Presentation to Portfolio Committees on Trade and...
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Presentation to Portfolio Committees on Trade and Industry Geoffrey Qhena CEO Parliament of the Republic of South Africa 17 June 2009
Transcript of Presentation to Portfolio Committees on Trade and...
Presentation to Portfolio Committees on Trade and Industry
Geoffrey QhenaCEO
Parliament of the Republic of South Africa17 June 2009
Economic overview
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• The global economy is experiencing its worst economic crisis since the Great Depression of the 1930s.
• The severity of the crisis, its widespread nature, as well as the speed at which it unfolded have been extraordinary.
• Increased global interdependence has demonstrated the vulnerability of the global economic system in times of extreme difficulty.
• The advanced economies have been the most harshly affected, but emerging and developing economies have also been hard hit as global trade came under immense pressure.
• It would seem as if the worst has been avoided, with the massive stimulus packages (fiscal & monetary) adopted in numerous countries playing a role in this regard.
Global economy: Growth prospects remain subdued
Economic growth around the globe
-10
-5
0
5
10
15
World USA Euro area Japan Africa DevelopingAsia
China India
% G
row
th
2007 2008 e 2009 f 2010 f
Source: IMF (WEO - Apr '09)
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• Substantial slowdown in economic growth in 2008 (Q4 contraction of -1.8%), followed by a 6.4% contraction in Q1 of 2009 - the worst performance since Q3 of 1984 (- 6.5%).
• Supply-side of the economy (e.g. mining and manufacturing) taking strain on the back of worsening global and local economic conditions.
• Sharply lower consumer spending reflected in contracting retail trade sales and declining new vehicle sales.
• Export sector still under severe pressure, facing weakening global demand.
• Although it has moderated, demand for imports remained strong – linked to fixed investment activity and capacity constraints in various sub-sectors of the economy.
South African economy: Economic growth slowing down sharply
Real GDP growth
-8
-6
-4
-2
0
2
4
6
8
Q1 Q2 2003
Q3 Q4|
Q1 Q2 2004
Q3 Q4|
Q1 Q2 2005
Q3 Q4|
Q1 Q2 2006
Q3 Q4|
Q1 Q2 2007
Q3 Q4|
Q1 Q2 2008
Q3 Q4|
Q1
% C
hang
e (Q
-o-Q
)
Source: Stats SA
Worst performancein 25 years
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South African economy: Slowdown experienced by most economic sectors
• Conditions in the manufacturing sector (2nd largest economic sector) have deteriorated further due to worsening local and global economic conditions (incl. reduced demand domestically and internationally, cost and output price pressures, and fierce competition).
• Mining sector remains under pressure for several reasons, incl. commodity market weakness (volumes & prices) and volatility, technical and energy constraints.
• Confidence levels in the construction sector declined sharply during the course of 2008, and in Q2 of 2009 dipped to their lowest level since early 2001.
• Service-related sectors (e.g. finance, trade & transport) have all reported a contraction in the first 3 months of 2009.
Real GDP growth in 2008 Q4 and 2009 Q1
-40 -30 -20 -10 0 10 20
Agriculture
Mining
Manufacturing
Electricity
Construction
Trade
Transport
Finance
Government
Other services
Total GDP
% Change (q-o-q)
08 Q4 09 Q1
Source: Stats SA
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South African economy: Manufacturing sector under severe strain
• Overall volume of manufacturin g production contracted 6.8% (q-o-q) in Q1 2009 (-5.8% in Q4 2008).
• Transport equipment (incl. motor vehicles) and metals & machinery sub-sectors reported the sharpest drops in output in the 6 months to March ’09.
• Manufacturing production fell even more sharply in April ’09 (-21.6% y-o- y, compared to -11.8% in March) as sector severely affected by holiday closures.
• Recent rand appreciation posing a further threat to export-oriented and import competing segments.
• Vehicle exports have fallen rapidly in recent months, whilst iron & steel exports are substantially lower.
Average growth rate in production volume: Oct 2008 to Mar 2009
-35
-30
-25
-20
-15
-10
-5
0
5
10
TotalManufac-
turing
Food &beverages
Textiles &clothing
Wood &paper
Chemicals Non-metallicmineral
products
Metals &machinery
Electricalmachinery
Radio'sand TV
Transportequip.
