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TWO DECADES OF
FREEDOMWhat South Africa Is Doing With It, And What Now Needs To Be Done
“The people of South Africa have spoken ... They want change! And change is what they will get. Our plan is to create jobs, promote peace and reconciliation, and to guarantee freedom for all South Africans”– President Nelson Mandela, inaugural speech, May 1994
TWO DECADES OF FREEDOM–A 20-YEAR REVIEW OF SOUTH AFRICA
As the 20th anniversary of the birth of democracy in South Africa, on April 27 2014, approaches, it seems a perfect opportunity to take a step back and get a long-range perspective on the important question: “So, what has Nelson Mandela’s South Africa done with its freedom?”
Goldman Sachs has produced this report in the hope of contributing to-wards a more balanced narrative on South Africa; one, which in the wake of 2012’s tragic events at Marikana, had become somewhat hysterical, short-term and often negative.
The report provides a data-rich, empirical analysis of how South Africa has changed in the past 20 years, and its position in the world, and identi� es:
• The 10 areas in which South Africa has made structural advances in this time• The 10 large challenges that remain to be tackled• The 10 key issues now to be addressed
We have privately presented to, discussed and iterated this report in private audiences with the South African government, some of South Africa’s top political leaders, the South African Reserve Bank, business leaders, boards of leading companies, business organisations and leading academic institu-tions.
The report aims and hopes to present a balanced picture, at a time after close on 20 years of democracy, when it is possible to re� ect, take stock and get a clear picture of the challenges ahead for South Africa.
We also hope that by providing this balanced perspective on South Africa’s achievements in the past 20 years, and identifying in factual relief the chal-lenges which remain, all South Africans will be in a better position to chart the way forward to realising Nelson Mandela’s vision.
Colin ColemanPartner Managing Director, Head of South African Of� ce and Investment Banking Division, Sub-Saharan Africa, Goldman Sachs International
Johannesburg, 4 November 2013
COLIN COLEMAN
I. How South Africa has changed in the almost two decades
since 1994, and how it is now positioned in the world…
i
2
South Africans now and at the dawn of
democracyBased on National Census 1996 and 2011
1996 2011
Population (m) – Total 40.6 51.8
- African 31.4 41.0
- Other 9.2 10.8
GDP ($bn) 143.8 404.3
Unemployment (millions) 4.7 5.6
Employment (millions) 9.0 13.2
Functional illiteracy¹ (%) 33.6% 19.1%
Access to services (%)
Electricity² 58.2% 84.7%
Water³ 60.8% 73.4%
Sanitation4 50.3% 62.6%
Social Welfare (millions) 2.4 14.6
Source: National Census, Stats SA
¹ Defined as the number of persons aged 15 years and older with no schooling or whose highest levels of education are less than Grade 7
² Based on % of population that use electricity for lighting in the home
³ Based on % of population that have access to piped water inside the dwelling/yard4 % of households that have flush or chemical toilets
How South Africa has changed in the almost two decades since 1994, and how it is now positioned in the world…
+11.2m (27.6%)
+9.6m (30.6%)
+1.6m (17.4%)
?
?
?
79%
(now 15.2m)
(now 16.6m)
2.8x
State non-
cash
transfers
State cash
transfers
The South African population is even more African dominated today - Based on information provided by the 1996 and 2011 census, the African population is
the fasting growing population group and now accounts for c.79% of the South African population. This fact dominates the political and commercial landscape and makes the African community the key determinant of the political and economic life of the country
- Economic growth shows strong improvement but unemployment is sticky - GDP, on a dollarised basis, has grown more than 2.8x over the period to around $400bn - Whilst unemployment has remained high with a net 900,000 added to the unemployed
between 1996 and 2011, those with employment have in fact grown by 4.2 million in the period and by 6.2 million to 2014. Employment has therefore grown, albeit at an insufficient rate to bring the aggregate % unemployed down
The poor have benefited from cash and non-cash state transfers - Non-cash transfers by the State in the form of providing public sector goods and services
to the poor is evident in areas such as education (functional illiteracy improving from 34% to 19%), access to electricity (improving from 58% to 85%) and access to water and sanitation facilities (both reaching an additional 13% of the population)
- Social welfare monthly cash grants are now afforded to over 16m people in need, which corresponds to the number of people living below the $2/day poverty line in South Africa, at an annual current cost to the fiscus of over $10bn
- The combination of these cash and non-cash transfers of value represents a vital safety net and cushion for the poor and supports their ability to acquire their basic needs
3
Service delivery has improved since 2002
Results of the Stats SA 2012 General Household Survey
Source: Statistics SA (General Household Survey)
Note: The target population of the survey consists of all private households. The survey does not cover other collective living quarters such as students’ hostels, old-age homes,
hospitals, prisons and military barracks, and is therefore only representative of non-institutionalised and non-military persons or households in South Africa
How South Africa has changed in the almost two decades since 1994, and how it is now positioned in the world…
Health
70% of households went to public clinics
and hospitals first vs. 57% in 2002
79% of households that attended public
health-care facilities were either very
satisfied or satisfied with the service they
received
Household Access to Services
Households with electricity increased
from 77% in 2002 to 85% in 2012
91% of households have access to piped
or tap water in the dwelling, off-site or
on-site vs. 56% in 2002
94% of households have access to either
landlines or cellular phones in 2012
41% of households had at least one
member who used the Internet either at
home, work, place of study, or Internet
cafés
Between 2002 and 2012, the percentage
of individuals who experienced hunger
decreased from 24% to 11% Social Security
The percentage of individuals that benefited from social
grants has increased from 13% in 2002 to 30% in 2012
The percentage of households that received at least one
grant increased from 30% to 44%
Education
57% of learners had benefitted from the ‘no fee’ system vs. 1% in 2002
93% of South Africans can read and write
29% of people older than 20 have grade 12 as their highest level of education vs. 22% in 2002
Education
Health
Social
Security
Household
Access to
Services
The Stats SA General Household Survey, provides a picture of broad improvements for poorer communities - One example to highlight is health, where 70% of households made use of public clinics
(vs. 57% in 2002) and around 80% recorded being satisfied or very satisfied with the service received
- This stands counter to prevailing public perception of the state of public health facilities and, whilst not evenly performing, on aggregate the data reflects that public health services is deemed by its client users to have improved
4
The US still dominates the world as we know it
todaySouth Africa a small economy
Source: Bloomberg, IMF WEO April 2014 Database1 Nigeria 2014E GDP based on revised GDP for 2013 of $509.9bn and extrapolated for 2014 based on a constant multiple over previous estimates of 1.8x
How South Africa has changed in the almost two decades since 1994, and how it is now positioned in the world…
Region
2014 Market
Cap ($bn)
2014E
Nominal GDP
% of World
GDP
World 61,963 76,776 100.0%
US 22,099 17,528 22.8%
China 3,362 10,028 13.1%
Japan 4,186 4,846 6.3%
Germany 1,952 3,876 5.0%
France 2,217 2,886 3.8%
UK 3,889 2,828 3.7%
Brazil 988 2,216 2.9%
Africa 1,043 2,197 2.9%
Italy 701 2,171 2.8%
Russia 622 2,092 2.7%
India 1,252 1,996 2.6%
Canada 2,161 1,769 2.3%
Nigeria¹ 77 563 0.7%
South Africa 880 354 0.5%
US
Japan
Germany
FranceUK
ItalyCanada
South Africa
Nigeria¹
China
BrazilRussia
India
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
(1,000) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000
20
14
E N
om
ina
l G
DP
(U
S$b
n)
Market Cap at April-2014 (US$bn)
G7
Africa
BRICs
20,000
20,00
South Africa is a small economy when seen in a global context with only 0.5% of world GDP - The US ($17trn GDP) and China ($10trn GDP) are the dominant, leading economies. The
performance of these economies is central to South Africa's economic prospects - South Africa’s total equity market capitalisation is a standout 2.5x GDP, the highest
market cap / GDP ratio of all countries shown on the table, and one key measure on which it compares favourably against other BRIC countries
5
ARS
BRL
CLP
CNY
COP
CZK HUF
INR
IDR
ILS
KRWMYR
MXN
PHPPLN
RUB
ZAR
PEN
THB TRY
RussiaBrazil
Chile
China H-shares
Hong Kong
India
Turkey
Hungary
Czech Rep
South Africa
EEM
MalaysiaPhilippines
Thailand
Indonesia
Mexico
Korea
Israel
Poland
Taiwan
(3)
0
3
6
9
12
15
(3) 0 3 6 9 12
FX Equities
US Factor (t-stat)
Ch
ina
Fa
cto
r (t
-sta
t)
South Africa is leveraged to China’s prospectsSA Equities (JSE) more correlated to US growth and SA FX (ZAR)
more correlated to China growth
China Produces Three South Africa’s a Year FX and Equity Relationship with China and the US
Source: GSAM, Goldman Sachs Global Investment Research, IMF WEO April 2014 Database
How South Africa has changed in the almost two decades since 1994, and how it is now positioned in the world…
240
350
1,400
2,000
9,200
1,000
1,100
Greek GDP
South African GDP
Spanish GDP
Italian GDP
Chinese GDP
Change in ChineseGDP, 2012-2013
Change in BRICGDP, 2012-2013
2013 GDP (US$bn)
The importance of both China and the US for South Africa is further evidenced by their sheer size and influence over global FX and equity markets - Even at a “slower” growth rate of c.7.5%, China is currently adding around $1tn per
annum to world GDP. This equates to adding an economy the size of Greece every 12 weeks or the size of South Africa every 4 months
- As a major commodity consumer and importer from South Africa and Africa, and given China's increasing overall importance as a trade partner for South Africa, its' economy is hugely influential in determining the overall health of South Africa's
- On the right hand side, we see that the ZAR's performance is more correlated to China (given the commodity factor) and the JSE is highly correlated to the performance of US equities. If the US economy enters a phase of sustained growth going forward this should be good news for the JSE
6
Well positioned to benefit from the high
potential across Africa
Top 11 High-potential African Economies
Africa 11 Growth Environment Scores³
Source: Goldman Sachs Global Economics
¹ Geometric average growth rates (CAGR)
² Growth rate ppp weighted
³ The GES is an index developed to measure the extent to which structural conditions and policy settings in a country are conducive to transforming the economic potential of the
BRICs, Next 11 and other countries into reality. A higher score denotes a more conducive environment
How South Africa has changed in the almost two decades since 1994, and how it is now positioned in the world…
Africa’s Rapid Growth Should be Supportive to
South Africa’s Potential
Nigeria
Kenya
Tanzania
South Africa
Ethiopia
Morocco
Zambia
Ghana
Rwanda
Angola
Mozambique
Stronger Track Record Larger Population
We now live in a “good neighbourhood”
3.3 3.1
3.7
NA
7.0
2.4
NA
3.1
2.22.4
3.6
1.6
6.1
6.7
8.2
5.6
5.2
4.8
3.73.4
3.7
2.1
4.7 4.84.5
6.7
NA
4.4
NA
4.2
Wo
rld
DM
's
EM
's
BR
IC
EM
Asia
Sub
-Sa
ha
ran
Afr
ica
CIS
ME
NA
CE
E
La
tAm
%yo
y
1980-2000
2000-2013
2010-2050²
Real GDP Average Growth Rate1:
Sub-Saharan Africa to grow at an average rate of more than 6.5% p.a. to 2050
0
1
2
3
4
5
6
1997 1997-2012 GES Change
1997 Developing Average 2012 Developing Average
- In 1994 South Africa suffered from a "bad neighbourhood" syndrome, particularly highlighted by the political and economic state of Zimbabwe. The Sub-Saharan Africa region grew at only 2.4% real GDP average growth rate from 1980-2000
- However, in the last 13 years the region actually recorded a 5.6% average growth rate. We forecast this to rise to 6.7% into 2050 which will produce a region the size of $14trn, ranking as one of the fasting growing regions in the world. South Africa and its companies are now ideally positioned to benefit from the growth potential of the continent
- Using the Growth Environment Scores as a measure of progress, we see countries universally improving their performance since 1997, albeit off a low base, in providing an environment that is conducive to economic growth
II …South Africa has made significant structural advances
since 1994…
ii
8
South Africa has in the two decades since 1994
made decisive structural advances in 10 key areas
II …South Africa has made significant structural advances since 1994…
Macro fiscal and monetary balances have improved
Government debt costs have trended lower and foreign reserves have risen
Overall cost of capital has declined
Corporate valuations have improved relative to global peers
Real asset ZAR returns have compared favourably
China and African trade rise has largely offset European trade decline
Disposable income of South Africans has risen
The rise of the black middle class has led to a structural boost in spending
Wage inflation and government grants have supported this trend
Per unit labour productivity has improved
1
2
3
4
5
6
7
8
9
10
South Africa has made significant structural advances since 1994
9
Macroeconomic, fiscal and monetary
balances have improved1994 – 2007 a golden period of higher growth and lower inflation
Source: IMF WEO April 2014 Database, Stats SA
II …South Africa has made significant structural advances since 1994…
14 years 14 years IMF Forecasts
1
Macro fiscal and monetary balances have improved
Avg
Inflation
14.3%
Avg
Inflation
6.3%
Avg
Inflation
6.6%
6 years
SARB
Target
Range
(3-6%)
Avg CPI Over
Forecast Period
5.4%
80.5
135.8
285.8
350.8
14.2%
8.8%
7.1%
5.8%
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
0
50
100
150
200
250
300
350
400
450
500
1980 1988 1996 2004 2012
CP
I (%)
No
min
al G
DP
($b
n)
Nominal GDP ($bn) Average Annual Inflation (CPI)
20071994
Average Real GDP Growth Rate During Period
1989 1999 2019E1989 1989
466.6
5.2%
2013Jacob
ZumaPW Botha FW de
Klerk
Nelson
MandelaThabo
Mbeki
This graph tells a remarkable story about economic growth in South Africa before and after 1994 - Between 1980 and 1994, when South Africa was at the height of the anti-apartheid
conflict (with associated sanctions, repression, labour and political unrest), it achieved a 1.4% average GDP growth rate, accompanied by average inflation in the period of 14.3%
- Notwithstanding inheriting this dire economic legacy, junk status sovereign credit rating (Standard & Poors BB) and a practically empty bank account (Net Open forward position of -$25bn), South Africa recorded an average GDP growth rate of 3.6% between 1994-2007 and brought inflation down (with the introduction of inflation targeting) to an average in the period of only 6.3%. This was a "golden period" of economic performance and a peace dividend for South Africa
- Post 2007, the changes brought about by the ANC's Polokwane conference and the onset of the global financial crisis had the effect of moderating this growth, which resulted in a more subdued but still positive average GDP growth rate of 2.2%, and average inflation of 6.6% in the period 2007 to 2013
- Importantly, this impressive performance has, through the period, transformed South Africa from an $80bn economy to a $350bn economy today, accompanied by prudent monetary and fiscal policy
10
Government debt position improved and
foreign reserves risen…
Government Debt as % of GDP Gross Gold and Foreign Exchange Reserves (US$bn) Have Risen
Source: IMF WEO April 2014 Database, SARB
II …South Africa has made significant structural advances since 1994…
2
Government debt costs have trended lower and foreign reserves have risen
Region %
USA 105.5
UK 91.6
EU 89.4
Brazil 67.5
India 67.5
Russia 14.3
Peers: 2013 Debt
as % of GDP
3.1 4
.3
2.2
5.8
5.5
7.5 7.7
7.6 7.8 8.2
14.9
20.7
25.6
33.0
34.1
39.7
43.8
48.9 50.7
49.6
0.0
10.0
20.0
30.0
40.0
50.0
60.0
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
US
$b
n
31.9
49.7
28.3
43.6
20%
25%
30%
35%
40%
45%
50%
55%
198
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
92
01
02
01
12
01
22
01
3
56%
(43)%
54.1 %
- Government debt as a % of GDP shot up through the pre-1994 period to 50%, declined through policies of fiscal prudence in the "golden period" to 28% in 2007 and, since the onset of the global financial crisis, has risen again to 44%, still way below the developed world benchmark in the UK, EU and USA
- The IMF recently warned South Africa that a 1% decline in growth could see a rapid rise in Debt/GDP to around 60%
- The National Treasury's recent forecasts aims to keep South Africa well clear of the high indebtedness recorded in certain developed markets, and certainly below 50% in the next 4 years
- Gross gold and foreign exchange reserves in 1994 were only $3bn (before the negative Net Open Forward Position). As the $(25bn) position closed around 2003, the reserves rose rapidly to around $50bn
11
…although there is room to accumulate further
FX reserves
Emerging market central banks have accumulated large FX reserves, especially since the mid-1990s
Actual FX reserves level vs. the 'optimal' level of precautionary reserves¹
Source: World Bank, IMF, Goldman Sachs Global Investment Research
¹ Goldman Sachs research has defined the optimal level of FX reserves as the level where the marginal benefits of higher FX reserves equal the marginal costs
II …South Africa has made significant structural advances since 1994…
2
21.3
31.1
13.8
11.4
21.9
0
5
10
15
20
25
30
35
401980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
FX
Reserv
es a
s %
of
GD
P
CEEMEA Avg Asia Ex-Japan Avg LATAM Avg South Africa EM Median
0
50
100
150
200
250
300
350
400
450
500
Russia
Isra
el
So
uth
Afr
ica
Hungary
Cze
ch R
ep.
