3.4 3.4 -0.6 2.0 1.6 2.2 2.5 2.5
Romania 4.8 6.8 5.2 4.5 4.1 4.1 -1.5 1.3 4.7 3.4 3.3 3.3
Russia* -0.1 1.5 2.0 2.9 2.9 2.9 5.4 2.5 3.3 3.6 4.0 4.0
South Africa 0.6 1.3 2.4 2.4 3.1 3.0 6.3 5.3 4.4 3.6 3.9 3.9
Turkey 3.2 7.4 4.0 3.5 3.1 3.1 7.8 11.1 11.3 9.7 8.0 8.0
Ukraine 2.4 2.6 2.5 2.8 3.0 3.0 14.9 14.4 13.0 8.0 5.0 5.0
Source: Goldman Sachs Global Investment Research, Haver Analytics

CEEMEA Policy Rate Forecasts

Forecast (%, eop)
Current Q2 18 Q3 18 Q4 18 Q1 19 2017 2018 2019 2020
Czech Republic 2-week repo rate 0.75 0.75 0.75 0.75 1.00 0.50 0.75 1.25 1.75
Hungary 3-month deposit rate 0.90 0.90 0.90 0.90 0.90 0.90 0.90 1.00 1.50
Israel Repo rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.25 0.75
Poland Reference rate 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.75 2.25
Romania 1-week repo rate 2.25 2.50 2.75 3.00 3.25 1.75 3.00 3.75 4.25
Russia Min 1-week repo rate 7.25 7.00 6.75 6.50 6.25 7.75 6.50 5.50 5.50
South Africa Repo rate 6.50 6.25 6.00 6.00 6.00 6.75 6.00 6.00 6.00
Turkey Late liquidity lending rate 13.50 13.50 14.25 14.25 14.25 12.75 14.25 13.50 12.00
Source: Goldman Sachs Global Investment Research, Bloomberg
4 May 2018 15
Interest rate and exchange rate forecasts

CEEMEA Exchange Rate Forecasts
*Close 02 May 2018
3-Month Horizon 6-Month Horizon 12-Month Horizon
Current* Forward* Forecast Forward* Forecast Forward* Forecast

Czech Republic EUR/CZK 25.7 25.7 25.3 25.8 24.8 25.8 24.3
Hungary EUR/HUF 315.7 316.0 310.0 316.4 305.0 317.1 305.0
Israel USD/ILS 3.62 3.60 3.40 3.58 3.35 3.54 3.30
Nigeria** USD/NGN 305.00 366.50 350.00 371.65 350.00 382.50 350.00
Poland EUR/PLN 4.28 4.30 4.15 4.33 4.10 4.38 4.05
Romania EUR/RON 4.66 4.71 4.65 4.74 4.65 4.83 4.70
Russia USD/RUB 64.0 64.7 60.0 65.4 60.0 66.6 60.0
South Africa USD/ZAR 12.7 12.86 12.00 13.01 11.50 13.29 11.00
Turkey USD/TRY 4.18 4.30 3.90 4.43 4.15 4.69 4.40
Ukraine USD/UAH 26.2 27.1 26.5 28.0 25.5 29.7 25.0

**Nigeria has a multiple exchange rate regime. Current rate and forecasts refer to the official rate whereas forwards are based on the interbank rate.
Global Interest and Exchange Rate Forecasts

*Close 02 May 2018
End-2018 End-2019 End-2020

Current* Forward* Forecast Forward* Forecast Forward* Forecast
Swap Rates (%)
Euro Area 3M -0.3 -0.30 -0.33 0.02 -0.13 0.44 0.57
10Y 0.6 1.16 1.15 1.38 1.55 1.57 1.60
US 3M 2.4 2.66 2.68 3.02 3.68 3.08 3.68
10Y 3.0 3.05 3.20 3.08 3.60 3.06 3.70
Exchange Rates
EUR/$ 1.20 1.35 1.40 1.40
EUR/¥ 131.54 148.50 147.00 140.00
EUR/CHF 1.20 1.25 1.30 1.30
EUR/£ 0.88 0.92 0.92 0.92
4 May 2018 16
Disclosure Appendix
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4 May 2018 18