Furniture& other
industries
% C
hang
e (Y
-o-Y
)
Source: Stats SA
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South African economy: Mining sector under extreme pressure
• Mining activity was sharply lower in Q1 of 2009 as the production of platinum group metals, diamonds, chrome, manganese, coal and in the mining of building materials declined in response to weakening global & local demand.
• Energy rationing, shutdowns for maintenance purposes and safety related stoppages due to mining incidents all contributed to lower production volumes.
• This poor performance has also had a negative impact on export earnings and employment creation in various sub-sectors.
• Higher commodity demand from China more recently could have a beneficial impact for the mining sector in the months ahead.
Mining production by sub-sector
-60
-50
-40
-30
-20
-10
0
10
20
30
Totalmining
Gold Iron ore Chrome Copper Man-ganese
PGM Nickel Othermetallicminerals
Dia-monds
Coal Buildingmaterials
Othernon-
metallicminerals
% C
hang
e (q
-o-q
)
2008-Q4
2009-Q1
Source: Stats SA
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South African economy: Business confidence remains weak
• Business confidence is currently (Q2 of 2009) at its lowest level in 10 years.
• Conditions in the manufacturing sector have deteriorated further, reaching their lowest levels since 1998, as economic conditions in South Africa and globally worsened.
• Confidence levels in the building sector dropped to levels similar to those in 2001, thus reflecting weaker fixed investment activity.
• A very marginal rebound in confidence was reported for the wholesale trade and motor trade sectors in Q2 of 2009, whilst the retail trade sector reported a modest drop in confidence.
Business confidence in the Manufacturing sectorand the SA economy
0
10
20
30
40
50
60
70
80
90
100
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
Net
bal
ance
Source: BER
Manufacturing
Downturn - shaded area
SA economy
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South African economy: Rising job losses a concern
• Deteriorating global and local economic conditions are having a profound impact on job creation in South Africa.
• Substantial job losses were reported in the opening quarter of 2009, with 208 000 people having lost their jobs.
• Key sectors affected by rising job losses have included the trade sector, manufacturing, as well as the construction sector.
• Prospects for job creation are not promising, with more job losses expected during the course of the year.
• The unemployment rate stood at 23.5% in Q1 of 2009, reflecting around 4.2 million unemployed people.
Change in employment by broad sector in Q1 of 2009
-150
-125
-100
-75
-50
-25
0
25
50
75
100
Agriculture Mining Manufac-turing
Utilities Construc-tion
Trade Transport Finance Commu-nity
services
Privatehouse-holds
Other
Cha
nge
(num
ber)
Source: Stats SA
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South African economy: Renewed currency strength
Currency strength indicative of the presence of ‘carry trade’ and revived interest in emerging markets assets. If sustained, it could aggravate weak economic conditions & worsen the current account deficit.
Exchange rate developments
6
7
8
9
10
11
12
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Ran
d pe
r USD
10
11
12
13
14
15
16
Ran
d pe
r Eur
o
Rand-USD Rand-Euro
Source: Bloomberg
10 June ‘09
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South African economy: Current account to remain in deficit
• Weaker global demand resulting in lower export volumes and price pressures, with most commodity prices well below their peaks.
• SA import demand has also declined, but not sufficiently to reverse the trade deficit.
• Balance of payments remains the “Achilles heel”, exposing SA’s reliance on foreign capital inflows and bringing fort h currency vulnerability.
• Encouragingly, the BOP deficit narrowed to -5.8% of GDP in Q4 2008 (-7.8% in Q3 2008).
• Outlook: relatively strong demand for imported capital goods on the back of the SOE capex and weak export performance.
Current account of the Balance of Payments
-10
-8
-6
-4
-2
0
2
4
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% o
f GD
P
-200
-160
-120
-80
-40
0
40
80
BoP
: R b
n
Current Account Balance
% of GDP
Source: SARB, IDC forecast
Forecast
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South African economy: Inflation and interest rate outlook
• Consumer price inflation is expected to trend downwards, although remaining at a higher level than earlier forecasted.
