Download 2015 Quarter 1

2015 Quarter 1
Inflation – Falling local fuel prices have helped consumer price inflation dip back to within the South African Reserve Bank (SARB) target range
of 3% - 6% p.a. However, with energy costs on the rise and core inflation trending around 5.8% y-o-y, there is no room for monetary easing at
present.
Growth – The continent’s second-largest economy expanded by a less-than-impressive 2.2% during both 2012 and 2013 and slowed further to
a pace of 1.5% last year as a myriad of local factors – including labour issues, a weak rand and low consumer confidence – pressured the
South African economy. We expect only a meagre recovery during the medium term, with real GDP growth forecast to average 2% p.a. during
2014-16.
National development plan – The Medium-Term Strategic Framework (MTSF) 2014-19 was launched during August as an implementation
framework for the National Development Plan (NDP). The Department of Planning, Monitoring & Evaluation and the National Treasury will
ensure that funding is available for the scheme. Monitoring of the MTSF outcomes will be based within the cabinet and progress will be
communicated to the public “at least three times per year,” the presidency has promised.
OPPORTUNITIES
STRENGTHS
Immense scope for wind and solar power generation, though
institutional factors need to be addressed.
Growing trade and investment benefits from joining the BRIC (Brazil,
Russia, India and China) countries grouping.
Growing middle class offering opportunities for the development of
retail, entertainment and tourism sectors.
Well-developed banking & financial sector – remained healthy
throughout global financial crisis.
Well-managed fiscal & monetary policy over the past decade, albeit
influenced by populist tendencies.
Large group of mega corporates supporting fiscal revenues, while the
country is not dependent on foreign aid.
Geographic location offers a gateway to Africa investment.
Diverse economy, with exports slowly moving away from minerals.
VULNERABILITIES
WHAT IS BEING DONE?
Lingering social unrest and political tension as the government fails to
live up to its voters’ expectations.
Low economic growth is not keeping pace with employment creation
and poverty reduction needs.
South Africa’s power utility, Eskom, has been dumped into a state of
crisis, with the threat of electricity blackouts becoming part of everyday
life.
The export-oriented mining & manufacturing sectors are challenged by
an unpredictable exchange rate and labour unrest on an annual basis.
Not much – the ruling party continues to expand its social grant
expenditure to compensate for a failure in creating sustainable jobs.
Government is growing its public works programme to offer two million
more (mostly temporary) state-funded jobs over the medium term.
Construction of the country’s two new coal-fired power plants, Medupi
and Kusile, has been delayed countless times. Until these plants come
online, rolling blackouts will persist.
The ruling party is intertwined with the labour movement and is
reluctant to make any reforms to the labour market.
MEGA TRENDS
Population
Total: 54,002,000; Male: 26,366,000 (48.8%); Female: 27,635,900 (51.2%); Under 25: 26,664,442;
Age 15-64: 34,850,298 (2014 est.)
Population growth rate (%)
1.58% (2014 est.)
Life expectancy at birth
Total population: 67.9 years; male: 64.7 years; female: 71.0 years (2014 est.)
HIV/AIDS
Total number of people living with HIV: 5.26 million; Total adult prevalence (15-49): 15.9%; HIV/AIDS
orphans 2.1 million (2013 est.)
Adult literacy rate (age 15 and over can
Total population: 94.3%; male: 95.5%; female: 93.1% (2015 est.)
read and write)
Urbanisation
Urban population: 63.9% of total population (2013); Urban population growth: 2.2% (2013)
Population below $1.25 (PPP) poverty
line
9.4% (2011 est.)
Unemployment rate
24.7% (2013 est.)
Employment (% of total)
Agriculture: 5.03%; Industry: 23.28%; Services: 71.67% (2013 est.)
Labour participation rate (% of total
population ages 15+)
65% (2013 est.)
Business languages
English, Afrikaans, SeTswana, SeSesotho, SePedi, isiXhosa, isiZulu, Tshivenda, Xitsonga,
IsiNdebele, siSwati
Telephone & Internet users
Main lines in use: 3.88 million; Mobile cellular: 76.87 million; Internet users: 26.41 million (2013)
Sources: CIA World Factbook, World Bank, StatsSA, UNESCO, ITU, UNAIDS & NKC Research
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Total
South Africa
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
175
67
Doing Business 2015 (1 best, 189 worst)
189
43
Global Competitiveness 2014-15 (1 most, 144 least competitive)
144
56
Economic Freedom 2015 (1 most, 178 least free)
178
72
HDI Ranking 2013 (1 most, 187 least developed)
0
Source: NKC Research
187
118
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
BBB-/Stable
BBB/Negative
Baa2/Stable
Moody's Investors Service downgraded South Africa’s rating from “Baa1” with a negative outlook to “Baa2” with a stable outlook on 6
November 2014. This move did not come as a surprise as the rating has been on a negative outlook for some time. The agency said that the
South African economy’s poor medium-term growth prospects and the expectation of rising government debt prompted their risk scores to be
downgraded. Moody’s highlighted the structural issues weighing on the South African economy, including ongoing energy shortages and rising
interest rates. Moreover, the country is facing further deterioration in the investor climate, a less supportive capital market environment, slowing
growth in China and frequent bouts of strike action.