Po
lan
d
Turk
ey
Ukra
ine
Pe
ru
Bra
zil
Colo
mbia
Mexic
o
Chile
Chin
a
India
Thaila
nd
Mala
ysia
Indonesia
FX
Reserv
es
(% o
f sh
ort
-term
exte
rnal
deb
t)
Actual FX reserves Optimal FX-reserves (lower bound) Optimal FX-reserves (upper bound)
'Optimal' level of precautionary reserves
Government debt costs have trended lower and foreign reserves have risen
- However, South Africa still has room on an absolute and relative (to other growth markets) basis to accumulate further reserves to get to the “optimal” level of precautionary reserves. Such a higher level of reserves theoretically affords the central bank with a cushion and flexibility to deal with any currency shocks
- The chart at the bottom shows South Africa’s position in the red bar and highlights that at this point there is room to accumulate further reserves between the current levels and the optimal level as defined by Goldman Sachs Global Investment Research
12
0
100
200
300
400
500
600
700660
180
139 Median:
SA 5 Year CDS Spreads (bps)
9.5%
15.6%
13.2%
8.5%
13.7%
8.9%
7.1%
5.8%
0%
6%
12%
18%
24%
1980 1988 1996 2004 2012
Average Lending Rate Average Annual Inflation (CPI)
20131994 2007
Cost of capital has declined
Lending Rates Since 1980 Credit spreads have trended lower
Source: Euromonitor, Bloomberg as of Apr-141 Average lending rates which usually meet the short-and medium-term financing needs of the private sector. These rates are normally differentiated according to creditworthiness of
borrowers and objectives of financing
II …South Africa has made significant structural advances since 1994…
3
Overall cost of capital has declined
2007Average 1980-1993 1994-2007 2008-2013
Lending Rate¹ 17.3% 15.6% 10.5%
Inflation 14.2% 6.3% 6.4%
- On the LHS, we see that the cost of capital has, in line with falling inflation, declined over the period from an average lending rate from 1980 to 1994 of around 17% to around 11% in the last 5 years. This benefits all members of society from corporates to consumers
- The sovereign spreads have largely improved with the exception of the spike in 2008 off very tight pre global financial crisis levels
- The recent slightly elevated levels reflect growing risk across growth markets as the US Fed prepares to taper it’s quantitative easing program
13
Valuation differences have largely closedThe JSE has shown solid relative growth
Rolling 12 Month Forward P/E Multiples JSE ALSI vs. S&P 500 Since 1995 in US$
Source: Datastream as of Apr-2014
II …South Africa has made significant structural advances since 1994…
4
Corporate valuations have improved on relative basis to global peers
5
10
15
20
25
30
Jan-1994 Jan-1999 Jan-2004 Jan-2009 Jan-2014
12
Mo
nth
Fo
rwa
rd P
/E
Europe US SA
15.5x
13.8x13.8x
2007
Apr-2014
0
50
100
150
200
250
300
350
400
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
Ind
ex
ed
Ma
rke
t C
ap
(o
n a
$ b
as
is)
JSE ALSI S&P 500
342.3
344.6
20
14
JSE Market
Cap: $880bn
S&P Market Cap:
$16,201bn
- On the LHS, it is clearly visible that around the period of 2000, there was a large differential (equal to about 15x) in the value attributed to US and European companies vs. South African companies, based on one year forward P/E multiples
- This made it difficult for South African companies to use their stock as currency for acquisitions globally as they were relatively undervalued and at an impossible competitive disadvantage
- At least partly as a result, companies like Old Mutual, Anglo American, SAB Miller and Dimension Data moved their primary listings to the London Stock Exchange, interalia, in the hope of an upward multiple rerating towards LSE valuations to compete on the global stage
- Over time, however, this valuation differential reduced as South Africa's Golden Period of economic prosperity assisted in re-rating JSE listed companies upwards, and US and European multiples fell into and beyond the Global Financial Crisis, thereby compressing the valuations close together
- South Africa’s current 1 year forward P/E multiple of 13.8x is now on par with the 13.8x of Europe, but lags the 15.5x of the US by only 1.7x. It will be interesting to see if the historic multiple differential re-emerges in future. In the meantime, South African companies are at better comparative valuations on aggregate than they have been since 1994
- The chart on the RHS reinforces the point that on a relative basis to the S&P500 Index, the JSE in US$ terms has performed in line since 1995 despite the effect of a deteriorating exchange rate
14
The JSE is ideally positioned as Africa's
investment hub
Source: Bloomberg as at April-14
¹ 1995 figure based on the Solidarity South African Transformation Monitor and 2012 figure based on a report released by the JSE in Dec-12, based on the top 100 companies on the
JSE, which account for almost 90% of the listed shares on the exchange.
II …South Africa has made significant structural advances since 1994…
Equity Market Capitalisation
Equity Market Capitalisation
4
The JSE's Market Cap / GDP ratio is over 2x and represents 80% of all African equity capital market flows
Corporate valuations have improved on relative basis to global peers
Black ownership of JSE-listed shares increased from c.5% in 1995 to c.21% in 2012¹
880
77 7458
2412 9 9 8 7 5 4 4 2 1 1
So
uth
Afr
ica
Nig
eri
a
Eg
yp
t
Mo
rocco
Ke
nya
Zim
bab
we
Ma
uri
tiu
s
Tu
nis
ia
Cote
d'Iv
oir
e
Uga
nd
a
Bo
tsw
an
a
Gh
ana
Za
mb
ia
Ta
nzan
ia
Nam
ibia
Ma
law
i
(US
$b
n)
South Africa has the Largest Equity Market in Africa...
61,96322,099 3,889
3,455 3,362
2,217 2,161 1,9521,574 1,419 1,255 1,252 988 880 810 722 701 622 466 387 77
US
Jap
an
UK
Hon
g K
on
g
Chin
a
Fra
nce
Can
ad
a
Ge
rma
ny
Sw
itze
rlan
d
Au
str
alia
So
uth
Ko
rea
India
Bra
zil
So
uth
Afr
ica
Sp
ain
Sw
ed
en
Italy
Russia
Me
xic
o
Neth
erl
an
d
Nig
eri
a
(US
$b
n)
...and the 14th Largest Equity Market Globally
The JSE is the only viable, liquid entry point into Africa's equity capital markets - South Africa’s corporate equity market cap, at c.$880bn, is more than 11x larger than any
other African stock exchange, with Nigeria’s $77bn market cap exchange the next largest. The JSE represents 80% of all Africa's equity capital markets. On a liquidity basis, South Africa trades c.$2bn average daily trading value (ADTV) vs. Nigeria’s $20m. Therefore, international investors, sovereign wealth funds and multinationals such as Walmart, Vodafone & ICBC consistently choose South African companies as the platform for their Africa strategy
- The high standards of corporate governance, excellence of management teams and the liquid capital markets make South African companies attractive targets and partners for African expansion
- On a global scale, the JSE as the 14th largest stock exchange compares favourably to fellow BRIC nations such as Russia
15
South African companies which have been
established or listed since 1994
Source: Datastream as of April 2014
II …South Africa has made significant structural advances since 1994…
SA “born free” companies have created significant value in both ZAR and USD since 1994
4
Corporate valuations have improved on relative basis to global peers
12-Aug-98 0.6 ($0.1bn) 124.4 ($11.9bn) 40.6% 36.3% 209.7x 127.5x
23-Sep-98 3.3 ($0.6bn) 104.3 ($9.9bn) 25.0% 20.5% 32.1x 18.2x
27-Nov-06 17.4 ($2.5bn) 50.6 ($4.8bn) 15.6% 9.6% 2.9x 2.0x
21-Oct-99 3.0 ($0.5bn) 50.5 ($4.8bn) 21.5% 17.1% 16.8x 9.9x
13-Jun-03 1.3 ($0.2bn) 34.2 ($3.3bn) 35.4% 31.8% 26.7x 20.0x
5-Dec-96 0.4 ($0.1bn) 32.6 ($3.1bn) 29.2% 23.3% 84.9x 37.8x
23-Feb-00 0.5 ($0.1bn) 29.3 ($2.8bn) 34.1% 29.4% 63.3x 38.1x
18-Feb-02 0.1 ($0.01bn) 24.0 ($2.3bn) 54.7% 55.9% 199.9x 219.8x
08-Nov-10 10.7 ($1.6bn) 10.9 ($1.0bn) 0.8% (10.9)% 1.0x 0.7x
Listing Date
on the JSE
Market Cap at
Listing (Rbn)
Current Market
Cap (Rbn)ZAR USD
Annual % Growth
ZAR USD
Money Multiple
- South African companies which have been established (or listed on the JSE) post democracy have been able to benefit from the positive trading environment and create significant value for shareholders in both ZAR and USD terms
- These companies have also successfully created over 60,000 new jobs in South Africa
16
While inward FDI has been on an upward
trend, net FDI has been volatile…
Foreign Direct Investment into South Africa Since 1994 ($bn) Net Foreign Direct Investment in South Africa Since 1994 ($bn)
Source: UNCTAD
II …South Africa has made significant structural advances since 1994…
0.4
1.2
0.8
3.8
0.6
1.5
0.9
6.8
1.6
0.7 0.8
6.6
(0.5)
5.7
9.0
5.4
1.2
6.0
4.6
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
($b
n)
4
Corporate valuations have improved on relative basis to global peers
0.4
1.2 0.8
3.8
0.6
1.5
0.9
6.8
1.6
0.7 0.8
6.6
(0.5)
5.7
9.0
5.4
1.2
6.0
4.6
(1.2)
(2.5)
(1.0)
(2.4)
(1.8)(1.6)
(0.3)
3.2
0.4
(0.6)
(1.4)(0.9)
(6.1)
(3.0)
3.1
(1.2)
0.1
0.3
(4.4)
(0.9)
(1.3)
(0.2)
1.5
(1.2)
(0.1)
0.6
10.0
2.0
0.2
(0.6)
5.7
(6.6)
2.7
12.1
4.2
1.3
6.3
0.2
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
($b
n)
FDI Inflow FDI Outflow Net FDI 1994-2012 Average Net FDI
1.9
- The chart on the left shows that there has been improvements in inward FDI to South Africa, however on a net basis, after accounting for outflows such as dividends to international investors, particularly post 2000, as a result of offshore listings, dividends or outward bound FDI, we see that net FDI has been volatile
- Through the period 1994 -2012, net annual FDI has been on average only $1.9bn with only 2 years (2001 and 2008) in which net FDI has exceeded $10bn
17
…and lags the major BRIC economiesNet foreign direct investment of other emerging economies ($bn)
Source: UNCTAD
II …South Africa has made significant structural advances since 1994…Corporate valuations have improved on relative basis to global peers
4
0.2
36.9
17.0
68.1
0.4
(23.1)(25)
(15)
(5)
5
15
25
35
45
55
65
75
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ne
t F
DI ($
bn
)
South Africa China India Brazil Russia South Korea
In comparison with India, China and Brazil, South Africa's net FDI has lagged (in line with Russia) - As we show later, in respect of funding the current account deficit, South Africa should
aim to lift the average annual net FDI closer to the $5-10bn range. This requires decisive steps to improve the climate for foreign investment across the economy, and to aggressively compete globally for that investment
18
Real asset returns compare favourablyHistorical returns and rates from 1980 to 2012
Local Nominal and Real Returns Across Major Markets (1980-2012)
Japan Switzerland Germany US France Australia UK Italy South Africa
Nominal Asset Returns
Cash 2.4% 3.1% 4.7% 5.1% 5.2% 8.5% 7.3% 6.1% 12.8%
Bonds 6.7% 5.4% 7.6% 10.0% 11.2% 10.1% 11.0% 10.7% 13.4%
Stocks 2.9% 8.6% 9.1% 11.1% 10.9% 11.7% 12.4% 9.7% 18.0%
Exchange Rate vs. USD 3.1% 1.7% 0.5% (0.6)% (0.2)% (0.9)% (1.8)% (6.8)%
Inflation 0.9% 1.9% 2.2% 3.4% 3.3% 4.4% 4.3% 5.4% 9.5%
Real Asset Returns
Cash 1.5% 1.2% 2.4% 1.6% 1.8% 3.9% 2.9% 0.7% 3.0%
Bonds 5.7% 3.4% 5.3% 6.4% 7.6% 5.5% 6.4% 5.0% 3.6%
Stocks 2.0% 6.6% 6.8% 7.4% 7.4% 7.0% 7.8% 4.1% 7.8%
Real Returns to ZAR Investors (1980-2012)
Source: Dimson, Marsh & Staunton, Global Investment Returns Sourcebook 2013, Credit Suisse
II …South Africa has made significant structural advances since 1994…
Higher inflation,
depreciating
currency, but similar
long term real
returns for ZAR
investors
Japan Switzerland Germany US France Australia UK Italy South Africa
Real Returns in ZAR
Cash 3.5% 2.8% 3.1% 2.9% 2.4% 6.1% 4.2% 2.1% 3.0%
Bonds 7.7% 5.0% 6.0% 7.8% 8.3% 7.7% 7.8% 6.5% 3.6%
Stocks 4.0% 8.2% 7.5% 8.8% 8.1% 9.2% 9.2% 5.6% 7.8%
5
Real asset ZAR returns have compared favourably
- This analysis, summarised in the box on the bottom of the RHS as highlighted in yellow, demonstrates the comparative returns for a ZAR investor if they were free to invest, after removing all currency effects, freely in cash, bonds and stocks across these markets over the period 1980 to 2012
- The results reveal that the performance of South African cash and stocks are largely in line on a global basis, although bonds have underperformed
- This picture reflects favourably on returns for SA investors notwithstanding exchange controls, inflation and currency effects
19
2002 2013
SA
Exports
SA
Imports
Europe Rest of Africa Asia Pacific excl. China North America Middle East Australasia Latin America China Other
China dominates growth in SA tradeEurope’s contribution largest but falling rapidly
Source: Euromonitor database
II …South Africa has made significant structural advances since 1994…
Since 2002, SA’s exports to China have increased at a CAGR of 33% (total export CAGR of 10%) and SA’s imports from
China have increased at a CAGR of 24% (total import CAGR of 13%)
Total: $30.1bn Total: $86.7bn
