Darryl GobbettEconomist, Adviser & Commentatordarrylgobbett@adelaide.on.net

SA Business Conditions and Budget ForecastsFriday 19 June 2015

Master Builders SA State Budget BreakfastThe Playford Adelaide Hotel120 North Terrace Adelaide SA

Disclaimero Any advice contained in this presentation is general advice based on the investment merits of the security or

issuer alone without taking into account any person’s investment objectives, financial situation and particular needs.

o The information contained within this presentation was compiled by Darryl Gobbett and he provides no warranty regarding the accuracy or completeness of the information. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by Darryl Gobbett who assumes no obligation to update this presentation after it has been presented. Except for any liability which by law cannot be excluded, Darryl Gobbett disclaims all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information.

o Before making any investment or other decision based on such advice, the recipient must decide whether it is appropriate to his/her needs or seek specific professional advice.

The Global and National Trends: Implications for SA BusinessGlobal economy looking better than expected

Spending, Output and Profits higher than 2007 peaks Most major and developing economies growingPublic Sector deficits shrinking faster than expected – Australia is an exceptionCapital markets recovery continues, perhaps too exuberantly Rising view that 2014 Deflation fears were overdoneCash Interest rates to stay very low but Bond yields now risingAccelerating Pace of Technological, Demographic, Economic, Industrial & Financial Change

Increasingly severe questioning of what adds value in a business?How sustainable is the value added proposition?How well equipped are the Board, Management, Labour force, Suppliers, Investors etcIs Adaptivity now more important than Strategic Planning?How prepared are SA Businesses and Governments?

The Global and National Trends: Implications for SA Business2015/16 likely to continue Australia’s recession free growth since 1991

Sharp drop in commodity prices but likely to have bottomed outImpacts on profits, tax and investment

$A still higher than policy makers wantIn relation to productivity, sense of entitlement, industry costs

Issue of how the domestic economic and industrial structural change progressesHouseholds still big savers and wages growth slowingBusiness non-mining investment not lifting as fast as hoped Public Infrastructure, Housing and Exports main contributors to growthLow $A helping Tourism and Education

Interest rates staying very low well into 2016Tax mix increasingly seen as problem for growth, productivity and public finances

Global Growth Uneven, Moderate but ContinuingSource: IMF World Economic Outlook, April 2015

Over 75c+ of each $1 of global growth is now from Emerging Economies

Output Growth, Inflation Adjusted, % pa2009 2010 2011 2012 2013 2014 2015F 2016F

United States -2.6 +2.4 +1.8 +2.8 +2.2 +2.4 +3.1 +3.1Japan -6.3 +4.5 -0.8 +1.4 +1.6 -0.1 +1.0 +1.2Euro Area -4.1 +2.0 +1.4 -0.7 -0.5 +0.9 +1.5 +1.6China +9.2 +10.4 +9.2 +7.7 +7.8 +7.4 +6.8 +6.3India +6.8 +10.1 +6.8 +3.2 +6.9 +7.2 +7.5 +7.5Indonesia +5.7 +6.2 +6.5 +6.2 +5.3 +5.0 +5.2 +5.5ASEAN 5 +1.7 +7.0 +4.5 +5.4 +5.2 +4.6 +5.2 +5.3Brazil -0.6 +7.5 +2.7 +1.0 +2.7 +0.1 -1.0 +1.0

World Output -0.5 +5.1 +3.8 +3.1 +3.4 +3.4 +3.5 +3.8Inflation: Advanced Economies

Emerging Economies+0.1+5.2

+1.5+6.1

+2.7+7.2

+2.0+6.1

+1.4 +5.9

+1.4+5.1

+0.4+5.5

+1.4+4.8

$US 6month LIBOR 1.1% 0.5% 0.5% 0.7% 0.4% +0.3% +0.7% +1.9

Overseas Monetary Policies Remain Very StimulatoryAim of most Central banks is to Increase Inflation to 2% Cash Rates:

Financial Repression: Force savers to spend European Central Bank and Bank of Japan using Quantitative Easing Cash and Bond Rates at record low levels

Official Cash*: ECB -0.2%; Japan 0.1% Bank of England 0.5%, USA 0.25% * 10 Year Govt Bonds*: UK 1.89%, Germany 0.63%, France 0.92%, Japan 0.39%,

Keep retail deposit and loan interest rates very low: USA eg Mortgages*: 30 Year fixed 3.92%, variable 3.36%; New car loan 5 years at 2.93% *CMA 0.35% (>$50,000), 5 year CD 1.45%, 10 year Bonds 2.136%

Quantitative Easing To continue in Europe and Japan.