• A substantial increase in electricity prices would exert renewed pressure on consumer prices.
• The stronger currency, as well as substantially lower commodity prices, in general, should provide some relief on the inflation front.
• Of concern to the monetary authorities, however, are the high demands for salary and wage increases, whilst inflation expectations also remain fairly high.
• The MPC is expected to continue with very limited monetary easing in light of the poor performance of the domestic economy, but a plateau may soon be reached.
CPI inflation, the Prime overdraft and the Repo rate
0
2
4
6
8
10
12
14
16
18
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
CPI
: % C
hang
e
0
2
4
6
8
10
12
14
16
18
Prim
e &
Rep
o ra
te (%
)
Repo rate
CPI
Prime overdraft rate
Source: SARB, Stats SA, IDC forecast
Forecast
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South African economy: Outlook for GDP growth
• SA economy has recorded its first recession since 1992 - Q4 of 2008 (- 1.8%) and Q1 of 2009 (-6.4%).
• Consumer spending will remain under stress over the short- to medium term as high indebtedness, increased job losses, declining real disposable incomes, tighter credit control measures and lending practices by financial institutions, and falling asset prices all contribute to weak consumer confidence and spending activity.
• Private sector fixed investment is expected to contract by roughly 7% in 2009, reporting a gradual improvement thereafter.
• Weaker domestic demand and a slowdown in global growth and demand for resources are expected to keep export growth subdued in the short- to medium-term, but modest growth in imports is also expected.
Contribution to real GDP growth
-6
-4
-2
0
2
4
6
8
10
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Perc
enta
ge
Other (e.g.Govt, &Inventories)
Net exports
Fixedinvestment
Consumerspending
Total GDP
Source: SARB, IDC
Forecast
IDC plans for 2010 to 2012
Growing sectoral diversity
IDC’s Vision, Mission, Objectives and Outcomes
Visi
onM
issi
onO
bjec
tives
Out
com
es
To be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent”
The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the
building of competitive industries and enterprises based on sound business principles.
Supporting industrial capacity development
Promoting entrepreneurship
Sustainable employment
Growing SME sectorRegional equity
Industrialisation in the rest of Africa
Environmentally sustainable growth
Broad-based black economic empowerment
New entrepreneurs entering the economy15
IDC’s Role
• To support sustainable development, IDC funds businesses showing economic merit, in line with IDC Act;
• Some businesses finding it difficult accessing funding from commercial financiers as a result of perceived high risks;
– IDC views this as a market failure;– IDC’s funding decisions rely on a more detailed assessment of future
financial sustainability rather than on historical business performance;• IDC plays a critical role in assisting competitive and sustainable industries to
develop, in ways to stimulate SA’s growth, development and employment creation;
• A core role of IDC is to be a catalyst for project development, particularly green field projects;
• One of the country’s leading providers of private equity finance (including one the sole provider of “angel funding” for venture capital initiatives);
• IDC is a key agent in the provision of development finance;• IDC covers most sectors of economic activity, including all the priority
sectors.
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Sectoral Involvement
1 Exposure as at 31 March 2009 at market values, including commitments2 Value of net approvals 2008/093 Number of jobs expected to be created and saved by funding approvals 2008/09 17
Sectoral Involvement (continued)
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2008/09 Review
• Number of jobs expected to be created declined to 24 300, mirroring economic conditions;
• Higher amount of jobs saved1 (2 500) than in previous year– mostly in the clothing and textiles industries;
• Value and number of approvals increased – sign of higher demand for IDC funding;
• Number of SMEs funded increased to 68% of total number of business funded;
• Approval of special schemes for the Clothing, Textiles, Leather and Footwear, Gold Jewellery, Forestry and Orchard industries;
• Application of funding: Value and number of funding approvals
Jobs creation expectations
191 – Jobs saved does not include jobs retained through additional funding or restructuring of facilities to existing clients under financial pressure
Medium term objectives
• 2009/10– 26 000 jobs to be created, additional 13 000 jobs expected to
be retained through distressed funding;– R11.4 billion budgeted for investment approvals;– R1.5 billion budgeted for investment in the rest of Africa.