Total: $26.3bn Total: $101.3bn
China’s FDI presence in SA has grown from c.R340m in 2005 to c.R50bn in 2012, according to the SARB
6
31.7%
13.7%
11.4%
8.7%3.1%
1.8%
1.7%
1.5%
26.5%
45.3%
15.0%5.2%
12.3%
10.1%
3.4%
3.4%3.1%
2.2%
China and African trade rise has largely offset European trade decline
24.7%
18.2%
17.1%
11.8%
8.8%
3.9%
2.6%
1.1%
11.8%
30.6%
18.9%14.3%
11.5%
9.4%
8.1%
3.9%1.6%1.7%
The increasing volume of imports from and exports to China has somewhat compensated for the decline in trade with Europe - Whilst exports to Europe decreased from 32% to 25% since 2002, exports to China
increased from 1.5% to 12% - Similarly, while imports from Europe have decreased from 45% to 31%, imports from
China have increased from 5% to 14% - This reflects the growing importance of China. Africa's contribution to trade is also an
improving trend though more should be done to accelerate intra Africa trade
20
A rise in China exports has offset the fall to
Europe and Africa potential remains
Source: Euromonitor database
II …South Africa has made significant structural advances since 1994…
6
China and African trade rise has largely offset European trade decline
0
5
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 2012 2013
% o
f S
A e
xp
ort
s
Africa China Europe United States Rest of World
- This graph shows how China's rise in trade, supported by a moderate increase from Africa, is offsetting Europe's declining trade contribution (off a high base)
- Corporate expansion into Africa is helpful and should be further encouraged and facilitated to increase trade linkages across sectors
- Goldman Sachs forecasts 2014 GDP growth for Europe of 1.7% from (0.5)% in 2013, a positive swing of 2.2% in 2014. This will hopefully also see Europe's declining pattern of trade with SA stabilise
21
Annual disposable income of South Africans
has increased in line with real GDP per capita
gains
Real GDP Per Capita has Increased by About 90% Over the Last 19 Years Annual Disposable Income of South Africans (Rbn)²
Source: IMF, Euromonitor, National Treasury, Stats SA1 Based current prices as per IMF data2 Defined as gross income minus social security contributions (e.g. pensions) and income taxes; excludes illegal income.3 Based on National Treasury estimates in the 2014/15 National Budget
II …South Africa has made significant structural advances since 1994…
South Africa EM Median
7
Disposable income of South Africans has risen
South Africa’s registered individual taxpayer base has increased from 1.7m people in 1994 to 15.3m in 20133, resulting in
an increase of tax revenues from R114bn in 1994 to R900bn3 in 2013 (at a CAGR of 11.5%)
665
752819
919
1,019
1,137
1,284
1,417
1,494
1,623
1,792
1,962
2,121
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
60
70
80
90
100
110
120
130
140
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Real G
DP
Per
Cap
ita
1994:$3,447¹
2013:$6,621¹
- The graph on the LHS shows the rise, according to a recent IMF report, in real GDP per capita from just under $3,500 in 1994 to $6,621 in 2013, a 90% increase
- The evolution of the poor and the rise of the African middle class are particularly important demographic shifts
- The effect of this is depicted on the RHS, as the graph shows cumulative annualised growth in the annual disposable incomes of South Africans of 10.1% in the period to R2,121bn
- Remarkably, and thanks to the improving efficiency of the widely lauded SARS administration of tax collection, SA's registered tax payers increased from 1.7m in 1994 to 15.3m with tax collections dramatically increasing from R114bn in 1994 to R900bn in 2013
22
1.0
2.22.6
4.8
5.7
6.6
3.42.7
3.1
2.0
LSM1 LSM2 LSM3 LSM4 LSM5 LSM6 LSM7 LSM8 LSM9 LSM10
3.0
4.1 4.1 4.03.6 3.7
1.7 1.7 1.6 1.5
LSM1 LSM2 LSM3 LSM4 LSM5 LSM6 LSM7 LSM8 LSM9 LSM10
Source: SAARF, StatsSA
1 LSM is a wealth measure based on standard of living rather than income.
Around 10 million South Africans have entered
LSM 5-10 in one decade
LSM 5-10: 13.8m
48% of total
Improvement in Living Standards Measure1 (LSM) Since 2001
II …South Africa has made significant structural advances since 1994…
LSM: 2001 (Total: 29.0m)
LSM: 2010 (Total: 34.1m)
LSM 5-10: 23.5m
69% of total
4.7m more in
LSM 7-10
4.6m less in
LSM 1-4
8
LSM 5-636%
LSM 1-431%
LSM 7-818%
LSM 9-1015%
LSM 1-452%LSM 5-6
25%
LSM 7-812%
LSM 9-1011%
The percentage of population falling in the LSM 1-4 bracket has materially decreased,
with a corresponding shift in higher income consumers
5m more in LSM 5-6
The rise of the black middle class has led to a structural boost in spending
The rise in disposable incomes of South Africans has resulted in a remarkable progression in the LSM (Living Standard Measure) profile of the country - This is a standard method used to measure the population in 10 income categories - Between 2001 and 2010, the number of people in the LSM 1-4 categories (which is the
lower income group) decreased significantly from 52% to 31%, resulting in 4.6m less people in the lower income group. And the number of people in the LSM 5-10 increased from 48% to 69%, resulting in almost 10 million more people graduating into the middle to upper band. This was an average of 1 million people per year over a 10 year period, a truly remarkable development
- The largest numbers of people are now in LSM 5-6 (middle income) with 12.3m from 7.3m a decade earlier
23
The African middle class has more than
doubled from 1993 to 2008
Source: Project for Statistics and Living Standards 1993, the Income and Expenditure Survey 2000 and the National Income Dynamics Study 2008
¹ Defined as the monthly income per capita in constant 2008 prices (measured in after-tax earnings)
II …South Africa has made significant structural advances since 1994…
8
The biggest shifts over the period are a rise in African entrants into the middle class and a rise in white entrants into the
upper class segment
Lower Class Lower Class Middle Class Upper Class Total
Below Poverty Line
< R515¹
Above Poverty Line
R515 - R1,399¹ R1,400 - R10,000¹ > R10,000¹
African
1993 21,399 (70%) 6,755 (22%) 2,235 (7.4%) 19 (0%) 30,408
2000 23,053 (66%) 7,769 (22%) 4,006 (12%) 112 (0%) 34,940
2008 23,438 (61.0%) 9,361 (24.4%) 5,377 (14.0%) 257 (1%) 38,433
White
1993 183 (4%) 375 (7%) 4,158 (81%) 400 (8%) 5,116
2000 87 (2%) 298 (7%) 3,055 (75%) 650 (16%) 4,090
2008 125 (3%) 473 (11%) 2,958 (66.6%) 888 (20.0%) 4,444
Race and Class Size (in Thousands of Individuals)
The rise of the black middle class has led to a structural boost in spending
But 85% of Africans remain poor and 87% of whites remain middle-upper class
14%
20%67%
7%
61% 24%
These shifts in income or wealth can be further analysed by race - The middle class has doubled from 7% of the African population in 1993 to 14% in 2008,
a rise of 3.1m more Africans in the period to 5.4m - Over the same period, the white middle class decreased from 4.2m people to 3.0m. Of
that decrease, 0.5m whites graduated to the upper class income and the other 0.7m people emigrated (as evidenced by the overall decline in the white population from 5.1m to 4.4m over the period)
- Therefore, in absolute terms, Africans now dominate the middle class consumer segment, while white people who stayed have on aggregate become wealthier
- The stark reality is that 85% of Africans still remain poor (shown by the red circles), while 87% of white South Africans are in the middle to upper class categories (shown by the green circles)
24
Source: Euromonitor, StatsSA, ILO
Consumer expenditure growth supported by
wage inflation and government grants…
II …South Africa has made significant structural advances since 1994…
9
Wage inflation and government grants have supported this trend
11.1%
11.3% 10.7% 10.7%
5.0%
8.3% 8.9%
9.6%
9.5%
8.6%
10.5%
12.9%
8.4%
13.6%
12.7%
15.0%
8.8%
9.6%
6.4%
15.2%
13.0%
13.2%
8.4%
9.1%
13.6%
10.4%
13.3%
10.2%
12.4%
11.6%
12.9% 13.1%
9.5%
4.8%
8.0%
9.9% 9.9%
7.9%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Wage Inflation (%) Consumer Expenditure Growth (%)
- Real wage inflation of around 4% per annum and social grants have boosted consumer expenditure
25
…which are expected to increase albeit at a
less accelerated rateSocial grants
2007
2007
2013
2013
Source: Natural Treasury Budget Review 2014/15 and 2009
II …South Africa has made significant structural advances since 1994…
Social Grant Beneficiaries (m)
Social Grant Expenditure (ZAR’bn)
9
Wage inflation and government grants have supported this trend
Old Age37.3%
Disability25.0%
Foster Care5.0%
Care Dependency
1.8%
Child Support30.8%
Other0.2%
Old Age18.3%
Disability11.9%
Foster Care3.3%
Care Dependency0.8%
Child Support65.6%
22.8 26.0 29.8 33.8 37.1 40.5 44.8 49.8 54.1 58.8 15.3 16.6 16.6 16.8 17.4 17.6
18.0 18.8
19.9 20.7
3.4 3.9
4.4 4.6
5.0 5.3 5.5 6.0
6.3 6.6
1.1 1.3
1.4 1.6
1.7 1.9 2.0
2.3 2.4
2.6
19.6 22.5
26.7 30.3
34.3 38.1 40.0
43.6 46.1
48.3
0.1 0.1
0.1
0.2 0.2
0.2 0.2
0.3 0.3
0.3
62.5 71.2
79.3 87.5
96.0 103.9
111.0 121.0 129.5
137.6
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Old Age Disability Foster Care Care Dependency Child Support Grant-in-Aid Social Relief of Distress
CAGR2008-2013
CAGR2014-2017
12.1%
9.3%
10.6%
14.2%
17.7%
9.5%
6.5%8.6%
6.4%
8.4%
(11.7)%
2.9%
4.7%
20.4%
2.2 2.3 2.5 2.6 2.7 2.8 2.9 3.1 3.2 3.3
1.4 1.4 1.3 1.2 1.2 1.2 1.1 1.1 1.1 1.1 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
8.2 9.1 9.4 10.2 10.7 11.2 11.1 11.2 11.3 11.4
12.4 13.4 13.8
14.6 15.2
15.9 15.8 16.1 16.3 16.5
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Old Age Disability Foster Care Care Dependency Child Support
CAGR2008-2013
CAGR2014-2017
5.1%
3.0%
4.8%
6.5%
3.9%
(0.1)%
2.7%
2.9%
1.0%
(4.0)%
Old Age39.0%
Disability17.0%
Foster Care5.1%
Care Dependency
1.8%
Child Support36.7%
Other0.5%
Old Age17.9% Disability
7.3%
Foster Care3.2%
Care Dependency
0.8%
Child Support70.7%
Government grants are now distributed to around 16m people - The value of the grants has been similar between children and the old age, who are the
major beneficiaries - Children are the dominant beneficiaries by number of people (around 70% of total grants) - These trends are expected to continue through to 2017, with a CAGR of around 7% in
total expenditure, a slightly lower pace of growth than the 5-year CAGR since 2008 - Treasury remains committed to sustaining this programme
26
Social protection and housing expenditure has
expanded whilst defence spend and debt service
has reduced
1990/91 1994/95
Source: National Treasury
¹ Includes general economic and labour affairs, agriculture, forestry, fishing, fuel and energy, transport, communication and environmental protection
² Includes police services, law courts, prisons and other safety services
³ Converted at the average ZAR/USD rate for each respective year and the spot rate on 1-Mar-14 for the 2014/15 budget
II …South Africa has made significant structural advances since 1994…
South African National Budget Allocations by Function
2014/15
Total: R82.9bn
Total: $36.7bn³
Total: R140.1bn
Total: $39.2bn³
Total: R1.25tn
Total: $116.6bn³
Education20.9%
Health10.1%
Social Protection
6.9%
Housing 1.5%
Economic Affairs¹12.1%
Defence 13.7%
Public Safety² 8.1%
Debt Service14.8%
Mining and Manufacturing
1.5%
Other10.3%
Education22.0%
Health10.2%
Social Protection
9.3%
Housing 1.3%
Economic Affairs¹11.0%
Defence 8.7%
Public Safety² 9.5%
Debt Service17.5%
Mining and Manufacturing
0.7%
Other9.9% Education
19.7%
Health11.9%
Social Protection
15.0%Housing 11.6%
Economic Affairs¹11.8%
Defence 3.5%
Public Safety² 9.2%
Debt Service9.2%
Mining and Manufacturing
0.2%Other7.8%
9
Wage inflation and government grants have supported this trend
- A review of the National Budget reveals that in US dollar terms, expenditure has increased by over 3x from $37bn in 1990 to $117bn in 2014
- In 1990, the combined expenditure on the non-productive areas of debt service and defence was 28.5%, compared to only 12.7% in 2014; effectively more than halving as a % of total allocated expenditure
- A more prudent fiscal approach has resulted in a reduction in debt service costs from c.15% of total budget allocation in 1990 to just over 9% today
- The combined increased spend on social protection, housing and education from 29.3% in 1990 to 46.3% in 2014 of total budget allocation is reflective of changing priorities geared towards human development and a larger focus on narrowing the poverty gap
27
Labour productivity has improved on a per
unit basis… but not in line with labour cost
increases
Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/National Statistics , Statistics South Africa
¹ Productivity defined as the output of goods and services in the economy per employed person. It is calculated as gross domestic product divided by employed population.
