South African economy: recent economic developments and ...savinyls.co.za/files/files/09h30 Gerhard...
Transcript of South African economy: recent economic developments and ...savinyls.co.za/files/files/09h30 Gerhard...
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Southern African Vinyls Association
conference
7 June 2017
South African economy:
recent economic developments
and growth prospects
Gerhard Kuhn
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Global economic developments
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Global growth has been subdued, but expected to
be on a firmer footing going forward
• The global economy experienced a subduedrate of expansion in 2016, with the 3.1% GDPgrowth being the lowest since 2009.
• Developments in the US, China and the UK,have added to concerns over thesustainability of the growth momentum and itsfuture trajectory.
• US GDP growth has slowed to 1.6% in 2016(2.6% in 2015) as non-residential investmentdeclined and consumer spending moderated.
• UK’s Brexit decision not only impacted on itsown growth performance, but also affectedbusiness confidence throughout the region.
• The growth rate for emerging markets stoodat 4.1% in 2016, halting the declining trendthat has been in place for the past 5 years.
• Brazil and Russia were still in recession,whilst Sub-Saharan Africa saw its growthmoderating to a 22-year low. In turn, theIndian economy has continued to recordrobust growth.
• Although global prospects are set to brighten,growth remains fairly modest over the outlookperiod, in line with its long-term average.
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2
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4
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6
% C
han
ge (
y-o
-y)
Source: IDC, compiled from IMF data
Global growth performance and the economic outlook
Forecast
Long-term average
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US economy showing a mixed performance,
but growth is set to gain momentum
• US economy expanded by 1.2% in Q1 2017 (q-o-q),compared to 2.1% in Q4 2016, as growth in consumerspending decelerated, whilst inventories dropped.
• Manufacturing, which has been expanding at a steadypace in recent months, could be experiencing somegrowth moderation in the months ahead, with the May2017 PMI reading at a 8-month low.
• More jobs are being created, with the US economymoving closer to full employment. The unemploymentrate currently stands at 4.5% (10% in 2009).
• Consumer confidence rebounded, reaching a 16-yearhigh in March 2017, an indication of stronger growth inhousehold spending going forward.
• Real GDP growth in the US is forecast at 2.3% for 2017and 2.5% in 2018, up from 1.6% in 2016.
-25
-20
-15
-10
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2006
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2009
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2015
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2016
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% C
ha
ng
e (
y-o
-y)
Manufacturing production in the USA
Source: IDC, compiled from Federal Reserve data
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20
40
60
80
100
120
140
160
180
Ind
ex
: 1
98
5 =
10
0
Source: IDC, compiled from Conference Board data
Latest reading:
April 2017 = 120.3
Highest level in over 16 years
Consumer confidence in the USA
-2
0
2
4
6
8
10
12
-800
-600
-400
-200
0
200
400
600
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Un
em
plo
ym
en
t ra
te (
%)
Ch
an
ge (
'000)
Employment and unemployment trends in the USA
Source: IDC, compiled from BLS data
Change in non-farm employment
Unemployment rate (%)
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Eurozone experiencing more broad-based growth
• Economic sentiment in the Eurozone is currently at itsbest levels in 6 years and is being reflected in asustained growth momentum as economic growth hasbecome more broad-based among its members.
• Manufacturing PMI for May 2017 also at a 6-year high,confirming the stronger growth fundamentals.
• Consumer confidence is on the rise, supporting the viewof an ongoing economic recovery.
• While progress has been made on the employmentfront, with 5.9 million jobs having been added since2013, the unemployment rate remains high at 9.5%,although being at an 8-year low.
• Only in Q4 of 2016 did overall employment recover tothe levels recorded in 2008.
60
70
80
90
100
110
120
-6
-4
-2
0
2
4
6
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Ind
ex
% C
han
ge (
y-o
-y)
GDP growth (y-o-y)
Economic sentiment indicator (Index)
Source: IDC, compiled from EOECD and C data
Eurozone - GDP growth and the economic sentiment indicator
Q1 2017Recession
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
Ind
ex
Source: IDC, compiled from European Commission data
Long-term average
Latest data:
April 2017
Consumer confidence in the Eurozone
Recession
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-3
-2
-1
0
1
2
3
4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Nu
mb
er
(mil
lio
ns)
y-o
-y
Source: IDC, compiled from OECD data
Change in employment numbers in the Eurozone
Note: Quarterly employment numbers
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China’s growth moderation continues, but surprised
on the upside in Q1 2017
• Real GDP growth in China slowed to 6.7%in 2016, its lowest since 1990.