• 2009/10 to 2011/12– 100 000 jobs to be created, additional 30 000 saved from
assisting distressed companies;– R40 billion budgeted for investment approvals;– R7 billion budgeted for investment in the rest of Africa.
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Capital Allocation
Job Creation Objectives
Sectoral distributions does not include allocations for distressed companies
Sector % of Jobs Expected % of Capital AllocatedFood, Beverages & Agriculture 14% 6%Mining and Beneficiation 16% 15%Forestry, Wood, Paper 3% 3%Clothing, Textiles, Leather and Footwear 4% 1%Chemical and Allied Industries 2% 5%Fabricated Metals, Machinery and Transport 6% 5%Construction 8% 3%Public Private Partnerships and Infrastructure 16% 44%Transportation, Financial & Other Services 6% 5%Tourism 6% 4%Franchising 5% 1%Media & Motion Pictures 1% 1%Techno Industries 8% 3%Venture Capital 0% 1%Healthcare & Education 5% 2%
Financial base
– IDC’s capital base declined substantially in the wake of the financial crisis, necessitating a fair value adjustment of approximately R26 bn.
– Despite this decline, the budgets show the Corporation remaining financially sustainable despite increased investment budgets.
– Borrowings expected to increase from R5.9 bn to R24.9 bn over forecast period.
– Already embarked on a programme to source these funds, with R3.4 bn worth of borrowings approved since November 2008.
– A robust equity buffer is essential for the IDC considering the significant risks the Corporation takes, allowing it to:
– Serve as a catalyst for balanced sustainable development;
– Facilitate greenfield, large project participation and “ring-fenced” finance activities;
– Contribute to the country’s vast investment needs amongst others; and
– Maintain its credit rating (which impacts on IDC’s borrowing capacity). Footnote: 2009 actuals unaudited,
Increasing demand for IDC funding
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IDC alignment with national objectives
• Addressing unemployment– IDC’s Leadership in Development strategy underpins the creation of
sustainable employment as one of the most important outcomes that the corporation aims to achieve in its investment activities;
– To achieve this, IDC job targets were doubled from 2007 onward and in light of the current crisis, substantial job retention initiatives put in place as well;
– Continued focus on labour intensive industries such as agriculture, clothing, certain other manufacturing sectors, services industries as well as support for small and medium enterprises.
• Entrepreneurial and SME development– IDC has a multi-faceted approach to assisting and developing small and
medium enterprises;Funding entrepreneurs with viable business plans (including special schemes);Business support to further address skills deficiencies identified pre-or post-investment;Training for potential entrepreneurs to teach them basic entrepreneurial skills;
– IDC builds partnerships with entrepreneurs and continues financial and other support if businesses go through difficult times;
– Will work in partnership with Khula to reach micro-enterprises.
TrainingFunding Business support
Entrepreneurial Development
Approach to entrepreneurial development
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Monitoring developmental
impact and financial performance
IDC alignment with national objectives (continued)
LegendHistorical approvals (23)Approved during 2008/09 (7)Potential agencies (15)
Local Development Agencies
Agencies approved to date: 23Agencies approved in 2008/09:
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• Rural and regional developmentDevelopment Agencies– Municipal level intervention; – Unlocking investment potential to address inequitable
regional socio-economic development;– Exploiting comparative advantages in area;– Capacity building for third-tier government.– Expanding concept to townships and mining town
revitalisation.Regional offices– IDC offices opened in all nine provinces; – Improve cooperation with provincial government and
business community;– Proactive identification of development projects;– Improved access to clients;– Conduit for business support.Sector specific– Agriculture – emerging farmers, deep rural 2nd economy;– Forestry – aforestation, wood value chain development;– Mining – early stage project finance;– Tourism – arts and crafts.
IDC alignment with national objectives (continued)
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• Broad-based black economic empowerment– Is shifting its focus further towards supporting
expansionary BEE; – Specific emphasis on facilitating broad-based
ownership and inclusion of black designated groups (including a focus on SME development).
• Renewable energy and cleaner technologies– Various projects approved and being investigated:
– Supporting companies utilising selling of carbon credits as an income stream;
– Energy Enterprise Efficiency Programme for South Africa Study being undertaken in partnership with other stakeholders.