II …South Africa has made significant structural advances since 1994…
10
Per unit labour productivity has improved
Labour Productivity of South Africa and Other Emerging Markets¹
However, Labour Cost Constantly Rising Relative to Productivity Over the Period
2002-2013 Labour
Productivity CAGR
45.0
23.0
12.84.6
17.5
7.3 5.9 8.8 5.7 7.7 7.52.1 2.2 4.4 2.1 1.6 1.3 1.6
30.8
20.3
16.7
20.7
7.0
17.0 16.4 12.313.1 10.8
5.69.7 8.7 5.8
5.65.3
3.31.4
75.7
43.4
29.525.3 24.6 24.3 22.3 21.1
18.818.5
13.111.8 10.9 10.2
7.7 6.94.6
3.0
Israel SouthKorea
Poland Russia Mexico Argentina East.Europe
SouthAfrica
Brazil LatinAmerica
Tunisia China BRIC Egypt Indonesia Nigeria India Kenya
US
$ (
'00
0)
pe
r P
ers
on
Em
plo
ye
d
2013
Change from 2002 2013
2002
5.9% 7.9% 16.8% 3.1% 11.6% 12.9% 8.2% 11.5% 8.2% 5.2% 17.2% 15.6% 7.9% 12.4% 14.3% 11.9%4.9% 6.0%
(20)%
0%
20%
40%
60%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Annual Change in Labour Productivity Annual Change in Wages per Hour
South Africa’s per unit labour productivity has improved over the last decade by 8% per annum - Productivity output has increased from $8,849 per worker in 2002 to $21,100 in 2013,
positioning SA well relative to other growth markets on this measure - However, nominal unit labour costs over the period have risen at a higher frequency than
labour productivity - In essence, fewer workers are producing more; however the value of productivity gains
are not keeping pace with the rising cost of the workforce - Should SA find a formula for employing more people at a cost lower than the value of
associated production, the good news is that individual employee productivity is healthy by global growth market standards and such job creation should lead to expansion of GDP
III. ...but large challenges to further transform the economy
and defend structural advances remain…
iii
29
Decisive improvement is required in the
following 10 key areas
...but large challenges to further transform the economy and defend structural advances remain…
Unemployment and inequality
Current account deficit
Recent fiscal trends and volatility of currency
Savings rate and consumer indebtedness
Manufacturing / mining sectors
Labour instability and wage inflation
Education / health outcomes and public sector productivity
Infrastructure
Computer & internet access / research & development / patents
Sovereign credit ratings under pressure
1
2
3
4
5
6
7
8
9
10
30
Inequality: South Africa’s triple challenge
Source: World Bank, SA Labour Force Survey1 Based on latest available estimates 2 Based on latest available % from the World Bank database applied to SA population from IMF WEO Database as at April 2014
...but large challenges to further transform the economy and defend structural advances remain…
HIV Prevalence (% Pop. Aged 15-49)1 Unemployment (%)
% Population Living Below $2 Per Day2
1
Unemployment and inequality
20.0%24.1%
31.5%34.0%
1994 2013
Narrow
Broad
5.2m 4.8m
4.0%
15.9%
1994 2013
1.0m
4.6m
40.0%
31.3%
1994 2013
15.8m 16.6m
- 4.6 million people between the age of 15 and 49 in SA live with HIV and 6.4 million of the total population are infected. The expansion of the current ARV programmes and the lowering rate of infection are positive signs of the effects of a rising attack by South Africans on the disease
- 4.8 million people are looking for and cannot find jobs, and another 2.2 million have given up looking for work. Together this represents a broad unemployment rate of 34%
- 17 million people today live below the commonly used $2/day poverty line - This is SA's triple challenge of HIV, unemployment and poverty still affecting the lives of
around one third of the population
31
9.2%
22.9% 24.0% 24.1%
0%
5%
10%
15%
20%
25%
30%
35%
1980 1988 1996 2004 2012
Un
em
plo
ym
en
t (%
)
Unemployment Rate
Average: 1.9munemployed people
Average: 3.9munemployed people
Average: 4.3m
unemployed people
1980 - 1993 Average: 15.8%
1994 - 2007 Average: 24.6%
2008 - 2013 Average:
24.3%
20071994 2013 05
15-24 25-34 35-44 45-54 55-64
Unemployment has been stubbornly high
Source: Euromonitor, Stats SA Quarterly Labour Force Survey1 Unemployment according to the narrow definition i.e. unemployed workers are those who are currently not working but are willing and able to work for pay, currently available to
work, and have actively searched for work.
...but large challenges to further transform the economy and defend structural advances remain…
1
Unemployment and inequality
Unemployment Since 1980¹ Youth Unemployment of Particular Concern (Dec-13)
¼ of the labour force cannot find a job
66% of the unemployed have been unemployed for more than
a year
66% of the unemployed are youth aged 15-34
44% of the unemployed have never worked before
1/3 of the 15-24 were not in employment, education or training
59% of the labour supply have not completed matric
Youth 15-34
share of
unemployment:
66%
Adult 35-64
share of
unemployment:
34%
14 years 14 years 6 years
An understanding of the nature of SA's unemployment challenge is of paramount importance to effectively address the situation - In the period leading up to 1994, the unemployment rate rose quite significantly as we
experienced an era of sanctions, unrest and de-industrialisation. Whilst the chart reflects a steep rise in unemployment from a base of around 9% in 1980, this is probably understated as the former “Bantustan” areas (which were home to high unemployment levels) were likely not reflected in the statistics
- Democratic South Africa inherited an unemployment rate of 23% - Unfortunately, this rate has remained static around the mean of c.24% (excluding the
broader unemployment definition) - Of the almost 5 million unemployed people, 66% are youth aged between 15 and 34,
making it a largely youth unemployment problem - 59% of the labour supply have not completed the matric school leaving qualification
32
South Africa’s unemployment in context
South Africa’s Unemployment by Definition: 2008-2013
High Unemployment and Inequality1
(Latest Available Observation)
Source: Statistics South Africa, IMF1 Blue represents a decrease and red an increase in unemployment between 2008 and 2012. The size of the bubble illustrates magnitude of the change in unemployment
...but large challenges to further transform the economy and defend structural advances remain…
1
(2.2m given up looking for
work)
(4.8m cannot find work)
Unemployment and inequality
PolandHungary
South Africa
Ukraine
Thailand
Mexico
South Korea
Brazil
Peru
Turkey
Chile
Colombia
Philippines
Romania
Argentina
Russia
China
(5)
0
5
10
15
20
25
30
20 30 40 50 60 70
Un
em
plo
ym
en
t R
ate
(2
01
2)
Gini Coefficient
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Q1
200
8
Q2
200
8
Q3 2
008
Q4
200
8
Q1
200
9
Q2
200
9
Q3
200
9
Q4
200
9
Q1 2
010
Q2
201
0
Q3
201
0
Q4
201
0
Q1
201
1
Q2
201
1
Q3 2
011
Q4
201
1
Q1
201
2
Q2
201
2
Q3
201
2
Q4 2
012
Q1
201
3
Q2
201
3
Q3
201
3
Q4
201
3
Expanded Unemployment Rate
Official Unemployment Rate
31.3%34.0%
23.8%
24.1%
- 4.8m people cannot find work and a further 2.2m (and rising over the last 5 years) have given up looking for work, so in total around 7m South Africans are unemployed (or 34% of the labour force) whilst 15m have jobs
- South Africa has the highest gini coefficient (measure of the income inequality of the population) amongst peers, although now down from its peak of 72 in 2006 to 69 in 2011 (latest available data)
- Brazil by comparison has, through economic growth and social distribution, improved from a high of 61 to now 55 over a decade period
33
Source: Goldman Sachs Global Investment Research
¹ The Misery Index is a measure used to reflect the degree of macroeconomic hardship coming from inflation (change in CPI), unemployment, growth weakness (shortfall of
actual real GDP growth with respect to potential growth), and cost of capital (short-term interest rates used as a proxy).
Unemployment remains South Africa’s
biggest hurdle…“Misery Index¹”
...but large challenges to further transform the economy and defend structural advances remain…Unemployment and inequality
Factors Contributing to South Africa’s Performance South Africa Relative to Other Regions
36.8
22.3
10.6
18.716.3
0
10
20
30
40
50
60
Jan-2003 Feb-2005 Mar-2007 May-2009 Jun-2011 Aug-2013
South Africa BRIC Developed Markets
Emerging Markets LatAm Developing Asia
18.7
1
36.8
6.5
24.9
0.3
5.1
(10)
0
10
20
30
40
50
60
Jan-2003 Feb-2005 Mar-2007 May-2009 Jun-2011 Aug-2013
SA Misery Index Inflation Unemployment
GDP Growth Cost of Capital
- The “Misery Index” is a global economic tool used to measure the macroeconomic hardship of countries based on inflation, unemployment, GDP growth relative to potential GDP and cost of capital
- Not surprisingly, we see that the largest contributor to South Africa’s “misery” score is the high unemployment rate, accounting for 24.9 of the 36.8 index rating as shown by the red line on the LHS graph
- GDP, cost of capital and inflation factors are stable and trending lower - The RHS graph shows that in the last decade, South Africa has underperformed on a
relative basis relative to other markets. Unemployment remains the Achilles heel
34
The current account deficit remains high…Current account deficit ($bn)
Source: Euromonitor, South African Reserve Bank Quarterly Bulletin, GS Research
...but large challenges to further transform the economy and defend structural advances remain…
2
Current account deficit
High Deficit vs. Other Countries
0.0
(2.5) (1.7) (2.2) (2.4)(0.7) (0.2)
0.3 0.9
(1.8)
(6.7)(8.5)
(13.7)
(20.0) (20.1)
(11.4) (10.1)
(13.7)
(24.1)
(20.4)
0.0
(1.7) (1.2)(1.5) (1.8) (0.5) (0.1)
0.30.8
(1.0)
(3.1)(3.4)
(5.3)
(7.0)
(7.4)
(4.0)(2.8)
(3.4)
(6.3)(5.8)
(9)%
(8)%
(7)%
(6)%
(5)%
(4)%
(3)%
(2)%
(1)%
0%
1%
2%
(25)
(20)
(15)
(10)
(5)
0
5
10
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Current Account Balance % of GDP
(7.9)%
(5.8)%
(3.6)%
(2.6)%
(1.8)%(1.0)%
1.7%2.1% 2.4%
3.0%
Turkey South Africa Brazil India Poland Czech Rep Russia China Israel Hungary
Cu
rren
t A
cco
un
t (%
of
GD
P)
At the top of the page, we see a gradual worsening of the current account deficit, now at 5.8% of GDP or around $20bn - From 1994 - 2003, the current account deficit was always less than 2%. From 2004 it rose
to the lows seen in 2008 of 7.4%, returning to around 3-4% until 2012 when it returned to an elevated level around 6%
- This currently places South Africa at the highest end of the spectrum in terms of our peers, as can be seen at the bottom of the page, with Turkey, Brazil and India other high current account deficit countries
- National Treasury expects this deficit to remain stagnant at around the 6% level, decreasing only to 5.5% by 2016
35
...making the portfolio flows a source of
vulnerability Net foreign purchases/sales of SA equities and debt
Source: Bloomberg as of Apr-2014
...but large challenges to further transform the economy and defend structural advances remain…
2
Current account deficit
NA
15.2
44.4 40.1
17.6
35.0
(0.2) (0.6)
29.1
45.8
65.6 62.3
(55.5)
74.8
36.2
(19.1)
(3.6)(1.5)
16.3
4.1
15.4
(9.2)
14.5
(17.7)(21.4)
4.9
(4.3)
16.7
(4.4)
19.2
7.0
(14.2)
27.3
55.9
48.4
92.4
25.8
(2.6)
(70)
(50)
(30)
(10)
10
30
50
70
90
110
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD
Rb
n
Equities Bonds
- The chart shows the portfolio flows into South Africa over the period, which is particularly important in the context of financing the current account
- The volatility of equity and bond flows can be observed over the period, demonstrating the vulnerability of South Africa should we rely on these flows as a major source of finance
- The increase in bond purchases (light blue bars) post the 2008 financial crisis as developed market yields fell is clearly noticeable. But as yields inevitably rise in developed markets in response to the tapering of quantitative easing the relative attraction of all growth markets, including SA on a risk adjusted basis, is likely to see a proportional decline in bond purchases. This can be seen in the negative bond purchases YTD in 2014
36
Source: Goldman Sachs Global Investment Research
¹ BBoP denotes broad balance of payments (defined as Current Account plus net portfolio flows and net direct investments)
² UT is the unrecorded transactions or errors and omissions (in SA usually resulting from to lags occurring between the recording of individual transactions and the time of the actual
payments flow)
Removing the external vulnerability requires a
significant correction…c. 2% of GDP is required to restore the external balance
...but large challenges to further transform the economy and defend structural advances remain…
2
Current account deficit
(4.5)
(2.8)
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
% o
f G
DP
BBoP¹ UT-adjusted BBoP²
- Goldman Sachs estimates that a correction equivalent to around 2% of GDP is required to remove the vulnerability and to restore the external balance
37
Source: IMF, Goldman Sachs Research
…and a more stable financing mix
Quality of financing has deteriorated
2
...but large challenges to further transform the economy and defend structural advances remain…
The composition of the capital account exposes India, Turkey and South Africa as the most vulnerable to a
reversal of portfolio and external financing flows
Breakdown of Capital Account (2012, $m)
(20,000)
0
20,000
40,000
60,000
80,000
100,000
Brazil India Turkey Indonesia South Africa Malaysia Thailand Ukraine
FDI Portfolio Investment Debt
Current account deficit
$25.2bn
South Africa, together with India and Turkey, is vulnerable to a reversal of portfolio and external financing flows - The majority of the capital account of $25bn is funded by debt and portfolio inflows. The
former gets more expensive to the extent the local currency depreciates and the latter is volatile and uncertain
- Therefore, while South Africa needs to revitalise its export sector (in particular mining and manufacturing) and bring down the current account deficit, South Africa also needs to take aggressive steps to attract FDI to fund it. A range of $5-10bn net FDI per annum would significantly assist and improve the quality of financing available
- South Africa needs to work hard on improving the framework and picture for FDI by welcoming investors, improving the labour environment, and by decreasing the overall costs and complexity of doing business. South Africa needs to find a better balance of attractive returns for investors whilst requiring investor compliance with empowerment, licensing, taxation and other domestic requirements
38
The global backdrop is of elevated risk to
emerging markets
Historical Perspective and Importance of “Global Variables”
Total Local Response¹ to a 1bp Shock to US Rates Caused by
Change in US Policy (Average from 2001 – Present)
Source: GS FX Sales Strats (GS Securities Division) as of Aug-2013. Past performance not an indicator of future returns1 Predicted Response to 1 bp change in US Rates (in bp).