• However, in Q1 2017, growth surprised onthe upside at 6.9% (y-o-y), the strongestexpansion rate since Q3 2015.
• Growth was underpinned by higherindustrial output and stronger retail tradesales, whilst fixed investment spendingremained fairly robust.
• This should bode well for commoditymarkets, with prices expected to remainstronger for some time, whilst commodityexporting countries are likely to benefitfrom ongoing demand, especially forindustrial commodities.
• Attempts by the Chinese government toalter the economy’s growth model, provesto be rather difficult as progress in thisregard remains fairly modest.
• Investment spending still accounts for closeto 45% of GDP, although this ratio hasstabilised at this level in recent years.
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1980 1985 1990 1995 2000 2005 2010 2015
% o
f G
DP
Fixed investment
Household consumption expenditure
Source: IDC, compiled from World Bank, IMF data
Fixed investment and household consumption
expenditure in China
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-10
-5
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
% C
han
ge (
y-o
-y)
Exports Imports
Source: IDC, compiled from WTO data
Growth in China's merchandise trade volumes
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World trade growth has slowed sharply
• World trade has been under seriouspressure, with growth in global exportvolumes having slowed to just 1.2% in 2016,its worst performance since 2009.
• The growth moderation was mainly due tothe slowdown in trade recorded by emergingmarkets and developing economies.
• China, the world’s largest trading nation,experienced a marked slowdown in its tradeperformance in recent years.
• This affected many commodity exportingcountries, many on the African continent,including South Africa.
• Global trade flows are forecast to gain somemomentum in 2017 and 2018, althoughconcerns about the economic performanceglobally, along with monetary, fiscal andtrade policies could derail the much awaitedrebound.
• A more protectionist approach to trade policyas envisaged by the new US administrationcould have consequences for trade flowsand result in economic instability in manyparts of the world.
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Q1 Q32007
Q1 Q32008
Q1 Q32009
Q1 Q32010
Q1 Q32011
Q1 Q32012
Q1 Q32013
Q1 Q32014
Q1 Q32015
Q1 Q32016
% C
ha
ng
e (
y-o
-y)
World export volumes
Source: IDC, compiled from WTO data
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Modest outlook for global growth, while
downside risks remain
• Global growth is expected to improve overthe next 5 years, forecast at 3.5% for 2017,up from 3.1% in 2016.
• World trade flows should gain somemomentum in 2017/18, but risks remainhigh as potential protectionist tendenciescould derail the much awaited rebound.
• Emerging market and developingeconomies have become increasinglyimportant in the global economy, with risingcontributions to global output, trade andinvestment. They now account for morethan 75% of global growth in output, almostdouble the share of just 2 decades ago.
• Several regions and countries around theglobe are, nonetheless, still expected torecord lower rates of economic growth over2017-2021 when compared to the ratesrecorded during 2000-2010 (see chart).
• Growth in Sub-Saharan Africa, for instance,is forecast to remain largely subdued overthe next 5 years - being lower than thatrecorded over the period 2011-2016 andwell below the robust expansion ratewitnessed from 2000 to 2010 .
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Latin America andthe Caribbean
Emerging anddeveloping Europe
Middle East andNorth Africa
Sub-SaharanAfrica
Emerging anddeveloping Asia
Emerging markets &developing economies
Advancedeconomies
World
% Change p.a.
2000-10
2011-16
2017-22
GDP growth around the globe
Source: IDC, compiled from IMF data
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South Africa:
Recent economic developments
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SA economy in recession, outlook remains bleak
• SA economy entered its first recession
since 2009 as real GDP contracted by
0.7% in Q1 2017 (-0.3% in Q4 2016).
• Excluding agriculture and mining, the
contraction would have been 2.2%.
• Higher agricultural output mainly due to
improved weather conditions during the
2016/17 season and from a very low
base.
• Although mining production rebounded,
the sector is facing some challenges.
• Softer domestic demand and difficult
economic conditions in key external
markets, are adversely impacting on
manufacturing activity, as its output has
dropped by 3.7% in Q1 2017.