On 12 December 2014, both Fitch Ratings and Standard & Poor’s (S&P) released their six-monthly ratings reviews on South Africa. Fitch
announced no change to its “BBB” rating and retained the negative outlook it instated during June 2014. Fitch’s negative outlook reflects the
following factors that could (individually or collectively) result in a downgrade in the short term if they materialise: 1) weak economic growth and
a failure to boost the country’s growth potential; 2) a failure to reduce the fiscal budget deficit and stabilise government debt (as a percentage of
GDP); and 3) a failure to narrow the current account deficit. Fitch believes the NDP’s economic growth goals are “difficult and distant” and
foresee an “early test” for the government’s medium-term fiscal targets with the public sector wage negotiations resuming early this year. On
March 24, Fitch commented that South Africa’s credit rating will remain above “junk” status even if the sovereign is downgraded in June. The
rating agency commented that pressures on South Africa’s rating are long-term, adding that a single factor or event (like Eskom’s current woes)
will rarely result in a downgrade on its own. Similarly, S&P retained a stable outlook on its “BBB-” rating (i.e. one notch above junk status). The
rating agency anticipates a slight rebound in economic growth during 2015-17 that will help contain the fiscal budget and current account
deficits, and it anticipates that political and institutional stability will continue under the second Zuma administration. However, S&P warned that
their economic growth outlook is under pressure from the Eskom power supply situation.
Infrastructure
Diversity of
the Economy
Extensive, but
deteriorating
Quite diverse
Banking
Sector
Continuity
of Economic
Policy
Dominated by Debate & some
SA firms
uncertainty
GDP Growth
Key Balances
Foreign
Investment
Low
Substantial twin
deficits
Relatively
strong
Socioeconomic
Development
High in regional
context
Forex
Reserves
Healthy
Daily Trading
Volume
$1.21bn
(Source: Bloomberg)
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Johannesburg Stock
Exchange (JSE)
398 Primary listings
(Source: Bloomberg)
Very liquid
$554bn
(Source: Bloomberg)
Mining
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Advanced
Very liquid
91-day to 36-year
Yes
Yes
Macro-economic overview
South Africa has almost all the commodities essential for international competition except crude petroleum products and bauxite (which is used
in the manufacturing of aluminium). However, the two-tiered nature of the economy continues to constrain the country’s potential; one rivalling
developed countries and the other with only the most basic infrastructure. The economy is productive and industrialised around urban nodes,
but at the same time exhibits many characteristics associated with developing countries, including a division of labour between formal and
informal sectors. The country has one of the highest Gini coefficients in the world, indicating a significant disparity between the income and
wealth of its poorest and richest citizens.
The South African economy has come under significant pressure of late, with structural issues ranging from debilitating labour disputes to
electricity disruptions, coupled with external headwinds including slowing demand from major trade partners Europe and China, falling
international commodity prices and monetary policy normalisation by the US Federal Reserve. The structural obstacles facing South Africa and
its general level of development have resulted in the economy lagging behind the steady growth pace of many other African states. During the
past quarter, the country experienced several bouts of rolling blackouts, the currency dropped to a 13-year low, and overall economic indicators
pointed to a continuation of the lacklustre GDP growth seen during 2014. There are numerous headwinds on the horizon standing in the way of
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GDP growth and the authorities’ monetary and fiscal policy tools have been depleted. As such, we do not see annual GDP growth returning to
3% anytime soon, not to mention the 5% growth rate envisaged by the National Development Plan (NDP).
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
2.4%
Industry/GDP
29.4%
Service/GDP
68.2%
South Africa’s primary sector consists of fisheries at the coast, forestry operations located in Mpumalanga, KwaZulu Natal, and the Eastern and
Western Cape, and a farming sector that includes commercial (sometimes export-oriented) operations, as well as subsistence activities. The
secondary sector includes a diverse commercial mining sector, electricity and water services monopolised by the state, manufacturing and
heavy industrial installations in major cities, as well as a well-developed construction sector. The tertiary sector is comprised of a financial sector
on par with some of the developed world’s banking systems, ever-increasing general government services, extensive wholesale, retail,
restaurant and hotel facilities compared to other African states, transport and communication operators that work across the continent, and
diverse personal services.
