Download Four Goals for Higher Job-Rich Growth

2014 Parliamentary Budget
Hearings
Fiscal Framework and Revenue
Proposals
Presentation to the Standing and Select Committees of Finance
Parliament of the Republic of South Africa
4 March 2014
The Manufacturing Circle
has a Plan in the Making
PROMOTING MANUFACTURING FOR HIGHER JOB-RICH GROWTH
FACT: Manufacturing output accounts for 11% of GDP
FACT: Manufacturing is among the top three sectors in terms of value addition, job creation,
export earnings and revenue generation for every R1 invested.
FACT: Manufacturing provides the base load and scale for key national infrastructure such as
electricity generation and municipal services
Fact: Manufacturing provides the only viable means of beneficiating natural resources in SA
FACT: More than 300 000 South African manufacturing jobs have been lost or exported to other
countries since the beginning of 2008, with the majority going to China
FACT: More than 440 000 small business owners have closed up shop in 5 years between 2006
and 2011
FACT: In September 2012, South Africa’s Purchasing Management Index registered a three-year
low gesturing at bad business conditions and contraction in Manufacturing
Source: Manufacturing’s Moment: Four Goals for Higher Job-Rich Growth
PROMOTING MANUFACTURING FOR HIGHER JOB-RICH GROWTH
FACT: Electricity costs have rocketed by over 170% in South Africa over the past 5 years while
administered prices in other BRICS countries have decreased by over 36% in the last decade
FACT: The SA domestic market is under-protected against unfairly incentivised imports, while
China, India, Brazil and other countries offer much higher incentives and protection to their
manufacturers
FACT: The imbalance in our trade situation is evidenced by our negative trade balance with China,
which rapidly outstripped the negative trade balance with all other trading partners
FACT: There will be further decline over the next two years unless key domestic policy issues and
the unfair trade situation are addressed immediately. More companies will close down, more jobs
will be lost, the Manufacturing contribution to GDP will contract further and the balance of
payments situation will weaken
FACT: Manufacturing output is supported by a more stable and competitive rand exchange rate, but
this requires more focused policy determination
FACT: Post-2009, South Africa’s manufacturing sector has not recovered to the extent its peers has,
as our domestic policies do not foster manufacturing competitiveness
Source: Manufacturing’s Moment: Four Goals for Higher Job-Rich Growth
THE MANUFACTURING CIRCLE’s FOUR-GOAL PLAN that will put South Africa on a higher, jobrich growth path and enable us to compete and succeed as a manufacturing destination
Goal 1: South Africa will offer a business environment that attracts investment in
manufacturing
Goal 2: South Africa will be the gateway manufacturing destination for exports to SubSaharan Africa and South African manufacturers will compete domestically on an equal
footing with imports
Goal 3: South Africa will be a competitive beneficiator of its own resources
Goal 4: South African manufactured products will be preferred by South Africans and have
an excellent reputation around the world
Source: Manufacturing’s Moment: Four Goals for Higher Job-Rich Growth
Current Situation in Manufacturing
Current situation in Manufacturing
Manufacturing in South Africa
Currency vulnerability to external and domestic factors
11.5
11.0
10.5
10.0
9.5
9.0
8.5
Source: i-Net Bridge and Pairs
Current crisis for
Manufacturing in South Africa
Cost of production expected to rise faster despite a slowdown
in 2014 Q4
7
Average = 6.7
6.5
Per cent
Average = 6.2
6
Average = 5.6
Average = 5.4
5.5
5
4.5
2013 Jan
Feb
Source: StatsSA and Pairs
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Cost pushes and Rand strength
PPI
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Average increase
Total increase since 2002
13.4%
2.2%
2.4%
3.6%
7.7%
10.9%
14.3%
0.0%
6.0%
8.4%
6.6%
6.9%
81.4%
Electricity
-1.1%
-1.5%
2.4%
4.9%
4.6%
6.7%
21.4%
26.2%
24.0%
25.3%
11.3%
181.1%
% (strengthen) /
Wage Costs Rand: USD Weakening in Rand
7.3%
7.0%
0.0%
6.5%
6.5%
6.4%
8.0%
0.0%
7.5%
8.0%
7.0%
5.8%
74.0%
10.50
7.54
6.40
6.34
6.75
7.04
8.25
8.40
7.31
7.26
7.97
7.61
-24%
-28.2%
-15.1%
-0.9%
6.5%
4.2%
17.3%
1.8%
-13.1%
-0.7%
9.8%
The Rand is currently at 2003 levels, and has strengthened by 24% in the last 10 years.
