Dr Roelof Botha

The state of the South African economy

With perspectives on agriculture

& the status of

South Africa’s sovereign bondsThe strategic importance of agriculture

With reflections on the state

of the economy

Dr Roelof Botha

Notes on the global

outlook & the exchange

rate

• 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

Change is the only constant

SA not alone in facing lower growth - average real GDP growth

rates before and after recession (Source: IMF)

0

0.5

1

1.5

2

2.5

3

3.5

4

Emerging

Europe

Other

advanced

US Euro Area Japan

1998-'07

2008-'16

%

Economic growth forecasts – selected countries(Source: IMF)

-1.5

0

1.5

3

4.5

6

7.5

Russia UK US Sub-Saharan

Africa

China India

2016

2017

%

Gold price and the US$/rand exchange rate

(Sources: SARB; Bloomberg; Bullionvault; own calculations)

60

70

80

90

100

110

120

130

Q3'12 4

Q1'13 2 3 4

Q1'14 2 3 4

Q1'15 2 3 4

Q1'16 2 3 4

Index; Q4 2014 = 100

Gold

price

$/rand exchange rate

Structural decline in average S&P 500 dividend yield

(Sources: Multipl.com; R Shiller)

1

2

3

4

5

6

1947-'56 1957-'66 1967-'76 1977-'86 1987-'96 1997-'06 2007-'16 2016

%

Increase in average price/earnings ratio of S&P 500 companies

(Sources: Multipl.com; R Shiller)

5

8

11

14

17

20

23

26

1947-'56 1957-'66 1967-'76 1977-'86 1987-'96 1997-'06 2007-'16 2016

Ratio

Real effective exchange rate (REER) of the rand starting to

eliminate undervalued position (Sources: SARB; own calculations)

65

70

75

80

85

90

95

100

105

110

115

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Feb'17

REER

Avg. (93.32)

Foreign currency unit/R; Index; 2010 = 100

The Southern African economy

Prospects for

sustained growth

Agriculture focus

Number of SA households in the expenditure category of

R650k per annum (avg.) (Sources: Stats SA; own calculations)

0

150

300

450

600

750

900

1050

Indian Coloured White Black

2011

2015

Number

% change in average household income 2005 to 2015

0

25

50

75

100

125

150

White Indian Coloured Black

%

Land ownership in SA according to land audit

verification survey (Source : Dept. of Land Reform)

Organisation 0.5

Municipality 3.9

Traditional 5.2

Unknown 3.6

Public entity 0.5

Private 0.9Government

Dept. 5.8

Total 20.4m ha

Land ownership in SA according to land audit booklet

(Source : Dept. of Land Reform)

Privately owned

96.6

Unaccounted 8.4

State owned

17.1

Total 122.1m ha

Land ownership estimate (desktop research) – million

hectares (Sources : Dept. Land Reform; E Pringle;

Sanparks )

Municipalities 3.6Unknown 8.4

State land &

forests 12.2

Land claims 7.4

Private 64.8

Private sales -

blacks 2

National parks 4.1

Provinces 3.1

Homelands 16.4

Total 122m ha

Du Pont food security index 2016 – BRICS, Africa & Europe

20 30 40 50 60 70 80 90

Africa (average)

India

South Africa

China

Russia

Brazil

Europe (average)

Index

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

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

9. Provision of basic infrastructure

Key areas of corporate social investment spending by

agribusiness in SA

(Source: PwC)

Composition of GDP 2015 – R billion (Source : Stats SA )

Govt. - 618

Manufacturing -

463

Construction - 143

Finance & bus.

