South Africa: No Country for Old Men Ludovic Subran, Chief economist Stéphane Colliac George Kibala Bauer South Africa Roadshow Johannesburg - October 13-14, 2016
Agenda 1 2 3 Economic Tectonic Shifts Africa: No country for old men South Africa: Coping, one shock at a time
Resilient but fragile global growth 2016 has been a roller-coaster. Several local turbulences were expected to have global impact and lasting effects Stock market crash in China (-20% in one month) Greek never ending story Turkey failed Coup d'état United States presidential elections Fed interest rate hike January Ma y July, 15 November, 8 December February April, 17 June, 23 December, 4 Oil prices at USD25/bbl Brazil political deadlock begins (President s impeachment) Brexit vote Italian Referendum Source: Euler Hermes Yet, global growth proved resilient at +2.4%. It should pick up to +2.8% in 2017, driven up by the US and emerging markets Source: Euler Hermes
Insolvency friction: Global growth still too low to avoid a U-turn in insolvencies worldwide Insolvencies to accelerate to +2% in 2017, after +1% in 2016, the first increase since the global financial crisis of 2008-2009 Insolvencies will continue to rise in most emerging markets and in the US and decrease in Europe Global Insolvency Index (% change) 2016-17 insolvencies forecasts (% change) Sources: National Statistics, Euler Hermes Source: Euler Hermes
Trade Fault: Global Trade will never be the same again Global trade growth will be below pre-crisis average (+7%), below GDP growth, below zero in value terms. Simply below USD-Denominated World trade growth forecasts Why global trade growth is slow? Sources: IHS, Euler Hermes
Earthquake alert in the US: Post elections, the plate will be nudged by policy-makers The Fed should hike by +0.25pp in Dec-16 and twice more in 2017. Yet market expectations (Fed fatigue) may limit impact Both presidantial candidates call for a fiscal package to support growth and overhaul ageing infrastructures Exchange rate vs. USD change (%) Main policies proposed by US candidates Clinton Trump Trade: Against the Transatlantic Trade Partnership Trade: Against trade agreements and trade liberalization through WTO. Wants to renegotiate NAFTA, veto TTP. Wages: Increase of the minimum wage from USD7.25/hour to USD12.0/hour China: 45% tariffs on all Chinese imports, declare it a currency manipulator to allow for countervailing measures to be taken Infrastructure: Overhaul plan worth USD275bn (1,6% of GDP) over a five-year term Infrastructure: USD1tn (5.4 % of GDP) rebuilding program to patch up existing roads, bridges Tax reform: Series of measures to tax wealthiest individuals such as a +4% surcharge on incomes above USD5mn, bringing this tax bracket to 43.6%. Represents USD1tr over 4 years (5,4% of GDP) Tax reform: Overhaul of the whole revenue tax system from 7 tax brackets into 3, Decrease business taxation from 35% to 15%. Overall tax cuts worth USD1tr over 10 years (5.4% of GDP) Sources: Bloomberg, IHS, Euler Hermes Source: Euler Hermes
Earthquake alert in/from China: Bumpy transition(s) Lower demand growth for foreign goods, negative price pressures, and financial stress to continue In the longer term, China s aggressive trade policy could change the game Channels of impact and triggers from China s growth normalization Five OBORtunities to take for China Source: Euler Hermes
Earthquake alert in Europe: Internal social tensions, risks at the borders Europe will not be the same in one year due to a hectic, unprecedented political calendar Brexit: the calm before the storm? The negative impact has been delayed to 2017 as Art. 50 is expected to be triggered in H1 Mapping uncertainties in Europe Economic forecasts UK 2016 points of tension Elections scheduled for 2017 Other potential and upcoming events Source: Euler Hermes Sources: ONS, Eurostat, Euler Hermes forecasts