Buying long term public and private debt Additional offset to Budget deficit reductions

Bond rates moving up in anticipation of USA cash rate rise and 2014 overdone fears of European deflation

P 6* Wall Street Journal Market Data Centre, 15/5/2015

P 7

$A down more than expected. But likely to stay higher than RBA or Govt want

The Australian Economy: The Federal Government’s Forecasts% change, inflation adjusted(Italicised are DG forecasts)

10/11 11/12 12/13 13/14 14/15f 15/16f 16/17

Household Consumption 3.1 3.2 2.0 2.5 2.5 2.75 3.25

New Motor Vehicle Sales, m* 1.001 1.03 1.14 1.12 1.2 1.35 1.45

Private Investment - Dwellings 3.0 -3.6 -0.1 5.1 6.5 6.5 4.5No. of Private Dwellings Started (‘000)* 154 141 159 178 200 215 220

Business Investment – Mining Business Investment – Non Mining

34.93.2

74.71.7

13.6-9.7

-7.0-3.7

-15.52.0

-25.54.0

-30.57.5

Private Final Demand 3 6.2 2.8 0.9 1.25 1.25 2.25

Public Final Demand 3.4 2.3 -1.3 1.6 1.25 1.5 1.5

Source: Australian Government 2015/16 Budget Paper No. 1* DG Forecasts

Influence of Commodity Prices on Profits

Source: ABS Cat 5206, Australian National Accounts Mar Qtr 2015, 3/6/2015

Net Worth has improved again But Households likely to remain Big Savers

Source: Reserve Bank Chart Pack May 2015

Source: Reserve Bank of Australia Chart Pack June 2015

Spending and Borrowing likely to be in line with Income growth

Source: Reserve Bank Chart Pack May 2015

Source: Reserve Bank of Australia Chart Pack June 2015

The Australian Economy: The Federal Government’s Forecasts

10/11 11/12 12/13 13/14 14/15f 15/16f 16/17f

Consumer Prices, % change to June qtr 3.6 1.2 2.4 3.0 1.75 2.5 2.5

Wage Price Index, % change to June qtr 3.8 3.7 2.9 2.5 2.5 2.5 2.75

Terms of Trade, % change +20.6 +0.4 -9.8 -3.7 -12.25 -8.5 0.75

Current Account Deficit -$billion -% of GDP

43.73.1

49.33.3

59.03.9

48.73.1

483

583.5

482.75

Source: Australian Government 2015/16 Budget Paper No. 1

RBA Forecasts for Inflation and Growth - $A still higher than earlier expected - Inflation to lower end of the 2-3% range

Source: RBA May 2015 Statement on Monetary Policy

Source: Reserve Bank of Australia Statement on Monetary Policy May 2015

Domestic Inflation and Inflation Expectations Low, Overseas factors Dampening Impacts of Lower $A

Source: Reserve Bank Chart Pack May 2015Source: Reserve Bank of Australia Chart Pack June 2015

Markets Expecting one more Cash Rate Cut

Longer Term Rates at cycle lows. TDs could still go lower.