• On the expenditure side, a sharp drop
in household spending, as well as
weak private sector fixed investment is
testimony of a challenging domestic
economic environment.
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20
25
Agricul-ture
Mining Personalservices
Govern-ment
Finance &businessservices
Construc-tion
Transport&
communi-cation
Manufac-turing
Electri-city
Trade &accomm.
% C
ha
ng
e (
q-o
-q)
Source: IDC, compiled from Stats SA data
Real GDP growth by sector in Q1 of 2017
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SA’s economic growth from a global perspective:
performing well below the global average
• SA’s economic growth has been on a steady decline since the rebound in 2010 and 2011, following the2009 recession, falling below that of the global average in recent years.
• In 2016, 85% of all economies globally recorded a faster rate of expansion than South Africa.
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10
20
30
40
50
60
70
80
90
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Pe
rce
nta
ge
Source: IDC, compiled from IMF data
South Africa's global growth performance - share of
countries growing faster/slower than SA
Note: Share of countries growing slower than South Africa 2016 = 15%
In 2016, GDP growth in 85% of all economies was faster than that in SA
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Consumer spending increasingly under pressure
• A difficult consumer environment saw
growth in overall household spending
moderating to 0.8% in 2016, from 1.7% in
2015, with a sharp contraction of 7.3% in
spending on durable goods.
• Household balance sheets remain
stretched, whilst rising living costs, higher
interest rates, a sharp growth moderation
in demand for new credit, as well as poor
employment creation, have all affected the
ability and/or the willingness of households
to spend.
• At the beginning of 2017, retail trade sales
contracted quite sharply, being the worst
start to the year since 2009. Moreover,
sales of new passenger cars also declined
over the first 5 months of 2017 (y-o-y).
• This provides an indication that households
are still under strain and may not be able to
raise their spending ability in a meaningful
manner.
• Consumer confidence is low, whilst the
outlook for their own financial position for
the year ahead remains rather pessimistic.
-10
-5
0
5
10
15
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% C
ha
ng
e (
y-o
-y)
Retail trade sales in real terms
Source: IDC, compiled from Stats SA data
Q1 2017
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Household debt levels moving lower
• Lower household debt levels provide
some room for increased spending as
household balance sheets are moving
towards more sustainable levels.
• However, households will remain
cautious due to high debt service
costs, the impact of inflation on their
budgets and, among other factors,
weak employment prospects.
• A worsening inflation outlook in light of
the potential effects of the credit
ratings downgrades could result in a
further tightening in monetary policy,
thereby affecting debt-servicing costs
and household’s financial position.
• Although still generally precarious, the
financial health of consumers has
remained stable in recent months after
a period of deterioration.
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7
8
9
10
11
12
13
14
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16
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70
75
80
85
90
Q1 Q32007
Q1 Q32008
Q1 Q32009
Q1 Q32010
Q1 Q32011
Q1 Q32012
Q1 Q32013
Q1 Q32014
Q1 Q32015
Q1 Q32016
Deb
t serv
ice r
ati
o (
%)
Deb
t as %
o
f d
isp
osab
le in
co
me
Household debt as % of disposable income
Debt service ratio
Household debt and the debt-service ratio
Source: IDC, compiled from SARB data
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Household credit demand still subdued
• A worsening consumer environment
took its toll on household demand for
new credit over the past 4 years,
with a sharp declining growth trend
clearly visible.
• Higher interest rates, rising debt-
servicing costs and tighter lending
practises by the financial sector
affected the consumers’ ability and
willingness to incur more debt.
• In real terms, household assets have
fallen over the past few years, in the
process also negatively impacting
their financial position.
• As a result of adverse consumer
trends, growth in credit extension
decelerated sharply to just 0.4% by
February 2017 (y-o-y), an all-time
low, but edged higher in April.
0
2
4
6
8
10
12
14
16
18
20
0
5
10
15
20
25
30
2000 2002 2004 2006 2008 2010 2012 2014 2016
Pe
r c
en
t
% C
ha
ng
e (
y-o
-y)
Credit extension and interest rates
Prime lending rate (Rhs)
Household credit extension (Lhs)
Source: IDC, compiled from SARB data
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Fixed investment taking severe strain
• A challenging operating environment
has not been conducive for fixed
investment activity, as real capital
spending declined by 3.9% in 2016,
with a particularly sharp drop of 6% in
private sector fixed investment.