Earthquake alert in Emerging markets: Liquidity strains in frontier markets Commodity curse and exchange rate crises have paved the way to more fragility. Growth in Nigeria expected at -2.5% in 2016 As many economies have suffered from export losses, a growing number turned to the IMF to avoid BoP crises and ensure financing Exchange rate change vs USD IMF lending programs Sources: Bloomberg, Euler Hermes Sources: IMF, Euler Hermes
Money Volcano: Hot money still has a hard time going back to emerging markets in a sustainable way Portfolio inflows in emerging markets are recovering, but remain below long-term average Emerging markets banks continue to report weak credit conditions, stemming notably from a high share of nonperforming loans Net capital inflows to emerging markets Excluding Russia and China (USD bn) Emerging Markets (EM) Bank Lending Survey (Q2-2016) - Overall index Improving Deteriorating Sources: IIF, Euler Hermes Sources: IIF, Euler Hermes
Agenda 1 2 3 Economic Tectonic Shifts Africa: No country for old men South Africa: Coping, one shock at a time
Africa: No country for old men A tale of risks and shocks Source: Euler Hermes Middle East & Africa: country risk and economic growth growth in 2016 in light grey Source: Euler Hermes
Africa: any investor out there? Remittances are a genuine key buffer to offset the depreciation of local currencies affected by weak commodity prices Increasing FDI inflows in manufacturers vs. weaker performances in commodity exporters Africa: current accounts and remittances Africa FDI inflows (% change, 2014) Sources: IHS, Euler Hermes Sources: FDIintelligence, Euler Hermes
Africa: Commodity and weak external demand headwinds but variable impact Many countries experienced depreciation. The CFA zone is partly spared by its peg. For oil exporters, austerity looms ahead Fiscal vulnerability is stronger in some oil exporting economies (Nigeria, Libya, Sudan, Angola, Algeria) Africa: Exchange rate vulnerability Africa: Fiscal vulnerability 60% 40% 20% Sources: IHS, Euler Hermes Sources: EIA, Euler Hermes
10 myths to debunk on Africa Euler Hermes covers more than USD12 billion worth of commercial transactions in Africa. The company is committed to developing and connecting the African private sector
10 myths to debunk on Africa (2) Africa all the same? Wrong! Africa is only about natural resources. Wrong! Growth and Doing Business Africa, Land of Innovation Sources: World Bank, Harvard,, Forecasts by Euler Hermes Sources: World Bank, United Nations, Euler Hermes
10 myths to debunk on Africa (3) There is no decent infrastructure. Wrong! Africa is isolated from the world. Wrong! Quality of Logistics and Infrastructure Gap Cumulative additional gains (export-and import) ($billlion) by 2025 Sources : World Bank, Euler Hermes. Note: The estimated infrastructure gap covers the investment needs in electricity, the roads network, internet, and mobile phone lines in order to reach the same level of infrastructure of France today in 2030. Sources: Euler Hermes
10 myths to debunk on Africa (4) African institutions are not working. Wrong! Nobody wants to finance Africa s growth. Wrong! Governance Indicators Internal-and External Financing Sources : World Bank, United Nations, Euler Hermes. Sources: IMF, World Bank, Euler Hermes
10 myths to debunk on Africa (5) The African consumer is not bankable. Wrong! Euler Hermes Consumer Market Potential Index (100= maximum value) Sources : World Bank, Euler Hermes. Note: Each indicator (additional urban population, consumption growth, access to internet is normalized between 0 and 33 to create an index of 100.) You cannot work with African companies. Wrong! Cash flow and 30 day payment period Sources: Euler Hermes
10 myths to debunk on Africa (6) Agriculture is passé. Wrong! Africa has no talent. Wrong! Agriculture is climbing the value-chain Level of education and opportunities for entrepreneurs Sources : UNCTAD, African Development Bank, Euler Hermes calculations Sources : World Bank, Calculations and Data from Euler Hermes Note :The entrepreneurship climate index by Euler Hermes consists of the regulatory environment, and the degree of access to tools useful to entrepreneurs (quality of internet access, logistics, business climate).