The South Australian Outlook Small, Regional Economy: 1.7 million people

Smaller than Western Sydney or Brisbane, Irrelevant nationally Population older & ageing faster, sicker, less educated or skilled

Housing, retail, tax base, attitudes, national representation No Exports, No growth Industry structure and policy makers still adapting from 1960s, let alone for 21st C challenges

No private sector employment growth since 2010 More international competition and More opportunities

Public finances rely on Federal Support Lower per capita income, slower population growth Large Public Sector, Higher taxes, High Deficits & Growing Debt for decades Large and Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Growing Debt

ALP sees big public sector and high taxes as politically acceptable Liberals not a small government party

Likely less support from Federal Govt and Other States Don’t criticise the Government but it is starting to recognize change is needed

Royal Commission on Nuclear Fuel Cycle is a beginning

Sources of Employment Change by Sector

Where we are headed: SA Population Projections

Implications for the Economy and BusinessPrime working age population 20–59 years to rise 37,200 to 2021 (0.4% pa)

Assumes Net Overseas Immigration of 12,000 pa, ie 120,000 to 2021 If we slow migration, Working Age population falls over next decade To get your businesses to grow you will need:

Increased workforce participation, ie more old people and females working• Participation of Males is trending down: late 70s peak 80% to current 68%• Females has risen from late 70s 45% to current 56%

Ongoing higher productivity growth – recently flat to lower nationally Increasing overseas sourced workers and outsourcing

Ageing population By 2030 those over 60 will exceed those 0 – 19, or 20 – 39, or 40 – 59 Likely bigger market for Last Home Buyers than First Home buyers Land, Staffing, Training, Investment, Land and Cost issues for institutional aged care Health care issues for Baby Boomers wanting to stay mobile longer Education, Entertainment, Employment, Politics, Tax, Travel More expected of the public sector but Boomers not willing to pay

Metropolitan Home Prices Flat, Activity Should LiftAuction clearance rates March 2015 61%Dec 2014 59%Sept 2014 66%June 2014 63%March 2014 61%March 2013 55%March 2012 41%March 2011 48%March 2010 64%For 2014•Employment flat, population to grow •Interest Rates on hold •Vacancy rates should steady•High land costs continue•Funding constraints on investment housing•Dominance of the big banks impacting competition •First Home Buyer Affordability and overall confidence are the big issues

Residential Building Activity Needs the First Home Buyers to Return

Could be Some Loan Size Fatigue for FHB

Food Turnover

Retail Turnover

Retail Turnover

Retail Turnover

Retail Turnover

SA New Motor Vehicle Sales

SA Budget: Priorities, Themes & Issues Quotes from the Treasurer’s Budget Speech“Most comprehensive state tax reform in South Australia’s history“

“Jobs are the centre piece”

“Our tax reform package is about rewarding activity, the doers, the risk takers, the small business owners, entrepreneurs, our miners and explorers, the start-ups, new and long established family businesses, our farmers and primary producers, our retailers, our developers, our service industry, corporates large and small and most importantly our manufacturers.Every single business and enterprise in South Australia whether, big or small, can benefit from these changes. This government’s tax reform, stands our state out as a beacon for business investment.“

Big Picture tax reform is too hard and to be part of National Tax Reform Payroll Tax, Online gambling tax No annual land tax on family home and No road tolls

No mention of Budget Deficits in the Speech GST relativity changes and national economic recovery are the saviours

SA Budget: Priorities, Themes & Issues Tax changes are broad but not deep From 1/7/2015

Abolish Share Duty Abolish Stamp Duty on non-real property transfers Expand stamp duty concession for exploration tenements to include retention tenements Expand eligibility criteria for corporate reconstruction relief Abolish River Murray Levy and Hindmarsh Island Bridge Levy Extend small business payroll tax rebate to 2015/16 Increase land tax thresholds from $316,000 to $323,000.

From date of assent of changes to Stamp Duties Act Expand stamp duty exemption for farms transferred between family members Extend definition of family groups to include defacto couples Provide exemptions to replace a number of ex-gratia stamp duty relief schemes

From 1 July 2016 reduce by 1/3 stamp duty on non-residential real property transfers with further 1/3 reductions from 1 July 2017 and 1 July 2018

From 1 July 2018, abolish stamp duty on: Non-residential real property transfers Transfers of units in unit trusts Transfers of mining leases and tenements

o Targeted economic stimulus funding including Spending on attracting tourists, investors and conventionerso Upgrade arts centres in Whyalla, Port Pire, Mt Gambier and Renmarko Electric and Hybrid cars to be preferred CBD mode of transporto Northern Economic Plan