• Growth in real capital outlays has been
on a decline over the past three years,
whilst the economic climate remains
uncertain and not conducive for fixed
investment activity.
• The sharp drop in private sector fixed
investment can be linked to low
business confidence over an extended
period, whilst factors such as supply
constraints (e.g. electricity), the threat
of a potential sovereign credit ratings
downgrade, as well as policy related
issues, affected investment decisions.
• Recent political developments can
adversely affect business confidence,
which may impact on investment.
-25
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-5
0
5
10
15
20
25
0
10
20
30
40
50
60
70
80
90
100
% C
ha
ng
e (
y-o
-y)
Ind
ex
Business confidence (Index)
Private sector GFCF (% change)
Source: IDC, compiled from BER data
Private sector fixed investment and business confidence
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Manufacturing sector already in recession
• Manufacturing sector is already in
recession, with the last 3 quarters
having recorded lower output.
• The weakness is widespread across
the sub-sectors within manufacturing.
• Consumer related sectors such as
clothing and textiles, TV and radio’s,
furniture, as well as motor vehicles,
have all been adversely affected by a
worsening consumer environment.
• Domestic sales volumes have been
under pressure in Q1 2017, whilst a
weaker Rand supported the export
segment.-30
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-5
0
5
10
15
20
TotalManufac-
turing
Food & beverages
(24.4%)
Textiles &clothing(3.2%)
Wood &paper (12.7%)
Chemicals(22.1%)
Non-metallic mineralproducts
(3.9%)
Metals & machinery
(19.6%)
Electrical machinery
(1.7%)
Radio &TV (1.4%)
Transportequip. (7.4%)
Furniture & other
industries(3.6%)
% C
ha
ng
e (
q-o
-q)
2016 Q3 2016 Q4 2017 Q1
Source: IDC, compiled from Stats SA data
Manufacturing performance by sub-sector
Note: Growth rates are annualised
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Manufacturing sector’s outlook remains bleak
• Operating conditions remain largely
unsatisfactory, with the majority of sub-
sectors having indicated that they expect
unfavourable conditions to persist over
the next 12 months.
• The general political climate (incl. policy
and the regulatory environment) and
insufficient demand have been
mentioned as key constraining factors to
do business.
• Recent credit ratings downgrades can
add to the woes of the SA economy,
affecting investor and business
confidence, with more hardship most
likely for the struggling manufacturing
sector.
• Some comfort may, however, be drawn
from the up-tick in the May 2017 PMI
numbers, as business conditions are
expected to improve in 6-months’ time.
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Plastic products
Machinery and equipment
Furniture
Fabricated metal products
Clothing
Electrical machinery
Wood and wood products
Printing & publishing
Transport equipment
Basic metals
Paper and paper products
Textiles
Chemicals
Processed food
Beverages
Non-metallic mineral products
Manufacturing total
Net balanceSource: IDC, compiled from BER data
Business conditions
expected to improveBusiness conditions
expected to deteriorate
Manufacturing: Expected business conditions in 12 months' time
(results of survey conducted in Q1 of 2017)
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18
Fixed investment by the manufacturing sector
• Manufacturers have cut back on capital
spending in recent years, whilst
investment prospects remain largely
unsatisfactory for 2017.
• In real terms, the value of fixed
investment by the manufacturing sector
was at a 7-year low in 2016 (R76.8 bn),
whilst having been on a declining tend
since 2011.
• Subdued demand, both locally and in
global markets, have resulted in excess
production capacity in many industries,
thus not justifying additional fixed
investment for the expansion of
productive capacity.
• Supply-side constraints, especially cost
pressures and infrastructure-related
challenges, have impacted on private
sector investment decisions in recent
years.
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-20
-10
0
10
20
30
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
% C
ha
ng
e (
y-o
-y)
Fixed investment by the manufacturing sector
Source: IDC, compiled from SARB data
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Fixed investment outlook for manufacturing sector
highlights challenging operating environment
• Sentiment among manufacturers regarding their investment spending in 12-month’s time has fallen
sharply in Q1 2017 to an all-time low.