Transformation and Entrepreneurial Scheme
IDC alignment with national objectives (continued)
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• Economic planning and industrial policy support– Sector development strategies aligned with Industrial Policy Action Plans (IPAPs)
and National Industrial Policy Framework (NIPF);– Backing industrial policy initiatives such as Industrial Development Zones;– South-south cooperation (e.g. Indian Business South Africa (IBSA), cooperation
with southern DFIs);– Cooperation with government departments such as Department of Trade and
Industry, Department of Agriculture, Forestry & Fisheries, Department of Mining, Department of Energy, Department of Public Enterprises.
– Participation in presidency task teams (e.g. distressed sectors, investment and funding) and initiatives (e.g. recent workshops on decent employment);
– Participation in DFI council;– Technical analysis and economic modelling support to Government on industrial
policy measures;• Other initiatives
– Contribution to funding infrastructure that will alleviate industrial development bottlenecks.
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IDC alignment with national objectives (continued)
• Assisting companies in distress– Involved in Nedlac task teams as well as capital equipment,
automotive & components and clothing & textiles task teams;– Approach to funding distressed companies:
– To ensure a focus on long-term sustainability of enterprises, interventions will be on a firm-by-firm basis;
– Enhancing the long-term competitiveness of industry requires interventions to target those firms in distress due to cyclical factors;
– Business being assisted should demonstrate that the business case re-emerges within a reasonable timeframe;
– Interventions should be to the benefit of the company being assisted and not relieve existing shareholders or other financiers from their obligations;
– Developmental returns arising from the intervention should be measurable and monitored;
– Risk sharing should be encouraged by pursuing a collaborative funding approach with other financiers – enable IDC to leverage its balance sheet further.
Increasing demand for IDC funding
Project development
Large projects under investigation include, the following:– Petrochemicals – Construction of a synfuels plant and associated
infrastructure. Estimated investment of R200 billion.
– Platinum smelter and refinery – Early feasibility stage for establishing a PGM smelter and refinery. Project size up to R3.6 billion.
– Solar power generation – A renewable energy project, serving as a pilot project and potential more roll-outs in future. Investment of R6 billion.
– Natural fibres – Development of a sisal plantation to the benefit of local communities. Estimated investment facilitated of R2 billion.
– Wind power generation – A wind farm project to produce 500 MW of power. R8 billion investment.
– Bio-Ethanol – A bio-ethanol from sugar cane project. Project size = R 1 billion.
– Sugar – A Tanzanian based sugar project. Investment of R500 million.
– Electricity generation – Integrated coal mine and power project in Botswana. Potential overall investment of more than R70 billion.
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Implications of State of the Nation address for IDC
Industrial Development Corporation19 Fredman Drive, SandownPO Box 784055, Sandton, 2146South AfricaTelephone (011) 269 3000Facsimile (011) 269 2116E-mail [email protected]
Thank you
Funding Process
Applications from existing/prospective
businesses
Proactive identification and development of business
opportunities
Detailed due-diligence assessing development
impact and sustainability of opportunities:
•Development outcomes•Market for products/services•Technical viability and competitiveness•Financial viability•Management
Structuring of funding depending on client’s needs
Approval of viable transactions at appropriate
committee
Ongoing monitoring of client performance after funding is
made available
Interventions for businesses experiencing difficulties
•Business support•Restructuring of facilities•Etc.
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Funding Cycle
Loan funding
Equity funding
Capital growth
Interest repayments
IDC relies on borrowings, internal profitability, capital growth and exits from mature investments to maintain and expand its funding ability
IDC relies on borrowings, internal profitability, capital growth and exits from mature investments to maintain and expand its funding ability
Capital repayments
Dividend payments
Exits of mature investments
IDC Funds•Borrowings•Balance sheet•Mature investments
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Pricing of facilities is calculated taking into account IDC’s cost of funding + a margin for risk – a margin discount for developmental impact. IDC’s equity portfolio subsidises to a significant extent
the lending operations
Pricing of facilities is calculated taking into account IDC’s cost of funding + a margin for risk – a margin discount for developmental impact. IDC’s equity portfolio subsidises to a significant extent
the lending operations
