The state of the South African economy With perspectives on agriculture & the status of South Africa s sovereign bonds

Transcription

1 The state of the South African economy With perspectives on agriculture & the status of South Africa s sovereign bonds The strategic importance of agriculture With reflections on the state of the economy Dr Roelof Botha Dr Roelof Botha

2 Notes on the global outlook & the exchange rate

3 Change is the only constant EU under threat from Brexit to Frexit? Nationalism on the rise in the northern hemisphere Consolidation of democracy in Brazil India s economy outperforming China Negative real interest rates in high-income countries Trump vs. the rest of the world Commodity slump hammers sub-saharan Africa Severe weather patterns likely to persist Africa s population continues to rise Food insecurity prevails Heightened international terrorism

4 SA not alone in facing lower growth - average real GDP growth rates before and after recession (Source: IMF) % ' ' Emerging Europe Other advanced US Euro Area Japan

5 Economic growth forecasts selected countries (Source: IMF) % Russia UK US Sub-Saharan Africa China India

6 Gold price and the US$/rand exchange rate (Sources: SARB; Bloomberg; Bullionvault; own calculations) 130 Index; Q = Gold price $/rand exchange rate 60 Q3'12 4 Q1' Q1' Q1' Q1'

7 Structural decline in average S&P 500 dividend yield (Sources: Multipl.com; R Shiller) 6 % ' ' ' ' ' ' '

8 Increase in average price/earnings ratio of S&P 500 companies (Sources: Multipl.com; R Shiller) 26 Ratio ' ' ' ' ' ' '

9 Real effective exchange rate (REER) of the rand starting to eliminate undervalued position (Sources: SARB; own calculations) Foreign currency unit/r; Index; 2010 = REER Avg. (93.32) Feb'17

10 The Southern African economy Agriculture focus Prospects for sustained growth

11 Number of SA households in the expenditure category of R650k per annum (avg.) (Sources: Stats SA; own calculations) Number Indian Coloured White Black

12 % change in average household income 2005 to % White Indian Coloured Black

13 Land ownership in SA according to land audit verification survey (Source : Dept. of Land Reform) Municipality 3.9 Public entity 0.5 Organisation 0.5 Traditional 5.2 Government Dept. 5.8 Private 0.9 Unknown 3.6 Total 20.4m ha

14 Land ownership in SA according to land audit booklet (Source : Dept. of Land Reform) Unaccounted 8.4 Privately owned 96.6 State owned 17.1 Total 122.1m ha

15 Land ownership estimate (desktop research) million hectares (Sources : Dept. Land Reform; E Pringle; Sanparks ) Private sales - blacks 2 Homelands 16.4 Municipalities 3.6 Unknown 8.4 National parks 4.1 State land & forests 12.2 Provinces 3.1 Land claims 7.4 Private 64.8 Total 122m ha

16 Du Pont food security index 2016 BRICS, Africa & Europe Europe (average) Brazil Russia China South Africa Index India Africa (average)

17 Aspects of current food insecurity in Southern Africa (Sources: SADC - media release June 2016; own research) 41 million people affected (23% of the rural population) 21 million of these require urgent assistance 2.7 million children suffering from severe acute malnutrition Drought-related livestock deaths estimated at more than 1 million On-going depletion & degradation of water sources & reservoirs Cereal harvest shortfall of 9.6 metric tons in 2016 Currency depreciation exacerbating rising food inflation Food insecurity projected to peak in mid 2017

18 Key areas of corporate social investment spending by agribusiness in SA 1. Farm worker development 2. Education programmes & facilities 3. Personal upliftment programmes 4. Bursary schemes for non-employees 5. Training programmes for non-employees 6. Healthcare programmes 7. Provision of recreational facilities 8. Housing (Source: PwC) 9. Provision of basic infrastructure

19 Composition of GDP 2015 R billion (Source : Stats SA ) Mining Finance & bus. Ser Construction Personal ser Trade & catering (Total R3.6 trillion) Manufacturing Govt Transport & comm Agriculture - 84 Elec. & water - 130

20 Composition of household expenditure 2015 R billion (Source : SARB) Commun Transport Recreation Education - 84 Health Food H/hold equipm Housing & utilities Alcohol Clothing (Total R2.4 trillion)

21 Estimated output (turnover) for all agricultural activity In SA Agriculture Value Added R84 Retail trade R347b Wholesale trade R345b Secondary Agriculture (Processing) R391b Total Primary Agriculture Output R244b Finance R155b Communication R63b Meat, fish, fruit & veg Dairy Grain mills Beverages Tobacco Sawmilling Leather products Other food Total linked turnover R1.65 trillion Transport & Construction R26b Restaurants & caterers R43b Electricity & Water R39bn

22 Primary agriculture trade balance (R91b surplus since 2013) (Source: SARS) 70 Rb Exports Imports

23 Secondary agriculture trade balance (R39b surplus since 2013) SARS) (Source: 50 Rb Exports Imports

24 Top-10 agriculture export trade growth partners in Africa (annual avg ʹ15) (Sources: SARS; own calc.) Algeria Congo Zambia Nigeria Mozambique Malawi % Seychelles Angola DR Congo Mauritius

25 Agriculture exports to SADC 2010 & 2016 (at constant 2015 prices) (Sources: SARS; own calc.) 24 Rb Oils & fats Animals Veg. & fruit Prep. Food