-50
-40
-30
-20
-10
0
10
20
30
40
50
Net
bala
nce
Source: IDC, compiled from BER data
Fixed investment expectations by the manufacturing sector
(outlook in 12 month's time)
Note: data only available for Q1 & Q3Q1 of 2017
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20
Manufacturing sentiment still disappointing for domestic
sales and jobs, but export prospects improve
Note: A reading below 0 indicates a deterioration and above 0 an improvement
-80
-60
-40
-20
0
20
40
60
80
Q1 Q2 Q32008
Q4|
Q1 Q2 Q32009
Q4|
Q1 Q2 Q32010
Q4|
Q1 Q2 Q32011
Q4|
Q1 Q2 Q32012
Q4|
Q1 Q2 Q32013
Q4|
Q1 Q2 Q32014
Q4|
Q1 Q2 Q32015
Q4|
Q1 Q2 Q32016
Q4|
Q1 Q2
Net
bala
nce
Domestic sales volumes
Source: IDC, compiled from BER data
Expected
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
Q1 Q2 Q32008
Q4|
Q1 Q2 Q32009
Q4|
Q1 Q2 Q32010
Q4|
Q1 Q2 Q32011
Q4|
Q1 Q2 Q32012
Q4|
Q1 Q2 Q32013
Q4|
Q1 Q2 Q32014
Q4|
Q1 Q2 Q32015
Q4|
Q1 Q2 Q32016
Q4|
Q1 Q2
Net
bala
nce
Export sales volumes
Source: IDC, compiled from BER data
Expected
-40
-30
-20
-10
0
10
20
30
40
Q1 Q2 Q32008
Q4|
Q1 Q2 Q32009
Q4|
Q1 Q2 Q32010
Q4|
Q1 Q2 Q32011
Q4|
Q1 Q2 Q32012
Q4|
Q1 Q2 Q32013
Q4|
Q1 Q2 Q32014
Q4|
Q1 Q2 Q32015
Q4|
Q1 Q2 Q32016
Q4|
Q1 Q2
Net
bala
nce
Fixed investment
Source: IDC, compiled from BER data
Expected
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
Q1 Q2 Q32008
Q4|
Q1 Q2 Q32009
Q4|
Q1 Q2 Q32010
Q4|
Q1 Q2 Q32011
Q4|
Q1 Q2 Q32012
Q4|
Q1 Q2 Q32013
Q4|
Q1 Q2 Q32014
Q4|
Q1 Q2 Q32015
Q4|
Q1 Q2 Q32016
Q4|
Q1 Q2
Net
bala
nce
Employment : number of factory workers
Source: IDC, compiled from BER data
Expected
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21
Mining sector showing some recovery,
but challenges remain
• The mining sector showed some resilience at the start of 2017, following a 4.9% contraction in output
volumes in 2016.
• Gold production continues on a long-term declining trend, while coal output dropped sharply as demand
conditions weakened. Platinum and iron ore production rebounded, albeit from very low bases, but
demand conditions remain largely unfavourable.
-25
-20
-15
-10
-5
0
5
10
15
20
25
Totalmining
Platinum Gold Coal Ironore
Chrome Copper Manga-nese
Nickel Othermetallic
minerals
Buildingmaterials
Othernon-
metallicminerals
% C
han
ge (
y-o
-y)
Mining production by sub-sector
2016 2017*
Source: IDC, compiled from Stats SA data
Jan to March
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22
Trade balance has improved
• SA’s trade balance recorded a marked
improvement in 2016, for the trade deficit
narrowed to R12.5 bn, from R82.7 bn in
2015.
• Supported by higher commodity prices
and a weaker exchange rate, mining
exports increased by R27 bn in nominal
value terms. This was largely due to
higher gold, diamond and coal exports.
• Moreover, manufactured exports have
risen by R41 bn, mainly underpinned by
a R19.3 bn increase in exports of motor
vehicles and components, with exports of
basic iron & steel R9.5 bn higher.
• Demand for imported manufactured
goods remained virtually unchanged at
R949 bn during 2016 (0.2% increase
compared to 2015), reflecting the weak
performance of the SA economy.
• In Q1 of 2017, the trade deficit measured
R2.8 bn, mainly reflecting weaker import
demand in an ongoing slow-growth
economic environment.