...but large challenges to further transform the economy and defend structural advances remain…
2.2
3.1
0.5
0.3 0.3
0.2
0.1
0.8 1.0
1.8
0.5
0.5
0.5
0.3
0.2 0
.1
0.1 0.4
0.2
11.2
6.2
8.3
7.5
4.8
4.8
3.9 2
.4
2.1 0
.9
1.8
1.8
1.8
1.3
1.3
1.0
0.5
0.1
13.4
9.3
8.8
7.9
5.2
5.0
4.0
3.2
3.1
2.7
2.3
2.3
2.2
1.6
1.5
1.1
0.6
0.4 0
.3
Turk
ey
Indonesia
So
uth
Afr
ica
Po
lan
d
Hungary
Ko
rea
Cze
ch R
India
Bra
zil
Russia
Mexic
o
Ph
ilip
pin
es
Thaila
nd
Sin
ga
pore
Chile
Mala
ysia
Taiw
an
HK
Chin
a
Basis
Po
ints
Rates FX
The EM market sell-off which started in May-2013 on the back of “Fed
tapering” talk has triggered a profound change in EM outlook with
market participants being reminded of earlier episodes of EM stress
when (1) core yields rose (2) the USD rose (3) commodities fell
1970s 1980s 1990s 2000s 2010s
EMs have displayed significant vulnerability to US “policy shocks”
US Dollar Index (LHS) GSCI (out of scale) 3m US rates (RHS)
20
40
60
80
100
120
140
160
180
0
2
4
6
8
10
12
14
16
18
20
22
24
1975
1982
1989
1996
2003
2010
2017
1Jan1975 1Jan2020
?
?
?
1980s Latam
Debt Crisis
(Mexico 1983)
Tequila Crisis
(Dec’94)
MXN -45% Russia
(Sep’98)
RUB -32%
Asia
(Nov’97)
KRW -43%
Turkey
(Jan’01)
RUB -40%
Lehman Default
(Sep’08)
ZAR -33%
BRL -31%
TRY -30%
AUD -28%
MXN -26%
PLN -25%
HUF -25%Argentina
(1998)
Brazil
(2002)
3
Recent fiscal trends and volatility of currency
The global backdrop is one of elevated risk for growth markets as the "Fed tapering" is set to get underway - The chart highlights historical crises related to growth markets - South Africa’s currency is highly sensitive to US interest rate changes
39
FX exchange rate is the shock absorberZAR evolution vs. USD
Source: Datastream as of Apr-2014
...but large challenges to further transform the economy and defend structural advances remain…
3
Recent fiscal trends and volatility of currency
0
1
2
3
4
5
6
7
8
9
10
11
12
13
141
98
0
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Pri
ce (
ZA
R/U
SD
)
14 years 14 years 6 years
10.48
1980-1993 Average: 2.03
1994-2007 Average: 6.28
2008-2014YTD Average: 8.30
The ZAR, one of the most liquid and tradable currencies globally, serves as the shock absorber for these market forces - Historically, the ZAR has been highly volatile. In the 14 years up to 1994 the ZAR/$ traded
at an average of R2/$, in the 14 years post 1994 the average was R6.30/$ and in the last 6 years it has been at an average of just over R8/$
40
0
20
40
60
80
100
120
140
160
115
120
125
130
135
140
145
2007 2008 2009 2010 2011 2012 2013 2014
FX Energy Current Brent [RHS]
Index $/bbl
Although EM currencies are vulnerable as a
result of low commodity prices
Key Trends
High Correlation of Energy Exporters FX to Oil Prices
Source: GS Global Investment Research
...but large challenges to further transform the economy and defend structural advances remain…
Net commodity exporters expected to experience downward FX pressures
3
Recent fiscal trends and volatility of currency
Copper and oil have the closest link with exporter currencies – which is unsurprising given these commodities dominate
the share of exporters’ trade balances
After a decade of elevated commodity prices, Goldman Sachs expects the supply response to result in a continued
decline in prices through 2014
This presents a high downside risk for large commodity exporting emerging markets (EMs), particularly those with
large deficit balances such as South Africa
Copper and oil demonstrate the highest correlation with EM forex movements as can be seen below
South Africa and Peru, as the largest exporters of gold, remain vulnerable to the precious metal’s performance
- Goldman Sachs research finds a significant correlation between the performance of export-driven emerging market currencies and movements in commodity prices overt time
- As global commodity prices continue to experience downward pressure, economies like South Africa remain vulnerable as large net exports (as a % of GDP) and current account deficits limit the resistance against FX movements
41
Cyclical macroeconomic deterioration in Africa
likely to widen credit spreads further
Source: Haver Analytics, Goldman Sachs Global Investment Research
...but large challenges to further transform the economy and defend structural advances remain…
3
Recent fiscal trends and volatility of currency
Nigeria
Ethiopia
TanzaniaKenya
Morocco
Ghana
Mozambique
Angola
Zambia
Rwanda
Egypt
Uganda
Cote d'Ivoire
Senegal
Congo, Rep
Namibia
Gabon
Seychelles
South Africa
0
2
4
6
8
10
12
0 2 4 6 8 10 12
Growth, %
Infl
ati
on
, %
'Sweet spot'
- The re-pricing of emerging market (EM) risk in developed markets is augmented by a cyclical macro deterioration – marked by slower growth, inflationary pressure and widening twin deficits in African countries – which we believe is not yet fully priced into the “Africa premium”
- The combination of a low growth environment together with a high current account deficit results in increasingly significant vulnerability, evidenced by the few countries in the ‘sweet spot’ of relatively low inflation and high growth
- South Africa’s current real GDP growth of around 2% therefore places it at the unattractive end of relative risk-reward quartiling. Increasing growth rates must therefore be a priority
42
40%
50%
60%
70%
80%
90%
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
56.6%
75.7%
South African savings rates remains low and
the SA consumer is now highly indebted 47.5% or 9.5m South Africans have impaired credit records
Household Debt to Disposable Income (%)
Source: National Credit Bureau, GS Global ECS Research
...but large challenges to further transform the economy and defend structural advances remain…
4
Around 10% of the middle class are at risk
The total number of credit-active consumers increased to 20.1m
from 19.97m in previous quarter
10.55m consumers classified in good standing (52.5% of total
number of credit-active consumers, down 0.7% q-o-q and 1.1%
y-o-y)
The number of consumers with impaired records is 9.53m (47.5%
of total number of credit-active consumers, up 0.7% q-o-q and
1.1% y-o-y)
A total of 394.5m enquiries were made on consumer credit
records, an increase of 16.3% q-o-q and 27.1% y-o-y
— Of the total enquiries made on consumer records, enquiries
from banks and other financial institutions accounted for
83.3%, enquiries from retailers accounted for 3.8% and
enquiries from telecommunication providers accounted for
5.1%
Unsecured lending in the South African consumer credit market
has increased by 302% from a total of R40.9bn in December 2007
to a total of R164.6bn in March 2013, now 11.3% of total lending
across the SA banking sector
National credit bureau statistics for Q1 2013 revealed a
“concerning increase” in the levels of impairment
Savings rate and consumer indebtedness
- As household debt to disposable income has built up to 76% now from 57% in 1994, it is natural to expect some "indigestion" from over indebtedness accompanying the rise of the middle class
- The growth in unsecured lending is a contributor to the trend (growing by 302% since 2007)
- However, unsecured lending makes up just over 11% of total lending in South Africa and so is not a systemic issue for the banking system
- The National Credit Regulator measures around 20m credit-active consumers, 9.5m of which have some impairment on their credit records
- Examining the non-performing loan ratios and debt recovery rates suggests that around 10% of those struggling with credit could default, slipping back into the lower income bracket, most likely from the LSM 5-6 category
43
The unsecured lending market is growing
High growth in South Africa’s unsecured lending market
Arrears1 to total loans have been in a band between 12% and 16%
Source: National Credit Regulator; National Credit Bureau1 Defined by the National Credit Bureau as 1-2 months in arrears
...but large challenges to further transform the economy and defend structural advances remain…
4
Savings rate and consumer indebtedness
15.3%
14.2% 13.9% 14.2% 14.5% 13.9% 13.8% 14.3% 14.5% 14.2% 14.2% 14.7%15.0%
14.4%
14.3%
15.3% 15.4% 14.2% 13.7% 13.8%
6%
8%
10%
12%
14%
16%
18%
20%
0
5,000
10,000
15,000
20,000
25,000
30,000
Q1-2
009
Q2-2
009
Q3-2
009
Q4-2
009
Q1-2
010
Q2-2
010
Q3-2
010
Q4-2
010
Q1-2
011
Q2-2
011
Q3-2
011
Q4-2
011
Q1-2
012
Q2-2
012
Q3-2
012
Q4-2
012
Q1-2
013
Q2-2
013
Q3-2
013
Q4-2
013
Ov
erd
ue
Lo
an
s t
o T
ota
l L
oa
ns
Va
lue
of
Ac
co
un
ts (
ZA
Rm
)
Arrears¹ NPLs % Total
49.0 49.2 51.9 54.6 57.361.1
66.2
73.880.9
88.0101.1
113.0120.8 131.3
140.0
159.3 164.6 168.1 167.4170.8
17%9%
13% 14%17%
24%28%
35%
41%44%
53% 53%49% 49%
38% 41%36%
28%
20%
7%0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
120
140
160
180
Q1-2
009
Q2-2
009
Q3-2
009
Q4-2
009
Q1-2
010
Q2-2
010
Q3-2
010
Q4-2
010
Q1-2
011
Q2-2
011
Q3-2
011
Q4-2
011
Q1-2
012
Q2-2
012
Q3-2
012
Q4-2
012
Q1-2
013
Q2-2
013
Q3-2
013
Q4-2
013
ZA
R b
n
Unsecured Credit Book Y-on-Y Growth [RHS]
- The peak of the year-on-year growth in unsecured lending (which shot up from 2010) was in 2H 2011 at around 53%. There has since been a major correction in the market and growth has tapered off to around 7% but now off a higher base of a total unsecured book of R170bn
- Arrears to total loans has trended within a consistent band of 12-16%, currently around the midpoint of 14%
44
Banking &Real Estate
21.5%
Govt. Services
17.1%
Manufacturing11.6%
Retail16.6%
Mining9.2%
Transport8.9%
PersonalServices
6.0% Others¹9.2%
Manufacturing and mining are falling as
contributors to South African GDPBanking and real estate rises the most
1986² 1994
Source: IMF, Statistics South Africa and SA Chamber of mines
¹ Others consists of Construction, Agriculture and Electricity, Gas and Water
² Earliest data available
³ Represent the sum contribution of Mining and Manufacturing to GDP
...but large challenges to further transform the economy and defend structural advances remain…
Composition of the South African Economy (Contribution to GDP at Current Prices)
Although mining now contributes c.9% to GDP, it accounted for 38% of total South African exports in 2012
5
2013
Banking &Real Estate
12.5%
Govt. Services
12.4%
Manufacturing22.7%
Retail11.4%
Mining15.2%
Transport8.6%
PersonalServices
1.7%
Others¹15.5%
Banking &Real
Estate17.2%
Govt. Services
18.6%
Manufacturing18.7%
Retail13.4%
Mining9.4%
Transport7.5%
PersonalServices
5.8%Others¹
9.3%
GDP: $65.4bn
Mining: $10bn
Manufacturing: $15bn
GDP: $135.8bn
Mining: $13bn
Manufacturing: $25bn
GDP: $350.8bn
Mining: $32bn
Manufacturing: $41bn
Manufacturing / mining sectors
38%³ 28%³ 21%³
We have analysed the nature of the mix of GDP in the SA economy - Mining and manufacturing's combined contribution to GDP has declined from 38% in
1986 to 21% in 2013. Given their contribution to both exports and jobs, this is a concerning trend
- Banking and real estate's contribution almost doubled from 12.5% to 21.5% - Government services increased its contribution from 12% in 1986 to 18.6% in 1994 and,
despite an increase in the number of public sector employees, has since declined to 17% in 2013
- Mining and manufacturing's multiplier effect on jobs and its outsized contribution to exports brings into focus the need to revitalise these sectors as critical to the overall health of the SA economy
45
yoy % Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Agriculture & allied 0.9 1.5 5.3 6.2 (2.8) (2.2) 4.9 6.8 (2.9) (1.9)
Mining (3.7) (4.7) (9.4) (1.3) (0.7) (3.1) 3.5 (2.8) 2.7 9.4
Manufacturing 2.4 3.2 0.6 2.0 2.2 3.3 (0.3) 2.6 (0.4) 1.1
Utilities 1.1 0.5 (0.5) (2.0) (1.5) (2.5) (2.7) 0.1 0.9 0.0
Construction 0.6 0.4 1.3 1.6 2.7 3.6 2.0 2.2 2.4 4.5
Wholesale / Retail trade 4.4 5.0 4.7 4.2 3.5 3.1 2.2 2.4 2.0 2.1
Transport / Communication 3.0 3.2 3.0 2.7 2.2 1.9 1.8 1.8 2.1 2.0
Finance / Real Estate 5.1 5.5 5.5 4.2 2.7 2.4 1.7 3.6 3.3 1.1
Government services 4.3 4.6 3.1 2.6 2.7 2.7 2.2 1.7 1.0 1.2
Personal services 1.6 1.5 1.6 3.0 2.8 0.8 1.9 1.5 1.8 1.9
Total value added 3.1 3.5 2.5 2.9 2.2 2.1 1.6 2.3 1.7 1.9
Taxes less subsidies on products 4.8 5.7 4.1 3.4 1.7 1.7 1.5 2.3 1.9 2.7
GDP at market prices 3.3 3.7 2.7 2.9 2.2 2.1 1.6 2.3 1.7 2.0
2011 2012 2013
Mining down, finance and government
services up as contributors to GDP
% Change in the Quarterly Value Added by Industry to GDP (Constant 2005 Prices)
Driven by Secondary Industries
Source: SARB data, Stats SA
...but large challenges to further transform the economy and defend structural advances remain…
5
Manufacturing / mining sectors
- The last 2 years have continued to see this trend as further evidenced by the consistent decline (in red) in the contribution of mining to real GDP growth and the simultaneous increase (in green) in the contribution of the finance, real estate and government services sectors
46
Platinum, gold and coal are 66% and 81% of
revenue and employment contributors from mining
Sales Contribution Within Mining Sector1 (ZARbn, 2012) Direct Employment by Commodity (‘000s, 2012)
Source: Global Insights, StatsSA, Chamber of Mines; DMR1 Represents nominal figures of commodity/basic material sales contribution as reported by Chamber of Mines, for primary production.