• Northern Food Park - $2m• Ageing social housing stock renewal - $25m• Upgrade schools and children’s centres - $10m• New road for Gawler East housing development - $55m

o $10.8 b investment program over 4 years – mostly already committed• $260.8m on health capital works new funding

o Addition and bringing forward funds for Housing Trust refurbishment and new builds - $65m o New cost of living concessions for pensioners and low income earners - $36m pao Children at risk – reforms spending

SA Budget: Priorities, Themes & Issues

Expectations of National Recovery Central to Deficit Reductions for GST increasesSA GSP continues to decline relative to rest of Australia

Sources:SA Govt 2015/16 Budget Statement Paper No 3Aust Govt 2015/16 Budget Paper No.1

Now Surpluses as Far as the Eye can see!?Source: SA Govt Budget Statement Budget Paper No.3 2015/16

How is this So?Source: SA Govt Budget Statement Budget Paper No.3 2015/16

Large Dividend received from the Motor Accident Commission ($852.7m)

Otherwise Net Operating Balance would have been in deficit by around $850m

Above Budget Employee expenses as FTE grew instead of falling.

Depreciation expenses fell due to realignment of depreciation and amortisation budgets!!

Adverse Impact on Unfunded Super of very low interest rates

Main Revenue Sources: Taxes ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

10/11 11/12 12/13 13/14 14/15 15/16b 16/17f 17/18f 18/19fPayroll Growth %

9515.7%

1,0106.2%

1,0776.6%

1,0790.2%

1,114 3.2%

1,172 bud

1,1846.3%

1,2535.8%

1,3235.6%

1,3884.9%

ConveyancesGrowth %

7940.5%

686-13.6%

778 13.4%

7931.9%

90714.4%925 bud

9100.3%

9322.4%

9340.2%

9481.5%

Land Tax (Private)Growth %

352-1.4%

3602.3%

347-3.6%

345-0.6%

3470.6%

352 bud

3583.2%

3723.9%

3843.2%

3952.9%

ESL on Fixed PropertyGrowth %

996.5%

1034.0%

1030%

1041.0%

19082.7%190 bud

2078.9%

2111.9%

2183.3%

2232.3%

Gambling 404 411 422 388 388404 bud

408 419 442 451

Insurances 371 399 429 435 446 441 457 475 493

Motor VehiclesGrowth %

4956.7%

5092.8%

5457.1%

5677.2%

5975.3%

6183.5%

6373.1%

6583.3%

6803.3%

Other Taxes 365 376 403 374 405 417 432 446 460

Total Taxation 3,831 3,854 4,104 4,085 4,394 4,543 4,713 4,880 5,038

o Payroll Tax:• To grow around 3% pa in real terms• Employment growth of 1% pa and Wages growth 2-3% pa• Bracket creep on nominal wages growth is biggest contributor

o Property Taxes• Impacted by phasing out of duty on transfers of non-residential real property

• Property values expected to grow broadly in line with long term growth in nominal household incomes• Land values relevant to Land Tax: 4% for 16/17, 3.3% for 17/18 and 3% for 18/19 • Property transfers expected to grow “moderately” and return to long term trends

o Gambling affected by slower than expected gaming revenue. o Insurance taxes impacted by slower than expected growth in general insurance premiumso Motor vehicle taxes growing about in line with population

• Assisted by increased share of 3 month registrations• Stamp duties lower on transfers as new and used car prices fall

Tax Forecast Issues

Tax Effort Source: SA Govt Budget Statement Budget Paper No.3 2015/16

You will all be pleased to know “ In terms of tax revenue per capita, South Australia is a relatively low tax jurisdiction…” and this will improve further with the tax reforms announced

Main Revenue Sources: Other ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

10/11 11/12 12/13 13/14 14/15e 15/16 bud 16/17est 17/18 est 18/19 est

Current Grants

GST Revenue Grants% change

4,296.1+6.0%

4,239.2-1.3%

4,463.1+5.3%

4,618.2+3.5%

4,986.3+8.0%

5,517.5+10.7%

6,077.0+10.1%

6,460.2+6.3%

6,648.4+2.9%

National Partnership Grants 571.8 726.6 592.5 563.5 555.8 464.8 446.8 369.8 613.6

