south africa business forecast report q3 2013
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Published by BUSINESS MONITOR INTERNATIONAL LTD
BUSINESS FORECAST REPORT
Q3 2013www.businessmonitor.com
SOUTH AFRICAINCLUDES 10-YEAR FORECAST TO 2022
Tepid Growth Ahead
ISSN 1745-0713Published by Business Monitor International Ltd.
Copy Deadline: 19 April 2013
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2 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013 S
OU
TH A
FRIC
A
MA
CR
OE
CO
NO
MIC
IND
ICA
TOR
S20
12e
2013
f20
14f
2015
f20
16f
2017
f20
18f
2019
f20
20f
2021
f20
22f
Nom
inal
GD
P, U
S$b
n [5
]38
4.4
379.
339
0.4
422.
545
7.7
495.
853
5.5
577.
562
2.2
670.
371
8.6
Nom
inal
GD
P, Z
AR
bn [5
]3,
155.
23,
409.
13,
727.
04,
074.
04,
457.
54,
877.
45,
320.
05,
795.
16,
305.
46,
860.
87,
469.
3
Nom
inal
GD
P, E
UR
bn [5
]30
2.7
283.
130
7.4
343.
538
1.4
413.
244
6.2
481.
351
8.5
558.
559
8.9
GD
P p
er c
apita
, US
$ [5
]7,
577
7,44
17,
623
8,21
58,
860
9,55
710
,276
11,0
3411
,834
12,6
9213
,546
GD
P p
er c
apita
, EU
R [5
]5,
966
5,55
36,
003
6,67
87,
383
7,96
48,
563
9,19
59,
862
10,5
7711
,289
Rea
l GD
P g
row
th, %
cha
nge
y-o-
y [5
]2.
52.
83.
33.
53.
63.
63.
33.
13.
03.
03.
0
Priv
ate
final
con
sum
ptio
n, %
of G
DP
[5]
60.4
61.2
61.2
61.3
61.5
61.6
61.7
61.9
62.0
62.1
62.2
Priv
ate
final
con
sum
ptio
n, re
al g
row
th %
y-o
-y [5
]3.
53.
23.
43.
84.
04.
03.
53.
53.
33.
33.
3
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
% to
tal G
DP
[5]
22.4
22.7
22.8
22.8
22.6
22.5
22.3
22.3
22.2
22.1
22.1
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
real
gro
wth
% y
-o-y
[5]
4.2
3.5
3.5
3.5
3.0
3.0
2.8
2.8
2.8
2.8
2.8
Fixe
d ca
pita
l for
mat
ion,
% o
f GD
P [5
]19
.219
.219
.119
.018
.918
.818
.718
.718
.618
.618
.6
Fixe
d ca
pita
l for
mat
ion,
real
gro
wth
% y
-o-y
[5]
5.7
2.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
Pop
ulat
ion,
mn
[6]
50.7
51.0
51.2
51.4
51.7
51.9
52.1
52.3
52.6
52.8
53.1
Une
mpl
oym
ent,
% o
f lab
our f
orce
, eop
[7]
24.9
24.0
23.3
22.6
21.9
21.2
20.6
20.0
19.4
18.8
18.2
Con
sum
er p
rice
inde
x, %
y-o
-y, a
ve [7
]5.
76.
16.
05.
85.
75.
75.
75.
75.
75.
75.
7
Lend
ing
rate
, %, a
ve [1
,8]
8.8
8.5
8.5
8.8
9.0
9.0
9.0
9.0
9.0
9.0
9.0
Cen
tral B
ank
polic
y ra
te, %
eop
[2,8
]5.
005.
005.
005.
505.
505.
505.
505.
505.
505.
505.
50
Exc
hang
e ra
te Z
AR
/US
$, a
ve [9
]8.
218.
999.
559.
649.
749.
849.
9410
.03
10.1
310
.24
10.3
9
Exc
hang
e ra
te Z
AR
/EU
R, a
ve [9
]10
.55
12.0
412
.13
11.8
612
.17
12.3
012
.42
12.5
412
.67
12.8
012
.99
Bud
get b
alan
ce, U
S$b
n [3
,10]
-20.