...but large challenges to further transform the economy and defend structural advances remain…
Contribution%
5
Manufacturing / mining sectors
96.1
76.8
69.2
52.6
10.8
8.3
6.4
5.2
38.3
Coal
Gold
PGM
Iron Ore
Manganese
Chrome
Nickel
Copper
Other
26%
21%
19%
14%
3%
2%
2%
1%
11%
66%
198
142
83
23
20
12
9
8
30
PGM
Gold
Coal
Iron Ore
Chromite
Diamonds
Manganese
Aggregateand
Sand
Other
38%
27%
16%
4%
4%
2%
2%
1%
6%
81%
Despite its relative decline in contribution to GDP, mining remains a crucial aspect of the growth of South Africa, given our rich commodity base - Within the mining sector, platinum, coal and gold account for 66% of the revenue and
81% of direct employment - The future of the coal industry is linked for domestic uses to Eskom. Recent increases in
BEE procurement requirements has raised additional hurdles for mining majors - The platinum and gold sectors are experiencing challenging profit margins due to rising
costs and labour unrest
47
Mining sector and labour uncertainties
unsettle marketsJSE Resources Index impacted by labour unrest in 2012 and 2013
Source: Bloomberg as of Apr-2014
...but large challenges to further transform the economy and defend structural advances remain…
5
Manufacturing / mining sectors
70%
80%
90%
100%
110%
120%
130%
140%
150%
Jan-2012 May-2012 Oct-2012 Feb-2013 Jul-2013 Nov-2013 Apr-2014
Ind
exed
Pri
ce
JSE ALSI JSE Resources Index FTSE 100
46.6 %
15.1 %
5.3 %
- The troubled post Marikana environment in the mining sector has seen a 40% underperformance of the JSE Resources Index (in light blue) relative to the overall JSE (in dark blue) since the beginning of 2012
48
Source: Datastream as of Apr-2014; Wood Mackenzie Database
¹ Cost of production is derived by aggregating the cost of gold production for all mines in South Africa
...but large challenges to further transform the economy and defend structural advances remain…
5
The World Gold Council has recently published a guidance note on an “all-in sustaining costs” metric to provide further transparency into
the costs associated with producing gold. This includes 17 sustaining cost items, among them royalties, community costs and permits
Manufacturing / mining sectors
ZAR gold price has increased significantly but
cost rises offset commodity price gainsMining “cost inflation” above CPI
0
50
100
150
200
250
300
350
400
450
0
200
400
600
800
1000
1200
1400
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Co
st o
f Go
ld P
rod
uc
tion
, $/o
z (In
de
xe
d to
100
)
Go
ld P
ric
e (
Ind
exe
d t
o 1
00
)
Gold Price (ZAR), LHS Gold Price (USD), LHS Cost of Gold Production¹ ($/oz), RHS
R13,780/oz
$1,319/oz
$1,151/oz
$308/oz
R1,342/oz
$395/oz
- Notwithstanding a rise of the Rand gold price over the period of around 10x in ZAR terms since 1994 to just under R14,000/oz, profit margins in the gold industry have not improved
- The dotted green line shows a simultaneous rise in cost of gold production, largely related to increases in the cost of power and wages
49
South African natural resources stocks have
underperformed BRICs since 1994 but
outperformed developed markets
Source: Datastream as of Apr-2014
Note: SA, Brazil, Australia and Canada based on DJ Metals and Mining indices; China and UK based on FTSE Metals and Mining indices; Russia based on MSCI metals and mining
index; India based on CNX metals index and USA on S&P500 Metals and Mining index.
...but large challenges to further transform the economy and defend structural advances remain…
South African resources stocks have outperformed all developed markets since 1994 despite
a more challenging macroeconomic and political environment
5
Manufacturing / mining sectors
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-1994 Jan-1999 Feb-2004 Mar-2009 Apr-2014
% P
erf
orm
an
ce (
Ind
exe
d t
o 1
00
an
d i
n U
S$)
SA China India Russia Brazil Australia Canada USA UK
915 %
1572 %
515 %349 %269 %
148 %162 %
50 %
(45)%
South Africa missed the commodity
boom
- Using the performance of the resource indices of various countries as a measure of the gains from the commodity boom, we see in the grey highlighted area that despite a global commodity price boom, South Africa failed to take advantage or benefit from this boom
- The overall regulatory approach to licensing, BEE, taxation, health and safety, environmental issues, labour and other areas has acted as a handbrake on investment in the mining sector in SA
50
Mining sector wage inflation at 11% over 10
years...Average earnings in the mining sector (2002-2012)
Source: SA Chamber of Mines
...but large challenges to further transform the economy and defend structural advances remain…
5
Manufacturing / mining sectors
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ave
rag
e E
arn
ing
s (
R/Y
ear)
- One of the key contributing factors to this lower profitability of the sector has been the rising wage inflation of 11% per annum recorded over a 10 year period
- The recent wage settlements of around 8% is below this long-term trend and a step in the right direction for a sustainable mining sector
51
...while at the same time, PGM productivity has
been falling by c.5% per year and employment
has been broadly flat
SA Precious Metals1 Sector Productivity
(Production/Employee) Precious Metals1 Employment, 2002-2012
Source: SA Chamber of Mines, UBS Research1 Note: Consolidated Gold and PGM sector
...but large challenges to further transform the economy and defend structural advances remain…
5
Manufacturing / mining sectors
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Kil
og
ram
s / '0
00
Em
plo
ye
es
311 326 331
316 328
355 366
344 339 340 340
0
100
200
300
400
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Wo
rke
rs (
'00
0)
PGM Gold PGM and Gold
- Whilst wage inflation has risen by 11%, productivity in the gold and platinum sectors (measured by tons per employee) has declined around 5% per annum over a 10-year period off a labour force that has remained relatively stable, albeit in a different labour mix between platinum and gold
- This trend of rising real wages and falling productivity is clearly unsustainable
52
Wages have grown at a consistently higher
rate than inflation since 1994Average wages per hour have grown at a 9.4% CAGR since 1994
Source: EuroMonitor; ILO, National Statistics
...but large challenges to further transform the economy and defend structural advances remain…
6
Labour instability and wage inflation
14.416.0
17.819.7
21.822.9
24.8
27.0
29.6
32.4
35.2 34.9
39.442.7
48.5
54.7
62.9
68.4
75.0
79.8
13.615.0
16.017.3
19.120.1
21.523.2
25.4
29.1
32.8 33.3
35.8
38.8
44.0
49.7
56.7
63.2
69.1
74.6
14.0%
11.0%
14.6%
9.1%
9.2%
10.9%
7.7%
12.5%
7.8%
11.5%
10.5%
11.4%
12.6%
11.9%
8.2%
9.0%
9.0%
9.7%8.8%
(8.0)%
(6.0)%
(4.0)%
(2.0)%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
10
20
30
40
50
60
70
80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Infla
tion
(%)
Wag
es P
er
Ho
ur
(Z
AR
)
SA Total Average Wage per Hour Manufacturing Wage per Hour Average Annual Wage Inflation (%) Average Annual Inflation (CPI)
- Since 1994, real wages across SA's economy have grown on average by around 4% per annum. The change in average annual CPI inflation (red line) is consistently lower than the average annual wage inflation (orange line) demonstrating the rebalancing of wages that has taken place since 1994. The employed have thus benefited significantly from these gains, however at a cost to broader growth, investment and job creation
53
Industrial strike action has increased
significantly since 2005The public sector is the focus for growth of trade unions
Source: International Labour Organisation; SA Department of Labour
¹ Congress of South African Trade Unions
...but large challenges to further transform the economy and defend structural advances remain…
6
Labour instability and wage inflation
14.4 0.4 7.3 0.4 24.7 2.7
1,670.0
953.6 615.7
919.8 1,286.0
2,628.0
4,152.6
9,528.9
497.4
1,526.8
20,674.7
2,806.7
3,309.9
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Nu
mb
er
of
lost
wo
rkin
g d
ays
(th
ou
san
ds
pe
r an
nu
m)
Labour Peace
Between 1994 and 2012, union membership in South Africa increased by c.23% to 3m people
COSATU¹ has grown its public sector membership from 7% of total membership to 39% in 2012
— Total COSATU membership has grown from 1.3m in 1994 to 2.2m, with the largest affiliate being the NUMSA
- Under President Nelson Mandela, SA witnessed a period of complete labour peace. Although some evidence of industrial action emerged under President Thabo Mbeki, industrial action was muted until 2005 when, in the run-up to the ANC's Polokwane elective conference, labour unrest significantly ramped up. In the midst of and the aftermath following the global financial crisis and post Polokwane with the election of President Jacob Zuma, SA experienced 2 years of relative labour peace. But since 2010, SA has experienced a significant upsurge in violence and strikes, including unprecedented inter-union rivalry and conflict
- Overall union membership increased by c.23% over the 20 years to around 3m people - COSATU, with over 2m members, interestingly, has grown its public sector membership
from only 7% of its own members at the start of the period to 39% in 2012 - Therefore, the SA Government has, in the ruling ANC parties' alliance structure, not only
a political relationship with the unions but an intimate and complex employer relationship with its public sector union partners
54
Public sector employment has grown rapidly
since 2007…
Source: SARB Quarterly Bulletin
Note: Indices first quarter 2007=100, seasonally adjusted, shaded area indicates a downward phase in the business cycle.