-100
-80
-60
-40
-20
0
20
40
60
80
100
Q1 Q22010
Q3 Q4|
Q1 Q22011
Q3 Q4|
Q1 Q22012
Q3 Q4|
Q1 Q22013
Q3 Q4|
Q1 Q22014
Q3 Q4|
Q1 Q22015
Q3 Q4|
Q1 Q22016
Q3 Q4|
Q1
Ra
nd
Billio
ns
Mining Other (incl. electricity)
Agriculture Manufacturing
Overall trade balance
Source: IDC, compiled from SARS data
South Africa's trade balance according to broad sector
2017
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23
Manufactured export basket highly concentrated
• Manufactured goods had a 58% share in
the merchandise export basket in 2016.
• Motor vehicles took the lead with a share of
18.7% in the manufactured export basket,
reflecting the strong integration of the local
vehicle sector in global supply chains.
• This was followed by basic iron and steel
(12.1%), petroleum and petroleum products
(5.2%), parts and accessories for motor
vehicles (5.2%), as well as non-ferrous
metal products (4.9%).
• The top-20 export categories (see graph),
out of a total of 120, accounted for 72% of
all manufactured exports.
• This is a clear reflection of the very high
reliance on a few export sectors, indicating
the potential risks associated with adverse
developments in key export segments.
• Around 38% of SA’s overall manufactured
exports were sold in other African markets
in 2016. This could serve as a platform to
further develop and expand the domestic
manufacturing sector’s export capabilities.
0
10
20
30
40
50
60
70
80
90
100
0
2
4
6
8
10
12
14
16
18
20
Per
cen
t
% sh
are
in
exp
ort
basket
SA's leading manufactured exports in 2016
% share (Lhs) % Cumulative (Rhs)
Source: IDC, compiled from SARS data
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24
Mining export volumes sharply lower in 2016
• Mining exports have been adversely
affected by weaker global demand,
especially from China.
• Export volumes dropped significantly
across most of SA’s key export
segments within the mining sector in
2016, being testimony of still difficult
trading conditions as underlying
fundamentals have not improved.
• Commodity prices, in turn, have
rebounded from very low levels, but
may not be sustainable at these levels,
unless demand recovers
• PGMs, with a 24.6% share in overall
mining exports in 2016, gold (20.6%),
coal (15.8%), iron ore (14.7%),
manganese (5.7%) and chrome (5.1%)
have accounted for more than 86% of
all mining exports in 2016.
• Without a meaningful recovery in global
demand and some cap on further price
increases, SA’s trade balance may
again be under pressure in 2017.
-30 -25 -20 -15 -10 -5 0
Copper
Gold
Nickel
Iron ore
Coal
Chrome ore
PGMs
% Change (y-o-y)Source: IDC, compiled from DMR data
Mining export volumes by sub-sector in 2016
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25
Government finances in the spotlight
• SA government debt is a key fiscal metric
that is closely monitored by credit rating
agencies.
• These agencies have been expressing
concerns about the high and increasing
government guarantees to financially
vulnerable SOEs, as this may affect fiscal
consolidation efforts.
• In value terms, gross loan debt measured
R2.2 trillion by Dec 2016 - an increase of
94% in the past 5 years.
• Gross loan debt stood at 51.7% of GDP by
Q4 2016 - an all-time high.
• Higher government debt is resulting in rising
debt-servicing costs, which have been the
fastest growing expenditure item in recent
years. At an estimated R146.3 billion in the
2016/17 fiscal year, debt service costs claims
a share of 11.2% of total government
expenditure, the highest in 11 years.
• Further downgrades could follow if
government is not able to stabilise the debt-
to-GDP ratio.
10
20
30
40
50
60
70
% o
f G
DP
Total gross loan debt
Total gross loan debt, incl. guarantees
Government's gross loan debt
Source: IDC, compiled from SARB , Budget Review data Fiscal year to March:
Forecast
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26
SA’s sovereign credit ratings at sub-investment level
• SA’s sovereign credit rating for foreigncurrency denominated debt downgraded byS&P to sub-investment level on 3/04/2017.
• Fitch downgraded its ratings of SA debt, forlocal- and foreign currency denominateddebt, on 7/04/2017.
• At the beginning of June 2017, Fitch andS&P left their ratings unchanged, likely towait for the outcomes of the Medium TermBudget Policy Statement in October 2017,before deciding on further actions.