Real GDP Growth & Net FDI/GDP
2.5
4.5
Source: NKC Research
3.0
2.0
1.5
1.5
0.0
1.0
-1.5
0.5
0.0
-3.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
Mining represents a third of South Africa’s foreign direct investment (FDI) stock and its impact on the overall economy was again underscored
by the adverse effects of the five-month platinum strike during the first half of 2014. In addition to labour issues and the country’s electricity
woes, foreign investors are concerned about the plethora of new legislation being proposed and signed into law by the South African
Parliament. While the Department of Trade and Industry (DTI) is doing all it can to promote its industrial zones and other schemes to foster
investment, the overarching South African government is giving all the wrong signals. On the whole, real GDP growth averaged 1.5% in 2014,
down from a rate of 2.2% in 2013 and the lowest since the 1.5% contraction recorded in 2009. GDP growth figures should look marginally better
during the first half of this year compared to those seen during 2014, mainly due to base effects stemming from the five-month platinum strike
last year. However, with Eskom struggling to keep the lights on, low trending international commodity prices, and government having to curb
spending growth, we do not see annual GDP growth returning to 3% anytime soon.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
Main Imports: % share of total
2016F
2015F
2016F
23.62
18.03
19.04
13.18
14.10
13.95
9.98
10.58
10.37
Vehicles & automotive parts
8.36
8.43
8.42
Main Exports: % share of total
2014E
2015F
2016F
Precious metals & stones
14.19
15.08
15.21
Mineral ores & concentrates
13.27
12.44
12.55
Oil & petroleum products
10.40
9.75
9.83
Vehicles & automotive parts
7.79
8.35
8.66
Oil & petroleum products
Oil & petroleum products
Computers, appliances & machinery
Telecommunication & electrical
equipment
Vehicles & automotive parts
Computers, appliances &
machinery
Telecommunication & electrical
equipment
Precious metals & stones
Mineral ores & concentrates
Oil & petroleum products
Vehicles & automotive parts
0.0
Source: NKC Research
2014E
10.0
20.0
30.0
The import-dependent South African economy has not been able to benefit from a weak currency due to other structural challenges, e.g. labour
unrest and electricity blackouts, and continues to import more than it exports to the rest of the world. The South African Revenue Service
(SARS) provided a glimmer of hope when it reported that the country’s trade balance swung into positive territory in December for the first time
in almost a year. The trade account showed a surplus of R6.8bn in the final month of 2014, compared to a deficit of about R5.3bn recorded in
November. However, the positive news proved to be nothing more than a flash in the pan. SARS reported that the country’s trade balance
reverted deep into negative territory during January. The trade account showed a deficit of R24.2bn in the first month of 2015. In fact, January’s
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shortfall was the biggest of its kind since at least 2010, when trade estimates started to include dealings with Botswana, Lesotho, Namibia and
Swaziland. The trade deficit narrowed somewhat during February, driven by substantial improvements in the export of vehicles & transport
equipment and precious metals & stones, while imports also decreased.
Current Account & Budget Balance
(% of GDP)
0.0
0.0
-2.0
-2.0
-4.0
-4.0
-6.0
-6.0
Source: NKC Research
-8.0
-8.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
The improvement in the trade balance during the fourth quarter aided South Africa’s current account deficit in narrowing from a revised figure of
R223bn (5.8% of GDP) in the third quarter to R198bn (5.1% of GDP) during the final quarter of 2014. According to the SARB, the negative
balance was largely financed by a net inflow of other investment capital, mainly foreign currency-denominated loans extended to the domestic
banking sector. In terms of government finances, the National Treasury is faced with a myriad of challenges, including struggling parastatals like
Eskom and South African Airways (SAA) which are bleeding money, a slowing economic growth environment, and the need to consolidate
spending growth while the situation on the ground in various parts of the country remains dire. The 2015/16 budget proposes a consolidated
deficit equal to 3.9% of GDP, which is expected to narrow to 2.5% of GDP in 2017/18. The government will have to enforce considerable belt
tightening to reach these forecasts, which suggests the economy will not find much assistance in the way of government spending over the
medium term.
Average CPI (% change, y-o-y)
7.5
Source: NKC Research
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The effects of falling local fuel prices have been glaringly obvious in the CPI during the past few months. In fact, StatsSA revealed that CPI
inflation slowed to a four-year low of 3.9% y-o-y in February. However, headline CPI inflation inched up to 4% y-o-y in March, marking the first
increase after six consecutive months of declines. Looking forward, considerable fuel, tax and electricity tariff increases in April will see inflation
figures rise over the next few months. As such, the central bank raised its inflation forecast for this year to 4.8% at its March monetary policy
meeting, from 3.8% at its January meeting. The 2016 forecast was raised to an average of 5.9% from 5.4% previously. The SARB again
highlighted the exchange rate as the main upside risk to the inflation outlook, with the currency remaining highly vulnerable to the timing and
pace of US monetary policy normalisation. Moreover, higher electricity tariffs and wage and salary increases in excess of inflation and
productivity growth result in the risk to the SARB’s inflation outlook being to the upside.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Moses Kgosana – designation is Partner
Tel +27 11 647 8012
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by
any person upon such information or opinions.
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