...but large challenges to further transform the economy and defend structural advances remain…
7
90
95
100
105
110
115
120
2007 2008 2009 2010 2011 2012
Ind
ex (
Q1 2
007 =
100)
Private Sector Total Formal Non-agricultural Employment Public Sector
2.0m
8.4m
6.4m
Education / health outcomes and public sector productivity
- This chart illustrates the growth of the public sector to 2m people, now accounting for about a quarter of the 8.4m in total formal non-agricultural employment
- The public sector labour force comprised about 1.7m in 1994. The composition of the public sector (and its de-racialisation) has transformed since 1994
55
15%25%
42%
27%
9%
35%
31%
19%
44%
25% 21%
45%
32%
15%6%
9%
Strategic Management Governance and Accountability Human Resource Management Financial Management
Not Meeting Statutory Requirements
24%
60%73%
46%
Meeting Statutory Requirements
The Presidency Management Performance
Assessment ToolPerformance lagging
Source: MPAT report:, Management Assessment Tool: Statement of management practices in the Public Service
...but large challenges to further transform the economy and defend structural advances remain…
2013 Total % Distribution of Final Scores Per Key Performance Area
Level 1 Level 2 Level 3 Level 4(Poor Performance) (Good Performance)
24%
60%73%
46%
7
Education / health outcomes and public sector productivity
The government, to its credit, recently published a self-assessment scorecard compiled by the Department of Performance Monitoring and Evaluation, under Minister in the Presidency, Collins Chabane - The scope of the performance spans across all government departments across the
entire public service administration - The horizontal line/axis differentiates between where the government believes it is
meeting its own statutory requirements (red and orange) and not meeting their requirements (dark and light blue)
- The area of strategic management is the one broad category on which the report ranks its performance a success
- But the areas of governance and accountability and human resource management (in particular) are cause for concern as they achieve a 60% and 73% failure rate respectively
- Financial management is an area with significant scope for improvement across Government
- It is clear that there is significant scope, based on this report, for a dramatic improvement in the public service administration
56
The performance of South Africa’s government
departments and public entities Key findings of the 2012-13 Auditor-General report
Key Areas of Risk Unauthorised, Irregular and Wasteful Expenditure
Health, Education and Public Works Remains a Concern
...but large challenges to further transform the economy and defend structural advances remain…
The report analyses all government departments (provincial and national level) and 313 public entities, collectively regarded as “auditees”
57% of departments in Education, Health and Public Works (which
contributed c.80% of total spending by departments) received a financially
qualified opinion vs. 17% of other departments
Health and
education
accounted for
68% of
unauthorised
expenditure in
2012-13 (89%
in the previous
year)
Quality of Submitted
Financial Statements
Only 43% of statements did not
contain material misstatements
Most common qualification areas for
departments were property,
infrastructure, plant and equipment,
and disclosure of financial
commitments and irregular
expenditure
Common qualification areas for
public entities were revenue and
expenditure
Supply Chain Management
No overall reduction in weaknesses
Reported findings at just over 60% of
auditees
Major limitation is that 11% of auditees
could not provide documentation
Departments made awards to suppliers of
R232m in which employees or their close
family members had an interest
Information
Technology
Significant reduction
(from 49% to 27%) in
findings considered
material
Financial Health
10% of auditees exhibited more than 2 financial indicators that were of concern
16% of public entities disclosed that a material uncertainty existed with regard to their ability to operate in the
near future or were qualified because such disclosures were not included
Almost 20% of departments would have shown a deficit instead of a surplus had they been prepared in the
same manner as public entities and local government
41% of departments underspent on their capital budget and 9% on their conditional grants by more than
10%
Debt collection periods remained a challenge for 22% of the auditees
24% estimate that more than 10% of their debtors wouldn’t be able to pay them
Human Resource
Management
No significant improvement at
just under 50% still have
reported weaknesses
Most common findings were
on noncompliance with the
requirements for
appointments and the
management of leave
1
2
3
4
5
R2.6bnR2.0bn R2.3bn
2010-2011 2011-2012 2012-2013
2
34
5
1
R1.0bn R0.9bnR1.8bn
R0.3bn R0.6bnR0.3bn
2010-2011 2011-2012 2012-2013
Departments Public Entities
R16.5bn R22.2bn R20.6bn
R2.6bnR4.3bn R5.8bn
2010-2011 2011-2012 2012-2013
Source: Auditor-General South Africa Annual Consolidated General Report 2012-2013
¹ Unauthorised expenditure is expenditure by departments that was not made in accordance with the approved budget. Irregular expenditure is expenditure that was not incurred in the manner
prescribed by legislation. Fruitless and wasteful expenditure is expenditure that was made in vain and that could have been avoided had reasonable care been taken.
17%
40%
17%
40%
66%
3%17%
Education, Health and Public Works Other Departments
Outstanding Audits Adverse/Disclaimed with Findings
Qualified with Findings Unqualified with Findings
Unqualified With No Findings
Unauthorised Expenditure¹
Irregular Expenditure¹
Wasteful Expenditure¹
7
Education / health outcomes and public sector productivity
- Wasteful expenditure, defined as expenditure that was made in vain and that could have been avoided had reasonable care been taken, increased by 40% in the last reported year from R1.5bn in 2012 to R2.1bn in 2013
- Health and education accounted for 68% of unauthorised expenditure in 2012-13 (89% in the previous year)
- Education, Health and Public Works (which contributed c.80% of total spending by departments) remain a concern as the reports of these key areas continue to receive financially qualified opinions
57
31
37
15
Poor Medium Best
Nu
mb
er
of
Ed
uc
ati
on
Dis
tric
ts
Level of Performance
Rural Medium Poverty Affluent
LP - 7EC - 5KZN - 2MPU - 1NW - 1NC - 1
KZN - 5EC - 3MPU - 3LP - 3NW - 3FS - 2
EC - 10LP - 1KZN - 1
EC - 2 KZN - 2 FS - 1
GP - 9WC - 4KZN - 1
GP - 4WC - 4NC - 3EC- 2FS - 1
NC - 1 EC - 1
% CSI Spend
GP 23.3%
WC 11.4%
EC 7.6%
KZN 6.4%
MP 4.2%
NW 4.2%
LP 4.1%
FS 2.3%
NC 2.0%
National 34.6%
Education/healthcare and public sector
productivity remain a challenge
Source: IMF, WDI, WHO, JET
...but large challenges to further transform the economy and defend structural advances remain…
District Performance and Poverty Levels:
Rural/Poor Districts Perform Badly
3.3m Learners 5.5m Learners 2.6m Learners
7
Education / health outcomes and public sector productivity
As Fiscal Spending Grows, Life Expectancy Remains
Below Emerging Market Peers
South Africa (1995)
South Africa (2012)
Argentina
BrazilEgypt
Indonesia
Mexico
Turkey
Russia
50
55
60
65
70
75
80
85
90
0 500 1,000 1,500
Lif
e E
xp
ec
tan
cy a
t B
irth
(Y
ea
rs)
Healthcare Spending per Capita ($ PPP Adjusted)
- Whilst spending on healthcare per capita doubled from 1995 to 2012, life expectancy rose marginally from 60 to 61 years in 2012. Allowing for the effects of HIV on decreased life expectancy, spending increases have seemingly failed to have the desired impact
- According to a JET study, in measuring the government school sector across 11.4 learners, schools in rural and medium-poverty areas will likely deliver a poor to medium quality of education to learners, whilst government schools serving more affluent communities will likely deliver medium to best quality education to learners. In aggregate, 8.8m of the 11.4 learners, i.e. 77%, will receive poor-medium quality of education, thereby potentially reproducing another generation of poorly educated children
58
National Budget USDm
Consolidated Revenue¹ 110,043
Consolidated Expenditure¹ (128,315)
Budget (Deficit)/Surplus (18,272)
% of GDP (4.6)%
Basic Education Health
Economic Classification USDm Economic Classification USDm
Current Payments 16,885 Current Payments 13,266
Compensation of Employees 14,997 Compensation of Employees 9,143
Goods and Services 1,889 Goods and Services 4,123
Transfers and Subsidies 2,962 Transfers and Subsidies 3,625
Payments for Capital Assets 1,222 Payments for Capital Assets 956
Total Expenditure 21,069 Total Expenditure 17,847
Compensation of Employees Goods and Services Transfers and Subsidies Payments for Capital Assets
Majority of basic education and health
expenditure on public sector employee compensationHealth and education expenditure for 2013/14
Source: The Estimates of National Expenditure 2013, published by the South African National Treasury
Note: Figures converted using a ZAR/USD exchange rate of 8.96 as at 6-May-2013
¹ Flows between national, provincial, social security funds and public entities are netted out
...but large challenges to further transform the economy and defend structural advances remain…
51%
23%
20%
6%
71%
9%
14%
6%
7
Education / health outcomes and public sector productivity
- When examining government expenditure on health and education, of the $21bn allocated to basic education, 71% is spent on government education employee (salaries of teachers, administrators, principals, inspectors etc.) compensation, while in the health sector, 51% of the $18bn was spent on compensating employees (salaries for nurses, administrators etc.)
- A significant component of this workforce is unionised and part of the ruling party's governing alliance with the unions to which these employees belong
- Improving the performance and outputs of the education and health sectors requires a more productive and efficient relationship between the Government, as employer, and its unionised employees
59
A generation of underinvestment in
infrastructure
Inadequate infrastructure development limits
faster economic growth
Source: National Planning Commission, Standard Bank; McKinsey Global institute, World Development Indicators
¹ Russia is excluded from the BRIC average for road and rail. Road and rail density is measured in km per 1,000 square km; telecom and power access as a percentage of the total
population with access to these services; and water access is measured as a percentage of the total population with access to an improved water source.
...but large challenges to further transform the economy and defend structural advances remain…
8
Despite Comparative Challenges, Africa
Lags the BRICs¹ Infrastructure
0
10
20
30
40
50
60
70
80
90
100
RoadDensity
RailDensity
TelecomAccess
WaterAccess
PowerAccess
Africa BRICS
20071994
(2)
0
2
4
6
8
10
12
14
16
18
20
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
GD
P %
Net Capital Formation as % GDP
Gross Fixed Capital Formation by the Public Sector as % GDP
Infrastructure
- Capital formation as a % of GDP declined significantly into 1994, recovered in the 2000-2007 period, but since declined
- South Africa, and Africa more broadly, has a significant current infrastructure deficit, particularly in power, transport and roads
- Financing and executing this infrastructure investment is a key challenge for expanding the overall economic capacity (including facilitating production and exports) and overall size of the SA economy
- South Africa, with its' advanced financial and engineering capacity, is well placed, as seen in the building of the 2010 Soccer World Cup infrastructure to implement an ambitious and necessary infrastructure programme domestically and in the region.
60
South Africa can make significant
improvements Growth Environment Scores (GES)¹
South Africa’s GES Progression South Africa vs. Korea
Source: GS Global ECS Research
¹ The GES is an index developed to measure the extent to which structural conditions and policy settings in a country are conducive to transforming the economic potential of the
BRICs, Next 11 and other countries into reality. A higher score denotes a more conducive environment.
...but large challenges to further transform the economy and defend structural advances remain…
Technology is an area of underperformance… … as is patent applications, internet and R&D
Headline
South Africa
5.0
Korea
7.8
Difference
(2.8)
Corruption 4.7 5.9 (1.2)
Rule of Law 5.2 6.9 (1.8)
Political Stability 5.0 5.3 (0.3)
Openness 3.1 5.0 (1.9)
Investment 3.8 5.3 (1.5)
Government Deficit 2.6 5.9 (3.3)
Public Debt 7.7 8.1 (0.4)
Inflation 9.5 10.0 (0.5)
Life Expectancy 4.1 9.2 (5.1)
Schooling 7.7 9.6 (1.8)
Personal Computers 1.3 6.5 (5.2)
Mobile Subscriptions 10.0 10.0 0
Internet Users 3.7 9.1 (5.4)
Internet Servers 0.3 10.0 (9.7)
Patent Applications 1.0 10.0 (9.0)
R&D 2.2 9.3 (7.2)
Cost of Starting a Business 10.0 8.5 1.4
Urbanisation 6.9 9.3 (2.3)
Denotes a difference in GES score of more than 5
9
Computer & internet access / research & development / patents
0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.9 0.9 0.9 0.9 0.9 0.8 0.9 0.9 0.8
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.7 0.6 0.6 0.6 0.6
1.4 1.3 1.4 1.4 1.2 1.2 1.2 1.2 1.2 1.31.3 1.3 1.2
1.1 1.1 1.1 1.1
1.1 1.0 1.0 1.0
0.9 0.8 0.9 0.90.9
0.9 0.8 0.8 0.90.9 1.0 1.0 1.0
0.1 0.2 0.2 0.2
0.2 0.2 0.2 0.30.3
0.4 0.4 0.5 0.50.5
0.6 0.6 0.7
0.7 0.7 0.7 0.7
0.7 0.7 0.8 0.80.8
0.80.8 0.8 0.8
0.80.8
0.8 0.8
4.7 4.7 4.7 4.7
4.4 4.4 4.4 4.44.6
4.84.8
4.9 4.94.8
4.9 5.0 5.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Political Conditions Macroeconomic Conditions
Macroeconomic Stability Human Capital
Technology Microeconomic Environment
Headline
Goldman Sachs produces Growth Environment Scores (GES) which benchmarks the performance of countries against various parameters - SA's overall score has marginally improved from 4.7 in 1997 to 5.0 today - The biggest area of underperformance is technology When we benchmark South Africa against the best-in-class growth market peer, South Korea, we identified those areas in which SA lagged by more than 5 - South Africa significantly underperforms South Korea in the areas of patent applications,
internet access, personal computers, and R&D - By making improvements in these areas with large potential impacts, South Africa could
show significant progress. Finding a way to fund and roll out computers and internet access to communities at large would be one way in which South Africa could address this issue
61
R&D spend lags the rest of the worldGERD¹ as a percentage of GDP
Source: Human Sciences Research Council (HSRC) National Survey of Research and Experimental Development
¹ Gross Expenditure on Research and Development.2 Organisation for Economic Cooperation and Development.