• Moody’s has placed SA on a ratings reviewfor a potential downgrade, with its decisionto be announced before the end of June.
• Although foreign debt only accounts for10% of total debt, ca. 35% of governmentdebt is held by foreigners.
• Only one rating agency has thus far placedSA's local currency rating at sub-investmentlevel, with limited impact on capital flows,SA debt pricing and the ZAR.
• However, the adverse effects will bemagnified if a 2nd rating agency follows suit,with the impact likely to be particularlynegative if it is Moody's, for it will alter SAdebt's allocation within the large Citi WGBI.
-3
-2
-1
0
1
2
3
4
5
Source: IDC, compiled from Business Day report
South Africa's sovereign credit ratings
(foreign currency denominated debt)
Su
b-i
nv
es
tme
nt
gra
de
Inv
es
tme
nt
gra
de
Moody's
S&P
Fitch
Scale Moody's S&P Fitch4 A3 A- A-3 Baa1 BBB+ BBB+2 Baa2 BBB BBB1 Baa3 BBB- BBB--1 Ba1 BB+ BB+-2 Ba2 BB BB
April 2017
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27
Rand has recovered from a sharp weakening
following the Cabinet reshuffle
• The Rand has recovered some ground after depreciating substantially after the Cabinet reshuffle and
subsequent credit ratings downgrades.
• A recovery in some commodity prices, US dollar weakness and foreign investor interest in SA bonds due
to attractive yields, have all been supportive of the Rand’s recent recovery.
• However, further downgrades will trigger renewed Rand weakness, in the process possibly affecting the
inflation trajectory and the interest rate outlook.
12
13
14
15
16
17
18
Jan'16
Feb'16
Mar'16
Apr'16
May'16
Jun'16
Jul'16
Aug'16
Sep'16
Oct'16
Nov'16
Dec'16
Jan'17
Feb'17
Mar'17
Apr'17
May'17
Jun'17
Ra
nd
pe
r U
S d
olla
r
Daily Rand - US dollar exchange rate movement
Source: IDC, compiled from Bloomberg data
Latest data: R12.76 per USD on 6 June 2017
Minister Gordhan recalled
from overseas trip, followed
by Cabinet reshuffle
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28
Consumer inflation has declined
• Consumer prices increased sharply
during 2016, mainly on the back of a
steep rise in food prices due to the
impact of the severe drought.
• At an average of 6.4% in 2016 (4.6%
in 2015), CPI was at its highest level
since 2009.
• Food price inflation averaged 10.7%,
peak at 12% in December 2016, but
subsequently moderating to 8.7% in
March 2017. Since food has a 14.2%
share in the CPI basket, it accounted
for 1.5 percentage points of headline
inflation during 2016.
• Inflation surprised on the downside at
the start of 2017, having moderated to
5.4% in April – a 16-month low.
• A sharp drop in food prices contributed
to this improved inflation outcome.
Food prices are expected to continue
on a declining trend as agricultural
conditions normalise, with the largest
maize crop on record now being
anticipated in the 2016/17 season.
0
2
4
6
8
10
12
14
16
18
20
1
|
357
2006
9111
|
357
2007
9111
|
357
2008
9111
|
357
2009
9111
|
357
2010
9111
|
357
2011
9111
|
357
2012
9111
|
357
2013
9111
|
357
2014
9111
|
357
2015
9111
|
357
2016
9111
|
3
% C
ha
ng
e (
y-o
-y)
Consumer price inflation
CPI: Headline Food
Source: IDC, compiled from Stats SA data
Inflation target band
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29
Employment gains,
but prospects remain largely unfavourable
• A gradual improvement in employment
creation has been recorded despite
subdued economic growth.
• 144 000 jobs were added in Q1 2017,
with manufacturing (+62 000), finance
and business services (+49 000) and
mining (+26 000) the key contributors.
• For the economy at large, overall
employment is only 12.3% higher than
9 years ago.
• Manufacturing sector currently employs
about 15% fewer people than in 2008.
• SA’s unemployment rate measured
27.7% in Q1 of 2017, with 6.2 million
people being unemployed.
• In 2016, close to 590 000 more people
were added to the unemployed pool.
• About 65% of all unemployed have
been without a job for over 1 year.