Ser. - 744

Trade & catering -

535

Transport &

comm. - 354

Agriculture - 84

Personal ser. -

203

Mining - 287

Elec. & water - 130

(Total R3.6 trillion)

Composition of household expenditure 2015 – R billion

(Source : SARB)

Housing & utilities -

360

H/hold equipm. -

158

Transport - 403

Recreation - 170

Education - 84

Food - 496

Alcohol - 114

Health - 166

Commun. - 70

Clothing - 124

(Total R2.4 trillion)

Total Primary Agriculture Output

R244bSecondary Agriculture

(Processing)

R391b

Wholesale trade R345b

Retail trade R347b

Restaurants & caterers R43b

Electricity & Water R39bn

Finance R155b

Estimated output

(turnover) for all

agricultural activity

In SA - 2015

CommunicationR63b

Transport & Construction R26b

Total linked turnover R1.65

trillion

Meat, fish, fruit & veg

Dairy

Grain mills

Beverages

Tobacco

Sawmilling

Leather products

Other food

Agriculture Value Added R84

Primary agriculture trade balance (R91b surplus since 2013)

(Source: SARS)

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Exports

Imports

Rb

Secondary agriculture trade balance (R39b surplus since 2013)

(Source:

SARS)

0

10

20

30

40

50

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Exports

Imports

Rb

Top-10 agriculture export trade growth partners in Africa (annual avg. 2010 – ʹ15) (Sources: SARS; own calc.)

5 10 15 20 25 30 35 40 45

Mauritius

DR Congo

Angola

Seychelles

Malawi

Mozambique

Nigeria

Zambia

Congo

Algeria

%

Agriculture exports to SADC 2010 & 2016 (at constant 2015

prices) (Sources: SARS; own calc.)

0

4

8

12

16

20

24

Oils & fats Animals Veg. & fruit Prep. Food

2010

2016

Rb

• 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

Opportunities & growth drivers for the development of the agriculture sector (selection)

Key arguments supporting a

sovereign credit downgrade

The Zuma era’s dismal scorecard for South Africa’s global competitiveness (Source: WEF - 2016)

Indicator 2009 2016 Decline

Govt. procurement - hi-tech products 34 99 -65

Wastefulness of govt. spending 29 88 -59

Pay & productivity 81 98 -17

Favouritism by govt. officials 50 115 -65

Diversion of public funds 49 96 -47

Public trust in politicians 50 109 -59

Quality of primary education 104 126 -22

Burden of govt. regulation 95 116 -11

Government debt 54 73 -19

Cooperation between labour & employers 123 138 -15

Speculation over downgrade fuelled by the increase in total public

sector gross debt as % of GDP since the recession…

25

30

35

40

45

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

%

…while the rand/$ exchange rate was on a 12-month roller-coaster ride… (Sources: Oanda; own

research)

12.5

13.5

14.5

15.5

16.5

04-

Dec

13-

Dec

17-

Dec

16-

Jan

25-

Feb

29-

Feb

04-

Apr

20-

May

24-

Jun

28-

Jun

12-

Aug

02-

Sep

22-

Sep

12-

Oct

02-

Nov

18-

Nov

30-

Nov

R/$

Nene dismissal

Gordhan

appointment

US$ strength

Gordhan budget

Hawks/Moyane vs Gordhan

US to maintain

low rates

Strong US economic data

Brexit

Post-Brexit fears

Local elections & surge in gold price

Hawks vs Gordhan 2

Rise in China iron ore imports

Gordhan charged

Charges against

Gordhan dropped

Gold price slides

SA bond

status

retained

…and SA’s leading business cycle indicator continues to lag

behind that of key trading partners… (Source: SARB)

75

85

95

105

115

125

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2'16 Q3'16 Q4'16

US

SA

Index, 2010 = 100

Other

countries

…whilst a 24-quarter positive GDP growth trend comes to a

halt in Q1 2016 (Source: Stats SA)

-3

-1.5

0

1.5

3

4.5

Q1'0

8 3

Q1'0

9 3

Q1'1

0 3

Q1'1

1 3

Q1'1

2 3

Q1'1

3 3

Q1'1

4 3

Q1'1

5 3

Q1'1

6 3

Year-on-year %

…caused mainly by the commodity price declines between

2011 and 2015 (Source: World Bank)