...but large challenges to further transform the economy and defend structural advances remain…
9
South African GERD1 as a % of GDP
GERD¹ as a % of GDP for Selected Countries (Latest Year Available)
0.84%
0.61% 0.60%
0.73%
0.81%
0.87%0.92% 0.95% 0.93% 0.92%
0.87%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GE
RD
as a
s %
of
GD
P
Year
3.9%3.6% 3.6%
3.4%
2.9%
2.4% 2.3% 2.3%1.9%
1.7%1.4% 1.3%
0.9% 0.8% 0.6%
Fin
lan
d
Sw
ed
en
Ko
rea
Ja
pa
n
US
OE
CD
²A
ve
rag
e
Fra
nce
Au
str
alia
To
tal
EU
-27
Ch
ina
Sp
ain
Ru
ssia
So
uth
Afr
ica
India
Arg
entina
GD
P (
%)
Computer & internet access / research & development / patents
The expenditure on R&D, shown on the top chart, does not exceed 1% of GDP at any point since 1994 - This ranks SA at the bottom end of the global spectrum compared to countries like Korea
(at 3.6%), Japan (3.4%), China (1.7%) and the US (2.9%) and requires a step-up in investment
62
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013B3
B2
B1
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
A3
A2
A1
Aa3
Aa2
Aa1
Aaa
Baa1
A3
Baa1
Baa2
Improved sovereign credit ratings performance
recently under pressure
Source: Moody’s credit rating service; S&P credit rating service
...but large challenges to further transform the economy and defend structural advances remain…
Moody’s
S&P
Investment Grade
Investment Grade
10
Sovereign credit ratings under pressure
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
AA+
AAA
BBB
BB+
BBB-
BBB
BBB+
- South Africa excelled in improving its' sovereign credit rating from non-investment grade BB in 1994 (“junk status") up to investment grade BBB+ (in the case of the S&P rating), notwithstanding the recent downgrade to (still investment grade) BBB
- However, it is imperative to focus on maintaining and improving these ratings as any further downgrade (to below investment grade) would have significant knock-on effects on corporates and sovereign borrowing costs
63
Source: Goldman Sachs Global Investment Research
Some risks of a negative feedback loop
...but large challenges to further transform the economy and defend structural advances remain…
Government / CB
Banks
Corporates
External Sector
Higher Interest
Rate
Fewer Loans
Loan Losses
Weaker Growth
Weaker Growth /
Lower Debt
Service
FX Depreciation /
Reduced Funding
Lower Tax
Receipts
Bank Recap
Costs
Worsening Fiscal /
Capital Outflows
Weak Capital Inflows
/ FX Depreciation
Conclusioniv
65Conclusion
Two Decades of FreedomSummary key advances and challenges remaining
Source: IMF, Bloomberg, National Treasury, Stats SA, Euromonitor, SARB, S&P Ratings Agency, SAARF and independent Research
1994 Now
S&P Credit
Rating
BB (Sub
Investment
Grade)
BBB
(Investment
Grade)
GDP $136bn $350bn
Inflation 1980-1994
Average: 14%
1994-2013
Average: 6%
Tax Receipts R114bn / 1.7m
people
R900bn / 15.3m
people
Gross Gold and
FX Reserves $3bn $50bn
JSE Market
Cap $230bn $880bn
Labour
Productivity per
Worker
$8,800 (2002) $21,100 (2013)
LSM 5-10 13.8m people
(2001)
23.5m people
(2010)
Social Grants 2.4m people 16.6m people
Household
Electricity 58% (1996) 85% (2011)
15m people working and 7m not
70% of the unemployed are under 34
85% of Africans poor, 87% of whites middle or upper
income
Mining and manufacturing % of GDP now 21%
Mining wage inflation 11% over 10 years whilst
productivity fell 5%
Current account deficit equals 5.8% or $20bn
Net FDI averages only $1.9bn since 1994
Household debt to disposable income of 76%
Lost labour working days in last decade 10x more than
previous
Health, education and R&D
Advances Challenges
66
The ruling party’s platform since 1994
Conclusion
Social welfare support for SA’s poorest 16m people
Social service delivery improvements
A significant rise in the African middle class
Integration into BRICs and Africa
Transformation of the public service
Stability, respect for institutions of democracy and the constitution
1
2
3
4
5
6
But the (youth) unemployment problem remains its biggest vulnerability. Threat to
sustainability of fiscal expenditures and defence of the rising middle class remain
key risks
Conclusion
67
South Africa has the institutional infrastructure
but needs to continue to invest in its people
Top 5 Categories
Most Improved Since 2006
Bottom 5 Categories
Worst Performing Since 2006
Note: WEF Global Competitive Index Report1 Measures the degree to which collateral and bankruptcy laws protect borrowers’ and lenders’ rights and thus facilitate lending.
Conclusion
World Economic Forum Global Competitiveness Index: South Africa’s Performance (2006-2013, Rank in Parenthesis)
2009 2010 2011 2012 2013
Regulation of
securities
exchanges (2)
Regulation of
securities
exchanges (1)
Regulation of
securities
exchanges (1)
Regulation of
securities
exchanges (1)
Regulation of
securities
exchanges (1)
Strength of
auditing and
reporting
standards (2)
Strength of
auditing and
reporting
standards (1)
Strength of
auditing and
reporting
standards (1)
Strength of
auditing and
reporting
standards (1)
Strength of
auditing and
reporting
standards (1)
Efficacy of
corporate
boards (3)
Trustworthines
s and
confidence
(2)
Trustworthines
s and
confidence
(2)
Trustworthines
s and
confidence
(1)
Protection of
minority
shareholders
(1)
Financing
through local
equity market
(4)
Efficacy of
corporate
boards (2)
Efficacy of
corporate
boards (2)
Efficacy of
corporate
boards (1)
Efficacy of
corporate
boards (1)
Legal rights
index¹ (5)
Soundness of
banks (6)
Soundness of
banks (2)
Legal rights
index¹ (1)
Legal rights
index¹ (1)
Legal rights index (from 45 to 1)
Trustworthiness and confidence (from 37 to 1)
Total tax rate (from 70 to 48)
Mobile telephone subscriptions (from 56 to 35)
Financial market development (from 24 to 3)
2009 2010 2011 2012 2013
HIV prevalence,
% (131)
HIV prevalence,
% (136)
Cooperation in
labor-employer
relations (138)
HIV prevalence,
% (141)
Business
impact of
HIV/AIDS (143)
Business costs
of crime and
violence (133)
Business costs
of crime and
violence (137)
Flexibility of
wage
determination
(138)
Quality of math
and science
education (143)
HIV prevalence,
% (144)
Quality of math
and science
education (133)
Quality of math
and science
education (137)
Hiring and
firing practices
(139)
Hiring and
firing practices
(143)
Quality of
educational
system (146)
Business
impact of
HIV/AIDS (133)
Business
impact of
HIV/AIDS (138)
HIV prevalence,
% (139)
TB
cases/100,000
pop. (143)
TB
cases/100,000
pop. (147)
TB
cases/100,000
pop. (133)
TB
cases/100,000
pop. (138)
TB
cases/100,000
pop. (141)
Cooperation in
labor-employer
relations (144)
Quality of math
and science
education (148)
Primary education (from 48 to 125)
Government procurement of advanced tech products (from 29 to 105)
Burden of government regulation (from 59 to 123)
Government budget balance (from 42 to 105)
Favouritism in decisions of government officials (from 56 to 110)
This summarises an analysis of the World Economic Forum’s Global Competitiveness Index identifying the top and bottom 5 categories, as well as most improved and worst performing areas since 2006 - Best ranked is SA's securities exchange, corporate law and financial market development - Worst are human development indicators in particular quality of education, labour
employer relations and health - Notable improvements include tax and mobile phone subs, and notable declines include
the burden of government regulation and favouritism in decisions of government officials
68
South Africa’s global competitiveness has
declined as we enter an uneven global macro
recovery
WEF Global Competitive Index Goldman Sachs GDP Forecasts vs. IMF Forecasts
Source: WEF Global Competitive Index Report, Goldman Sachs Investment Research, IMF WEO Database
Conclusion
36
53
66
5659
64
42
60
35
29
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013
WE
F G
lob
al
Co
mp
eti
tiv
e In
dex (
in r
ev
ers
e o
rder)
South Africa Brazil Russia India China
% yoy 2012 2013
2014 2015 2016
GS IMF GS IMF GS IMF
USA 2.8 1.9 2.8 2.8 3.2 2.9 3.0 3.0
Japan 1.4 1.5 1.0 1.4 1.3 1.0 1.5 0.7
Euro Area (0.7) (0.5) 1.7 1.2 1.8 1.5 2.0 1.5
UK 0.3 1.8 3.0 2.9 2.7 2.5 3.0 2.4
Brazil 1.0 2.3 1.8 1.8 1.8 2.7 2.7 3.0
China 7.7 7.7 7.3 7.5 7.6 7.3 7.6 7.0
India 4.7 4.4 5.2 5.4 6.2 6.4 6.6 6.5
Russia 3.4 1.3 1.0 1.3 3.0 2.3 4.4 2.5
South
Africa2.5 1.9 2.4 2.3 2.9 2.7 3.6 3.2
BRICs 5.6 5.6 5.5 5.7 6.2 6.0 6.6 5.9
Advanced
Economies1.4 1.3 2.2 2.2 2.4 2.3 2.5 2.4
World 3.2 3.0 3.0 3.6 3.5 3.9 3.8 4.0
- Whilst South Africa’s overall ranking has worsened from 36 to 53, it is still ahead of Brazil, Russia and India, although well behind China
- Goldman Sachs' forecast for 2016 GDP growth for SA is 3.6%. This is a return to the higher average cyclical growth
69
What needs to be done
Improve ICT Utilisation…
…as well as Increasing Technical / Vocational
Education
…Improve Education Outcomes…
There is also Room to Cooperate to Improve
Healthcare Services…
…and Education ‘Efficiency’ (Outcomes Relative to
Expenditures)…
…and Achieve Better Health Outcomes
Source: GS Global ECS Research (Summarizes data from the World Bank on: Use of Mobile phones. Computers. Internet Subscriptions and the number of Secure Servers); WEF
Global Competitiveness Index; World Bank; Haver Analytics1 Using latest available data.
Conclusion
0
100
200
300
400
500
600
700
800
900
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
So
uth
Afr
ica
Su
b-S
ah
ara
nA
fric
a India
Wo
rld
Ru
ss
ia
Ch
ina
Bra
zil
Prevalence of HIV, Total (% of Population Ages 15-49, LHS)
Tuberculosis Prevalence Rate (per 100,000 Population, RHS)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
1.0
2.0
3.0
4.0
5.0
Su
b-S
ah
ara
nA
fric
a Ind
ia
So
uth
Afr
ica
Wo
rld
Ch
ina
Bra
zil
Ru
ss
ia
Physicians (per 1,000 People, LHS)
Hospital Beds (per 1,000 People, RHS)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Ru
ss
ian
Fe
de
rati
on
Ch
ina
Sub
-Sah
ara
nA
fric
a Bra
zil
So
uth
Afr
ica
India
Technical/Vocational Enrolment in Upper Secondary
Technical/Vocational Enrolment in Secondary (Upper & Lower)
% o
f T
ota
l E
nro
lme
nt
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Bra
zil
Ru
ss
ia
So
uth
Afr
ica
Ch
ina
Ind
ia
Su
b-S
ah
ara
nA
fric
aTechnology Sub-Component for GS Growth Environment Score 2012Global Average
Global Average
Ind
ex
(0
-10
; 1
0=
Be
st)
0
20
40
60
80
100
120
1400
1
2
3
4
5
6
7
Brazil Russia India China South Africa
Index Score (LHS) Global Ranking (RHS)
Ind
ex
(1-7
; 7
=B
es
t)
Glo
ba
l Ra
nk
ing
(Ou
t of 1
45
Co
un
tries
)0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Brazil Russia India China South Africa
Quality of Education (Index, LHS)
Public Expenditure on Education (% of GDP, RHS)¹
Public Expenditure on Education (% of Total Government Expenditure, RHS)¹
Ind
ex
(1
-7; 7
=B
es
t)
Conclusion
70Conclusion
Two Decades of FreedomWhat achievable performance targets do we aspire to in the next 20 years?
¹ Based on historical performance of South Africa’s economy since 1994 and comparison with a benchmark of countries including: Brazil, China, India, Indonesia, Korea, Poland,
Mexico, Nigeria, Russia, Turkey
² Average since 1994
South Africa Target Metric¹
Real GDP Growth 2% 5%
GDP ($bn) $350bn c.$1 trillion
GDP per capita $6,621 c.$13,500
Current Account
Deficit 5.8% 3.5%
Net FDI p.a $1.9bn² $7.5bn
Gross Gold and FX
Reserves $50bn (200% of short term debt) $60bn (250% of short term debt)
Gini coefficient 69 60
Unemployment 24% 12%
Debt / GDP 44% 20%
71
10 key issues to address
Conclusion
Public sector
- Productivity: “bang for buck” especially in the areas of health and education
- Exercise good management practices to meet own performance requirements
- Education fit for employment
Special focus on unemployed/unemployable youth
Labour pact for
- Sustainable growth and employment
- Balanced wage/productivity growth
Defending the rise of the African middle class
Creating fiscal space to sustain spending on the poor by optimising state assets
Driving economic growth through
- Promoting industry and driving new frontiers for growth
- Building economic linkages with Africa
- Creating visible economic wins from “BRICs”
Driving FDI through building investor confidence
Driving innovation via increased investment in research and development and technology
A common effort to protect the sovereign rating and cost of capital
Leadership driving a culture of accountability and teamwork
1
2
3
4
5
6
7
8
9
10
Conclusion
72
10 initiatives South Africa’s top CEOs would like
to see implemented Agenda for unlocking earnings growth, job creation and capital investment
A complete overhaul of SA's labour relations architecture- The effect of the current labour relations system is higher real wages for fewer workers, lower productivity and job losses and lower exports
- A less restrictive, more responsive labour system with a partnership approach between business, government and labour designed to avoid
strikes, drive job creation, attract investment and skill is needed
Lifting the administrative burdens on business- Requires simplification of regulatory requirements including onerous license regimes, empowerment requirements, complex planning consents,
customs clearing procedures and immigration procedures for hiring skilled expats
- Improvement of the public administration and eradication of corruption
A flexible and responsive trade policy- Create a more partnership-driven approach between government and business to unlock jobs and growth through a dynamic trade policy
Free movement of capital- The removal of the exchange controls architecture would be a progressive step in supporting corporate South Africa’s global competitiveness
Administrative excellence- The deployment of capable leaders into the public service to ensure that policies are executed well is a top priority for the 5th State administration
Prosecuting corrupt officials- Ensure prosecution with full enforcement of sentences for corrupt government officials. A State Tender Board is seen as a positive in this regard
Regional integration- Improving African regional trade and market viability, including improving cross-border logistics and reduced waiting time at border posts
Unlocking cheap, clean energy in Africa- Includes accessing viable gas resources in the region, considering Liquid Natural Gas (LNG) imports and collaborating on gas-to-power plants
Advancing the provision of infrastructure- Long term stability, availability and affordability of power and other infrastructure is essential to, inter-alia, the mining industry
- Efficiency, reliability and productivity, and pricing impacts should be foremost in the minds of the SOEs
- Coherence between South Africa’s .cR4.5tn pension funds and other long-term savings and funding the infrastructure is essential
Certainty of operating environment- Private sector needs certainty for long term investment and job creation; it’s imperative that regulatory authorities set rules and don’t change them
1
2
3
4
5
6
7
8
9
10
Conclusion
73
A final thought
Much progress recorded in two decades of democracy
Significant challenges remain
Achievements need to be defended
We live in a “good neighborhood” but a mixed, challenging world
Business, government, labour and civil society “in it together”
We need a “Team South Africa” response
The currency and our sovereign credit rating is the country’s ‘share price’ and ‘report
card’
We know what needs to be done, we need effective ‘team work’ and ‘execution
excellence’
We have the people and the capital, we have the ‘talent’ and the ‘tools’ to execute well
Leaders across Government, business, labour, academia, institutions and civil society
need to take individual and collective decisive actions to improve South Africa’s
competitiveness and overall performance
ConclusionConclusion