26 Opportunities & growth drivers for the development of the agriculture sector (selection) Positive population growth Sustained growth in per capita incomes Strong regional growth Diversification of crops & products Alignment with diet revolutions Beneficiation Improving food security in sub-saharan Africa High ratio of operating surplus to value added Cooperation with local authorities in maintaining infrastructure Agri-tourism

27 Key arguments supporting a sovereign credit downgrade

28 The Zuma era s dismal scorecard for South Africa s global competitiveness (Source: WEF ) Indicator Decline Govt. procurement - hi-tech products Wastefulness of govt. spending Pay & productivity Favouritism by govt. officials Diversion of public funds Public trust in politicians Quality of primary education Burden of govt. regulation Government debt Cooperation between labour & employers

29 Speculation over downgrade fuelled by the increase in total public sector gross debt as % of GDP since the recession %

30 while the rand/$ exchange rate was on a 12-month roller-coaster ride (Sources: Oanda; own research) R/$ US$ strength 16.5 Nene dismissal Hawks/Moyane vs Gordhan Strong US economic data Dec Gordhan appointment 13- Dec 17- Dec Gordhan budget 16- Jan US to maintain low rates 25- Feb 29- Feb 04- Apr 20- May Brexit Local elections & surge in gold price Rise in China iron ore imports 24- Jun 28- Jun Post-Brexit fears Hawks vs Gordhan Aug 02- Sep Gordhan charged Charges against Gordhan dropped 22- Sep 12- Oct Gold price slides 02- Nov SA bond status retained 18- Nov 30- Nov

31 and SA s leading business cycle indicator continues to lag behind that of key trading partners (Source: SARB) Index, 2010 = US Other countries SA Q2'16 Q3'16 Q4'16

32 whilst a 24-quarter positive GDP growth trend comes to a halt in Q (Source: Stats SA) 4.5 Year-on-year % Q1'08 3 Q1'09 3 Q1'10 3 Q1'11 3 Q1'12 3 Q1'13 3 Q1'14 3 Q1'15 3 Q1'16 3-3

33 caused mainly by the commodity price declines between 2011 and 2015 (Source: World Bank) Cotton Iron ore Sugar Coal Maize Platinum Bananas % decline Aluminium Oranges Gold

34 The repo rate and inflation inconsistency in gap tolerance (Sources: Stats SA; SARB) % Repo rate CPI 3.9 Q2' Q1' Q1' Q1' Q1' Q2'16 3 4

35 Money market interest rates in South Africa currently amongst the highest in the world (nominal) (Source: EIU) South Africa India Mexico Malaysia China Australia Poland US Hong Kong UK % Japan Euro area

36 Why SA s sovereign debt remains at investment grade

37 Ratings agencies often ignore a number of fundamental indicators, such as the recovery of taxation revenue (at constant 2015 prices) 1000 Rb

38 and the existence of a highly diversified composition of taxation revenue by emerging market standards (FY 2016/17- Rb) Total R 1.2 trillion Individuals 443 Fuel & elec. 73 Companies 200 Skills levy 18 Excise duties 44 Dividend tax 25 Property tax 16 Customs duties 55 VAT 301

39 furthermore, government s borrowing requirement as % of total gross debt continues to decline (fiscal years, National Treasury forecasts for ) %

40 as well as, arguably, the most important gauge of a country s creditworthiness the total public debt/gdp ratio, where South Africa compares favourably with most key trading partners USA Singapore UK Germany India Brazil Malaysia South Africa China Australia % Mexico Russia

41 Fiscal stability is also reflected in a budget deficit/gdp ratio that is only marginally above 3% and forecast to decline further % (fiscal years) '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '

42 According to the World Economic Forum, South Africa remains the most competitive large economy in sub-saharan Africa - out of 144 countries Mauritius South Africa Ranking Rwanda Botswana Namibia Ivory Coast Zambia Kenya Gabon Ethiopia

43 South Africa possesses balance of payments stability, due to a huge financial account surplus (Source: SARB; Note: 2016 = preliminary) Financial account R billion 0-50 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ' Current account -250

44 Commodity price slump showing signs of bottoming out (Source: World Bank) Indices; 2010 = 100 Energy Agriculture 70 Metals & minerals Nov'16

45 Some more reasons for modest optimism The recession is over prepare for higher growth Dr Roelof Botha

46 South Africa has some stunning competitiveness strengths to build on (Source: WEF ) South Africa s highest-ranked competitiveness indicators (selection out of 138 countries) Auditing & reporting standards 1 Soundness of banks 2 Financial services meeting business needs 2 Regulation of securities exchange 3 Efficiency of legal framework 9 Quality of air transport infrastructure 10 Strength of investor protection 14 Quality of management schools 21 Capacity for innovation 25 Domestic market size 27

47 South African households have a lower debt/disposable income ratio than most key trading partners Australia Sweden South Korea UK Japan US France % Italy Germany South Africa

48 Total assets of SA long-term insurers reaches new record high R trillion

49 Tourist arrivals from overseas (Jan to September) (Source: Stats SA) Million

50 Real retail trade sales regularly reach new record highs, also in Q Index; 2012 = Q1' Q1' Q1'

51 explained by continued progress with employment creation in South Africa (2.1 million jobs created since Q1 2010) Source: Stats SA Million Q2'09 4 Q2'10 4 Q2'11 4 Q2'12 4 Q2'13 4 Q2'14 4 Q2'15 4 Q2'16 4

52 South Africa s real GDP per capita has reached a structurally higher level & the country is classified by the UN as upper middle income" Source: SARB R 000 (constant 15p)

53 Leadership, smart policies & teamwork required!