Costs (PPI, Electricity and wages) have increased by between 74% - 181% over the same
period
Current situation in Manufacturing
Manufacturing in South Africa
Manufacturers and Currency: Volatility a Big Factor
•
95% of companies either sensitive (40%) or very sensitive (55%) to currency risk
•
Risk mostly because of dependence on imports/exports (around 70%) and because currency
moves cannot be passed on to customers (nearly 50%)
•
Just over 50% of all companies either selectively or comprehensively hedge against currency risk
•
While 40%-50% of companies believe hedging is simple enough and management capable enough
to use it, around 70% of companies are either indifferent or positive re the viability thereof
•
More than 50% of companies have a system for evaluating currency exposure and the majority
believe currency exposure is relatively easy to estimate
NB Conclusion: Currency volatility impacts investment decisions more than trade
NB Conclusion: Exporters selling majority of their output domestically give currency volatility and
competitiveness issues as reason for not exporting more
Source: WEF & Frontier Advisory
Export Competitiveness: Economic
Outlook
11
Real GDP is projected to grow by 2.7%
in 2014 and 3.4% in 2015…
…driven by the recovery
in high income countries.
South Africa’s current account
exposes it to shifts in global markets
If China weakens, commodity price
declines could extend further
Export Competitiveness: 5 Stylised
Facts about South Africa’s Export
Competitiveness
16
Fact #1: All main export
sectors are underperforming
Minerals rode the boom in prices
but did not rise much in volumes
Decomposition of mineral export growth
600
500
percent
400
300
200
Volume
100
Volumes virtually flat
0
Non-mineral exports grew much
slower than in peers
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Fact # 2: 93% of exports
from 5% of exporters
Fact #3: Super exporters are
losing competitiveness
Fact #4: Exports are capital
and knowledge intensive
Fact #5: Africa is now the main
market for non-mineral exports
Export Competitiveness: 3
Opportunities to Help Ignite Exports
and Create Jobs
22
#1: Competition will spur innovation
improve incentives to export
More competition at home encourages firms to
Innovate
Cuts costs
More
Exports
Go abroad
#2: Lower costs of transport & ICT,
address infrastructure bottlenecks
#3: Deepening regional integration
in goods and services
Location Of Production
26
Trends in the Location of Production
• An important expected effect of the rise of advanced manufacturing policies
was that the costs of low-skilled labour may become less important, thus
making off-shoring to low labour costs economies less attractive
• Developed economies may benefit in terms of the location of production, but
the direct employment benefits were still unclear and any benefits would
likely accrue mostly to highly skilled workers only. The impacton emerging
countries was of concern.
• Explanations for this move to “on-shoring” or “backshoring” starts with the
changing cost structure of production in emerging countries resulting in
market size rather than labour costs once again coming to the for as the
central concern for the location of production.
• The trend seemed to be a two-step one of mechanisation in offshore facilities
in developing countries, followed by back shoring to developedlocations.
• The declining cost of energy in the United States due to shale gas usage
exacerbates this trend.
27
Trends in the Location of Production
• While global manufacturing companies were keen to exploit emerging
markets growing on the back of rising incomes, more than a third of USoperators have underestimated the cost of entering markets like India, China
and Brazil.
• In turn, the trend towards global value chains may continue, but risk
dispersion is now also prioritised post natural disasters like the March 2011
Tohoku earthquake and the flooding in Thailand in the same year, which cut
off parts supply globally.
• On-shoring have generally become a way to build larger operational flexibility
into manufacturing companies, allowing them to adjust production process to
market signals with shorter turn-around times.
• Off-shoring to developing countries will remain an important strategy, but
more so to benefit from market growth due to higher wages, rather than from
low labour costs.