Specific Purpose Grants 1407.7 1,430.8 1,476.2 1,485.7 1,643.9 1,768.6 1,850.8 1,914.4 1,994.4

S.P. Grants for on-passing 735.8 863.3 689.1 729.6 770.1 815.1 866.3 908.9 948.8

Other Cont & Grants 164.4 157.1 153.4 245.1 141.8 142.1 143.1 144.0 144.7

Capital Grants

National Partnership Grants 734.7 995.8 156.8 68.8 100.0 348.4 448.6 325.9 184.6

Specific Purpose Grants 115.7 117.4 118.9 103.6 93.3 93.9 94.7 95.5 96.3

Other Capital Cont & Grants 221.3 68.5 37.4 40.1 11.5 11.8 8.1 8.1 8.1

Total Grants 8,247.5 8,601.7 7,870.9 7,854.6 8,302.8 9,162.3 9,935.3 10,226.7 10,638.9

GST Relativity UpdateSource: SA Govt Budget Statement Budget Paper No.3 2015/16

Increased GST share for SA from 2015 Review. SA now gets about $1.5b more pa than if distributed purely on a per capita basis.

Main Revenue Sources: Sales of Goods and Services ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

Main Revenue Sources: Other ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

Royalties below budget in 2014/15 due to lower than expected iron ore and oil and natural gas prices.

Fees and Charges

Fees and Charges

Spending by Function ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

Investment Spending ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16 $10.8 billion to be invested over next 4

years:• $3.3b in health – mainly buying the

new RAH• $1.4b on roads: mainly North-South

Road corridor• $353m on public transport• $216m on education facilities• $197m on Festival Centre precinct• $1.7b on water infrastructure

• This seems to be SA Water’s normal capital spend

Staffing General Government Source: SA Govt Budget Statement Budget Paper No.3 2015/16

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Employee Expenses $m Growth %

6,4002.9%

6,7705.0%

6,930 Bud

7,105 actual

+4.9%

7,155 Bud

7,258 actual

+2.2%

7,268 Bud

7,425 actual

+2.3%

7,271 (14/15)7,512 (15/16)

+1.2%

7,347 (14/15)

7,609 (15/16)

1.3%

7,554 (14/15)

7,804 (15/16)

+2.6%

Employee Nos FTE 30 June Growth %

80,254 82,214

+2.4%

81,731

-0.6%

81,161

-0.3%

80,018 14/15b

81,665 15/16b

+0.6%

78,214 14/15b

80,146 15/16b

-1.9%

77,619 14/15b

79,060 15/16b

-1.4%

77,437 14/15b

79,024 15/16b

0%

At 30 June 2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Employees in SA Public Sector FTE 69,670 76,720 78,211 79,715 81,270 83,885 84,900 84,882 85,727 86,257 85,371

Employee Persons Per 1000 SA Population

55.1 58.5 59.8 60.3 61.0 62.5 62.2 61.9 62.6 62.4 61.3

Employee Persons Per 1000 Employed South Australians

121 122 124 125 124 128 127 125 129 129 128

Ratio of Public Sector Full Time Adult Ordinary Time Earnings to Private Sector Full Time Adult Ordinary Time Earnings (May)

Victoria

123%

113.3%

119.5%

111.5%

120.4%

111.3%

118.4%

108.2%

117.1%

107.3%

115.4%

108.9%

118.6%

111.3%

118.3%

114.8%

122.1%

114.6%

120.9%

116.5%

117.4%120.4% (Nov 14)

116.1116.8% (Nov 14)

Employees in SA Public SectorSource: SA Public Sector Workforce Information June 2014 Table 2, ABS cat.6302.0

Ongoing Fall In Financial Net WorthSource: SA Govt Budget Statement Budget Paper No.3 2015/16

Economic Forecasts: South Australia Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.4 3 4.3 4 4