0 10 20 30 40 50 60

Gold

Oranges

Aluminium

Bananas

Platinum

Maize

Coal

Sugar

Iron ore

Cotton

%

decline

The repo rate and inflation – inconsistency in gap tolerance(Sources: Stats SA; SARB)

3.9

4.3

4.7

5.1

5.5

5.9

6.3

6.7

7.1

Q2'11 3 4

Q1'12 2 3 4

Q1'13 2 3 4

Q1'14 2 3 4

Q1'15 2 3 4

Q2'16 3 4

Repo rate

CPI

%

Money market interest rates in South Africa currently

amongst the highest in the world (nominal) (Source: EIU)

-1 0 1 2 3 4 5 6 7 8

Japan

UK

Hong Kong

US

Poland

Australia

China

Malaysia

Mexico

India

South Africa

%

Euro area

Why SA’s

sovereign debt

remains at

investment

grade

Ratings agencies often ignore a number of fundamental

indicators, such as the recovery of taxation revenue (at constant

2015 prices)…

500

600

700

800

900

1000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rb

…and the existence of a highly diversified composition of taxation

revenue by emerging market standards (FY 2016/17- Rb)…

Fuel & elec. 73

Companies 200

VAT 301

Property tax 16

Excise duties 44

Skills levy 18Dividend tax 25

Customs duties

55

Individuals 443

Total R 1.2 trillion

…furthermore, government’s borrowing requirement as % of total

gross debt continues to decline (fiscal years, National Treasury

forecasts for 2017-’19)…

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

%

…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

0 20 40 60 80 100

Russia

Mexico

Australia

China

South Africa

Malaysia

Brazil

India

Germany

UK

Singapore

USA

%

-7.5

-6

-4.5

-3

-1.5

0

1.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

% (fiscal years)

Fiscal stability is also reflected in a budget deficit/GDP ratio that

is only marginally above 3% and forecast to decline further

According to the World Economic Forum, South Africa remains the

most competitive large economy in sub-Saharan Africa - out of 144

countries

30 40 50 60 70 80 90 100 110

Ethiopia

Gabon

Kenya

Zambia

Ivory Coast

Namibia

Botswana

Rwanda

South Africa

Mauritius

Ranking

-250

-200

-150

-100

-50

0

50

100

150

200

250

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

R billion

South Africa possesses balance of payments stability, due to a

huge financial account surplus (Source: SARB; Note: 2016 = preliminary)

Financial account

Current account

Commodity price slump showing signs of bottoming out

(Source: World Bank)

30

50

70

90

110

130

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Nov

'16

Indices; 2010 = 100

Energy

Agriculture

Metals & minerals

The recession is over – prepare for higher growth

Dr Roelof Botha

Some more reasons for modest optimism

South Africa has some stunning competitiveness strengths to build on (Source: WEF - 2016)

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

South African households have a lower debt/disposable income

ratio than most key trading partners

60 80 100 120 140 160 180

South Africa

Germany

Italy

France

US

Japan

UK

South Korea

Sweden

Australia

%

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

0.5

0.8

1.1

1.4

1.7

2

2.3

2.6

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

R trillion

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

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2008 2009 2010 2011 2012 2013 2014 2015 2016

Million

Real retail trade sales regularly reach new record highs, also in

Q4 2016…

102

104

106

108

110

112

Q1'14 2 3 4 Q1'15 2 3 4 Q1'16 2 3 4

Index; 2012 = 100

…explained by continued progress with employment creation in

South Africa (2.1 million jobs created since Q1 2010)…

13.8

14.05

14.3

14.55

14.8

15.05

15.3

15.55

15.8

Q2'0

9 4

Q2'1

0 4

Q2'1

1 4

Q2'1

2 4

Q2'1

3 4

Q2'1

4 4

Q2'1

5 4

Q2'1

6 4

Million

Source: Stats SA

South Africa’s real GDP per capita has reached a structurally higher level & the country is classified by the UN as “upper middle income"

50

53

56

59

62

65

68

71

74

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

R ‘000 (constant ‘15p)

Source: SARB

Leadership, smart policies

& teamwork required!