Agenda 1 2 3 Economic Tectonic Shifts Africa: No country for old men South Africa: Coping, one shock at a time
Growth in South Africa: Feel the pain? Belt tightening is happening (contracting imports) as domestic engines are stalling and exchange rate depreciation weighed on consumer s inflation expectations GDP growth and demand drivers Consumer confidence and exchange rate Sources: IHS, Euler Hermes Forecasts Sources: IHS, Euler Hermes
Connecting continents: An additional ZAR201bn in goods exports to make in 2017 (only +31bn in 2016) Commodities on top. Metal prices are expected to recover by +9% in 2017 on average (after -37% from 2011 to 2016) China (Asia) and the U.S. will drive export growth in 2017 Top-12 sectors: Export gains in 2017 (in ZAR bn) Top-15 customers: Export gains in 2017 (in ZAR bn) Source: IHS, Euler Hermes Sources: IHS, Euler Hermes
Rand in free fall: a blessing or a curse? Only a cheaper rand helped increase total exports in value terms (so far) The depreciation of the rand has not helped boost export volumes (yet) Export gains: USD gains vs. Rand depreciation effect in ZAR bn Exports versus depreciation ZAR/ USD 9.6 10.8 12.8 14.7 15.5 Sources: IHS, Euler Hermes Sources: IHS, Euler Hermes
Stagflation and high reputation risk call for innovative policy actions A protracted period of low growth. No obvious signs of how to break out of it. Policy options limited by inflation & fiscal consolidation South Africa will be vulnerable to capital flows and exchange rate volatility, as the twin deficits will remain fairly high Growth-inflation balance Fiscal and current account balances Twin deficits Sources: IHS, Euler Hermes Sources: IHS, Euler Hermes
Investment: The tiny road ahead The public sector has to step in differently (investment) and turn around the mood of the private sector (precautionary savings) Net public savings vs. net private savings (% of GDP) Sources: IHS, Euler Hermes Foreign direct investment is a stable contributor but South African may be asked to chip in further Foreign direct investment, current account deficit and government revenues Sources: IHS, Euler Hermes
External financing is OK, internal financing is less OK The level of FX reserves is adequate and risk of capital controls is low because of free-floating exchange rate Domestic banks are merely rolling over credit, nothing less, nothing more Reserve adequacy: Foreign exchange reserve in % of likely financing needs Bank credit to the private sector (% of GDP) and interest rate Likely financing needs are an estimate of likely capital outflows, the risk of a credit crunch, and the risk of an export drop Sources: IHS, Euler Hermes Sources: IHS, Euler Hermes
Insolvencies: +5% expected in both 2016 and 2017 Reduced growth prospects should lead to more bankruptcies, but still far from past peaks The insolvency rebound is concentrated in a few sectors such as agriculture (drought) and general trading South African yearly insolvencies Insolvency breakdown by sector (cumulative 12 months, at end of August 2016) Source: Statssa, Euler Hermes forecasts Sources: Staatssa, Euler Hermes
The average DSO is relatively stable but the industry risk profile did deteriorate DSO in retail rebounded slightly in line with consumer defiance The good (Pharmaceuticals), the bad (Textile, Agrifood, Transportation) and the ugly (Metal) RSA is the 7th largest producer of iron ore South African DSOs (in number of days) Euler Hermes Sector Risk Assessment Q3 2015 Q3 2016 2013 2014 2015 Retail 23 16 23 Food 42 43 46 Pharmaceuticals 72 74 71 Chemicals 53 60 56 Machinery & equipment 55 59 55 Transportation 39 38 41 Technology 69 63 71 Telecom 39 40 41 Construction 55 55 51 Household goods 30 34 34 Country average 45,9 47,5 47,8 Sources: Bloomberg (listed companies), Euler Hermes Source: Euler Hermes
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