28
Employment & Outlook
Employment & Outlook
2.00
Manufacturing Employment Shrank in 2013 Q4
1.95
Millions
1.90
-49,000
Q4 ’13 vs. Q4 ‘12
1.85
1.80
1.75
-13,000
Q4 ’13 vs. Q3 ‘13
1.70
1.65
I
II III IV
2008
Source: StatsSA and Pairs
I
II III IV
2009
I
II III IV
2010
I
II III IV
2011
I
II
III IV
2012
I
II
III IV
2013
Employment & Outlook
Subdued manufacturing activity in US, China and SA, but not
Germany
60
55
50
45
40
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
2012
China
Source: BER, Markit, NBS, ISM and PAIRS
A
M
J
J
A
S
O
2013
US
Germany
N
D
J
2014
South Africa
Current situation in Manufacturing
Manufacturing in South Africa
1.
2.
3.
1.
2.
3.
4.
5.
1.
2.
3.
4.
Factors that affected demand conditions in 2013 Q4
Seasonality of certain manufacturing activities
Sluggish domestic spending
Elevated competition
Factors that affected production processes in 2013 Q4
Disruptions in Telkom landline and internet connectivity
Congestion and delays at the Durban port
Water and electricity supply disruptions (esp. in Ekurhuleni)
Shortage of steel as well as high quality grade coal
Poor road infrastructure (affecting regional deliveries)
Factors that negatively affected manufacturing employment in
2013 Q4
Weak domestic demand
Seasonal factors
Increased competition
Elevated labour costs
Source: WEF & Frontier Advisory
Current crisis for
Manufacturing in South Africa
Surveyed firms source significant inputs locally, but did not
benefit from govt’s local procurement programme
What percentage of your total purchase is
locally sourced products?
Share of respondents
27
Does your manufacturing concern
currently benefit from the government’s
local procurement programme?
25
20
24
16
Yes
12
No
0
76
Source: PAIRS
Budget Reaction
Budget Reaction: Cutting Costs
Municipalities, Competitiveness Benchmarking and
Infrastructure the Biggest Issues
FACT: Service interruptions to municipal electricity and water customers are becoming so severe
that numerous manufacturers have started to quantify this for their annual reporting, e.g 30
workdays lost per annum common in Ekurhuleni
FACT: Energy (electricity and gas prices) have rocketed in South Africa over the last decade while
they have declined in competitor economies
FACT: Our port charges are three times higher than the global average
FACT: Local government, the vanguard of service delivery, allocated only 9% of budget
FACT: High administered costs leave manufacturers even more vulnerable to global vagaries
PROPOSALS:
National Treasury should conduct a full fiscal review and benchmarking effort to ensure that:
- Infrastructure maintenance and provisioning is funded, financed and the costs recouped in the
most efficient manner that is in sync with what is being done in competitor economies;
- Price setting regulations and discount options for energy and other utility services are on par with
competitor economies insofar as South African realities allow; and,
- Act on research already completed by NEDLAC FRIDGE Fund and the dti on administered prices
Budget Reaction: Nurturing the Base
IPAP Endorsement Great, Infrastructure Great,
Implementation Crucial
•
•
•
•
REACTION:
Manufacturers derive great confidence from the strong endorsement provided to the Industrial
Policy Action Plan in the Budget – IPAP best in government at promoting policy coherence and
coordination and R25.5bn over the MTEF for manufacturing investment and competitiveness
allocations welcome
SEZs: Manufacturing Circle does not support the exclusive design of this programme – should be
extended to all compliant manufacturers to avoid market distortion and to enhance overall
economic competitiveness
Growth imperatives (5% of GDP) and debt (stabilising at 45% of GDP in 2016/17) will be
manageable only if confirmed additions to generation capacity and shale gas exploration can be
expedited.
Minister rightly emphasised: Infrastructure investments and the promotion of capital expenditure
to the quickest growing expenditure category will support competitiveness, provided government
improves its implementation record significantly
Budget Reaction:
Growing the Market
IPAP Endorsement Great, Infrastructure Great,
Implementation Crucial
•
•
•
•
REACTION:
The budget rightly affirmed the need to leverage local procurement, especially in light of
depressed global conditions
Growing the local market also means growing the regional market
Technological infrastructure and management improvements at SARS Customs, and better
industry co-operation through the SARS Customs Key Industry Forum have already resulted in
significant improvements
As a small open economy, we should use international finance and trade organisations to adopt
definitions of currency manipulators, so that they may be isolated and sanctioned as currency
manipulation by other nations frustrate the intended impact of legitimate trade remedies and
encourage predatory trading
THANK YOU