• In addition, many are poorly qualified,
making their chances of being re-
employed increasingly difficult.
70
80
90
100
110
120
130
140
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Ind
ex
: 2
00
8 Q
1 =
10
0
Total employment
Private sector
Community and social services
Manufacturing
Source: IDC, compiled from Stats SA data
Latest data: Q1 2017
Employment trend in select sectors
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30
South Africa:
Economic outlook
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31
Business confidence reflecting a challenging
economic environment
• Business confidence remains low, and
has been below the 50-point mark for
most of the time since 2008.
• This is reflecting a very challenging
operating environment that is affecting
business and investment decisions.
• Confidence levels in the manufacturing
sector remain below those of the
overall economy, highlighting the
difficult conditions the sector faces both
in domestic and international markets.
• The weakness of consumer spending
is reflected by low confidence levels in
the retail sector.
• Moreover, consumer confidence levels
at present are below those recorded
during the global financial crisis and
recession in 2008/09.
• Confidence levels are likely to have
been dealt a serious blow by recent
political developments and credit rating
downgrades.
0
10
20
30
40
50
60
70
80
90
100
Q1 Q32007
Q1 Q32008
Q1 Q32009
Q1 Q32010
Q1 Q32011
Q1 Q32012
Q1 Q32013
Q1 Q32014
Q1 Q32015
Q1 Q32016
Q1
Net
bala
nce
SA economy
Manufacturing
Retail sector
Source: IDC, compiled from BER data
Neutral
Extreme confidence
Extreme lack of confidence
Business confidence in the SA economy,
manufacturing and the retail sector
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32
Leading business cycle indicator improved, but
trend-reversal is likely
• The outlook for the SA economy had
improved towards the latter part of
2016, as reflected by the 34-month
declining trend in the SA Reserve
Bank’s leading indicator having come
to an end.
• The lower turning point for the leading
indicator was at 91.9 points in April
2016, the lowest since November 2009.
• The subsequent recovery was fairly
rapid, with the February 2017 reading
of 98 pts being the best in 3 years and
thus providing some optimism over the
economy’s future performance.
• However, considering the potential
implications of recent developments,
particularly associated with increased
political uncertainty and the concerns
over the economic impact of credit
rating downgrades, a trend-reversal is
likely.
50
55
60
65
70
75
80
85
90
95
100
105
110
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Ind
ex
: 2
01
0 =
10
0
Source: IDC, compiled from SARB data
Downward phases in the business cycle
The leading business cycle indicator
Recession: 1990 - 1992
Recession: 2008/09
Subdued growth: 1997 - 1998
Subdued growth: 2014 - 2016
Strongest economic growth period since 1960s
Longest downwardphase in the business cycle on record:
51 months
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33
Economic outlook:
Prospects have become more uncertain
• The much anticipated economic recovery has been clouded by recent developments as the credit ratings
downgrades could jeopardise a rebound in economic growth.
• Low business and investor confidence is likely to affect production activities and investment decisions.
• Businesses that are mostly reliant on domestic demand could be affected by the following anticipated
trends:
‒ Subdued household demand for consumer products and services in general, with spending on
durable goods to be most affected.
‒ A continuation of weak private sector fixed investment will impact adversely on those sectors
whose activities are largely reliant on the investment cycle.
‒ General government expenditure, both consumption and capital spending, to expand at a modest
pace, impacting on the procurement of goods and services from local enterprises.
‒ Lower than anticipated demand for goods and services from SOEs as they contain operational
expenditure and postpone some of their capital expenditure projects.
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34
Economic outlook: (continued)
Prospects have become more uncertain
• However, the improved economic outlook being anticipated for some regions/countries elsewhere in the
world over the medium- to longer-term, including a higher growth momentum for many African
economies, the United States and the UK, should provide market access opportunities.
• Companies, whether already exposed to these markets, or those attempting to expand their global
reach to these countries/regions, should prepare themselves to partake in such an up-tick in expected
demand by investing timeously in additional production capacity, if required, whilst also having their
marketing strategies in place.
• Due to a relatively weak currency the price competitiveness of local companies should be improving, in
the process providing opportunities for import substitution / localisation in various industries.
• A concerted effort is required by all stakeholders to ensure that the South African economy returns to a
much higher, sustained, job-rich, and a more inclusive growth trajectory.