New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 70,500 73,000 73,000

Business Investment, %, Current Prices- Plant & Equipment 0.1 1.7 -1.5 9 -17.5 -2.2 1 -8 0- Non Residential Construction 18.7 -6.8 17.6 13.5 15.1 -1.3 2 0 -15

- Cultivated Bio Resources & Intel Property -7.4 -2.7 12.4 6.8 4.9 3.5 0 4 4

Public Investment 33.6 54.9 -12.5 -5.7 -2.5 -3 -25 15 10

Unemployment Rate % (June, Trend), SA Govt F'cast year average

5.6 5.4 5.3 5.6 6.3 6.8 6.8 6.5 6.5

Actuals ABS; forecasts DG

0.7

3

10,365 10,500 10,500

0.3 -0.4 -0.6 1 1

2016/17f

1.3 1.5 1.5 1.5

0.8 0.7

8,187

2008/09 2009/10 2010/11 2011/12 2012/13

Employment Growth % (Year to June, Trend) 0.7 1.2 1.6 -0.6

2 34.6 6.7

Population Growth % (Yr to June) 1.3 1.1 0.8 1 0.9 0.9

Private Avg Weekly Earn % (FTAOT, (Yr to May) 7.4 0.7 4.5 3.2

2013/14 2014/15e

0.9

2015/16f

10,132

GSP(Total Output) % (Real) 2.3 1.1 2.4 1.5

Private Dwelling Commencements 11,676 11,061 10,058 8,653

Business Confidence in SA Sensis Small and Medium Business Index, March qtr 2015 (Interviewed March 2 to April 9)

Business Confidence in SA Sensis Small and Medium Business Index, March qtr 2015 (Interviewed March 2 to April 9)

SA Firms’ Expectations are Improving off a very low Base Sensis Small and Medium Business Index, March qtr 2015

South Australian Growth: Where from and to?Gross Value Added, ABS Cat 5220.0

1989/90 - 1999/00

1999/00 - 2005/06

2005/06 - 2013/14

2013/14 Share of State Gross Value Added

excluding Dwellings,

Current Prices

Health care and social assistance 3.1% 3.9% 3.2% 10.1% Supportive DemographicsManufacturing 1.7% -1.3% -0.1% 9.1% Tough, shrinking, changingFinancial and insurance services 3.7% 3.2% 5.0% 8.4% Oligopoly, funds managementConstruction 2.9% 5.1% 4.7% 8.4% Housing, public infrastructurePublic administration and safety 3.6% 3.2% 1.8% 7.1% Slowing further on Budget restraintsAgriculture, forestry and fishing -0.5% 7.2% 7.2% 6.1% Overseas demand lifting furtherProfessional, scientific and technical services 2.9% 4.0% 4.5% 5.9% Change, Outsourcing, RegulationEducation and training 1.9% 1.4% 1.8% 5.9% Should lift on overseas demand with lower $ARetail trade 3.3% 4.5% 2.4% 5.7% Growing but changingTransport, postal and warehousing 3.0% 2.6% 2.6% 5.6% Growth with online buying, inbound tourismWholesale trade 2.8% 3.4% 3.1% 4.8% As per Retail Trade but slowerElectricity, gas, water and waste services -1.3% 4.4% 0.8% 4.4% Waste services main growth areaMining 1.8% 1.0% 6.5% 4.1% Increasing exports. Investment to rise in 3-4 years

Average of Annual Rates, inflation adjusted

Summary Budget outlook saved by increased GST relativities

Recognition of economic weakness now and to come Tax changes are welcome but hardly scale of what was expected

Lack of recognition of cost to employment and profits of Payroll Tax Most of SA’s taxes unlikely to provide real growth Dependence on GST and kindliness of other States and Feds is a risk

Spending Increasing rigidity with growing real spending on Health and Education Public service employment continues to grow Patterns of spending reducing flexibility and capacity for tax reform and industry support

Risk of Credit rating being cut. Being saved only by Federal Govt backing

The SA economy is struggling with structural and cyclical changes The focus has to be outward, on being more competitive and adaptive and on strongly lifting productivity Budget not brave enough on those issues