South African economy: recent economic developments and ...savinyls.co.za/files/files/09h30 Gerhard Kuhn (2)(1).pdf · declined and consumer spending moderated. ... Source: IDC, compiled

Southern African Vinyls Association

conference

7 June 2017

South African economy:

recent economic developments

and growth prospects

Gerhard Kuhn

2

Global economic developments

3

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.

-1

0

1

2

3

4

5

6

% C

han

ge (

y-o

-y)

Source: IDC, compiled from IMF data

Global growth performance and the economic outlook

Forecast

Long-term average

4

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

-5

0

5

10

15

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)

Manufacturing production in the USA

Source: IDC, compiled from Federal Reserve data

0

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 (%)

5

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

-4

-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

6

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.

10

15

20

25

30

35

40

45

50

55

60

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

-15

-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

7

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.

-25

-20

-15

-10

-5

0

5

10

15

20

25

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

8

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


9

South Africa:

Recent economic developments

10

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.

-10

-5

0

5

10

15

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

11

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.

0

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


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

12

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


Q1 2017

13

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.

6

7

8

9

10

11

12

13

14

15

16

65

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

14

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)


15

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

-20

-15

-10

-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

16

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

-25

-20

-15

-10

-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


Manufacturing performance by sub-sector

Note: Growth rates are annualised

17

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.

-80 -60 -40 -20 0 20 40 60 80

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)

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.

-40

-30

-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


19

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


Fixed investment expectations by the manufacturing sector

(outlook in 12 month's time)

Note: data only available for Q1 & Q3Q1 of 2017

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


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


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


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


Expected

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*


Jan to March

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

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

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

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

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

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

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


Inflation target band

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


Latest data: Q1 2017

Employment trend in select sectors

30

South Africa:

Economic outlook

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


Neutral

Extreme confidence

Extreme lack of confidence

Business confidence in the SA economy,

manufacturing and the retail sector

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


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

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.

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.

Documents

South African economy: recent economic developments and ...savinyls.co.za/files/files/09h30 Gerhard Kuhn (2)(1).pdf · declined and consumer spending moderated. ... Source: IDC, compiled