GS Report On SA 'New Deal'

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GS Report On SA 'New Deal'

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4 May 2018 | 11:16AM BST

CEEMEA Economics Analyst

Cyril Ramaphosa’s ‘New Deal’ for South Africa

Cyril Ramaphosa’s ‘New Deal’ for South Africa

A post-apartheid history of economic reform initiatives…

implementation of Black Economic Empowerment (BEE) policies, superseded in the

In addition to government sponsorship, these initiatives and accompanying policy

…that have identified ‘binding constraints’ to growth and key policy

4% Private sector capital (% of

Weak private investment, uncertain property rights, unfavourable market

Source: Goldman Sachs Global Investment Research, Haver Analytics

President Ramaphosa’s ‘New Deal’ draws on past reform initiatives

4. Implement macro policy that - Maintain fiscal discipline

5. Accelerate the ownership and - Decentralise control of the economy

6. Improve access to quality

Source: Goldman Sachs Global Investment Research

‘New Deal’ likely to support investor confidence and growth

that a) President Ramaphosa is mindful of maintaining investor confidence and is

1. Maintaining reform momentum, with focus shifting to swift policy implementation

We see further upside to asset prices upon reform implementation

Four key areas of reform to monitor in the coming months

Public wage negotiations

If this outcome transpires, on many counts from a fiscal perspective it would be

Kevin Daly Clemens Grafe

Andrew Matheny Erik Meyersson

Conviction Macro Views

Turkey: Rates to rise further

Israel: Positive on bonds (receive Israel rates)

South Africa: Bullish on duration

Ukraine: Further bull steepening, further out the Curve

GDP (%yoy) Consumer Prices (%yoy, avg)

Source: Goldman Sachs Global Investment Research, Haver Analytics

CEEMEA Policy Rate Forecasts

Current Q2 18 Q3 18 Q4 18 Q1 19 2017 2018 2019 2020

Source: Goldman Sachs Global Investment Research, Bloomberg

Interest rate and exchange rate forecasts

3-Month Horizon 6-Month Horizon 12-Month Horizon

Current* Forward* Forecast Forward* Forecast Forward* Forecast

Hungary EUR/HUF 315.7 316.0 310.0 316.4 305.0 317.1 305.0

Israel USD/ILS 3.62 3.60 3.40 3.58 3.35 3.54 3.30

Nigeria** USD/NGN 305.00 366.50 350.00 371.65 350.00 382.50 350.00

Poland EUR/PLN 4.28 4.30 4.15 4.33 4.10 4.38 4.05

Romania EUR/RON 4.66 4.71 4.65 4.74 4.65 4.83 4.70

Russia USD/RUB 64.0 64.7 60.0 65.4 60.0 66.6 60.0

Turkey USD/TRY 4.18 4.30 3.90 4.43 4.15 4.69 4.40

Ukraine USD/UAH 26.2 27.1 26.5 28.0 25.5 29.7 25.0

Source: Goldman Sachs Global Investment Research, Bloomberg

Global Interest and Exchange Rate Forecasts

End-2018 End-2019 End-2020

Swap Rates (%)

Euro Area 3M -0.3 -0.30 -0.33 0.02 -0.13 0.44 0.57

10Y 0.6 1.16 1.15 1.38 1.55 1.57 1.60

US 3M 2.4 2.66 2.68 3.02 3.68 3.08 3.68

10Y 3.0 3.05 3.20 3.08 3.60 3.06 3.70

EUR/$ 1.20 1.35 1.40 1.40

EUR/¥ 131.54 148.50 147.00 140.00

EUR/CHF 1.20 1.25 1.30 1.30

EUR/£ 0.88 0.92 0.92 0.92

Source: Goldman Sachs Global Investment Research, Bloomberg

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