5-1
9.1
-17.
4-1
6.4
-16.
4-1
6.2
-17.
3-1
8.5
-19.
8-2
1.2
-22.
5
Bud
get b
alan
ce, %
of G
DP
[3,1
0]-5
.3-5
.0-4
.5-3
.9-3
.6-3
.3-3
.2-3
.2-3
.2-3
.2-3
.1
Goo
ds a
nd s
ervi
ces
expo
rts, U
S$b
n [5
]10
8.6
106.
510
9.2
117.
312
6.2
135.
814
5.4
157.
116
8.8
183.
119
7.6
Goo
ds a
nd s
ervi
ces
impo
rts, U
S$b
n [5
]12
0.4
119.
212
1.1
128.
013
6.4
147.
615
9.8
173.
118
6.0
199.
921
3.7
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, U
S$b
n [5
]-1
1.7
-12.
7-1
1.9
-10.
7-1
0.2
-11.
8-1
4.4
-16.
0-1
7.2
-16.
8-1
6.2
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, %
of G
DP
[5]
-3.0
-3.3
-3.1
-2.5
-2.2
-2.4
-2.7
-2.8
-2.8
-2.5
-2.2
Cur
rent
acc
ount
bal
ance
, US
$bn
[5]
-24.
1-2
4.8
-24.
2-2
3.8
-24.
0-2
6.6
-30.
1-3
2.8
-35.
0-3
5.7
-36.
2
Cur
rent
acc
ount
bal
ance
, % o
f GD
P [5
]-6
.3-6
.5-6
.2-5
.6-5
.3-5
.4-5
.6-5
.7-5
.6-5
.3-5
.0
Fore
ign
rese
rves
ex
gold
, US
$bn
[4,8
]47
.948
.950
.452
.956
.160
.064
.268
.773
.578
.684
.1
Impo
rt co
ver,
mon
ths
[4,5
]4.
84.
95.
05.
04.
94.
94.
84.
84.
74.
74.
7
Not
es: e
BM
I est
imat
es. f
BM
I for
ecas
ts. 1
Prim
e ra
te; 2
Rep
o ra
te; 3
Fis
cal Y
ears
(Apr
il
Mar
ch);
4 In
tern
atio
nal l
iqui
dity
pos
ition
of S
AR
B, i
nc g
old.
Sou
rces
: 5 S
outh
Afri
can
Res
erve
Ban
k/B
MI c
alcu
latio
ns; 6
W
orld
Ban
k/U
N/B
MI;
7 S
tatis
tics
Sou
th A
frica
; 8 S
outh
Afri
can
Res
erve
Ban
k; 9
BM
I; 10
Sou
th A
frica
n Fi
nanc
e M
inis
try/S
outh
Afri
can
Res
erve
Ban
k/B
MI c
alcu
latio
ns.
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3Business Monitor International Ltd www.businessmonitor.com
Contents
Executive Summary ................................................................................................................................. 5Core Views ......................................................................................................................................................................................5Major Forecast Changes ................................................................................................................................................................5Key Risks To Outlook ....................................................................................................................................................................5
Chapter 1: Political Outlook .................................................................................................................... 7SWOT Analysis .......................................................................................................................................................... 7BMI Political Risk Ratings ........................................................................................................................................ 7Domestic Politics ...................................................................................................................................................... 8On The Ground: Big-Picture Scenarios
We envisage three big-picture scenarios for South Africa following a trip to the country in March. Our core view is for insidious stagnation, but we also see potential for radical reform and severe instability.
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................ 8
Foreign Politics ....................................................................................................................................................... 10BRICS Bank: Opportunities And Limitations
Proposals to create a new 'BRICS Bank' capable of rivalling the World Bank and IMF has potential to be a game-changer in the global economy, at least over the long term. However, there are significant obstacles to creating and managing such an entity in the near term.
Long-Term Political Outlook .................................................................................................................................. 11Political Trials And Tribulations Over The Coming Decade
Many issues threaten South Africa's political stability over the long term, not least the inequalities still stemming from the apartheid era and the foreign policy challenge of Zimbabwe. Although our core scenario envisages no major change to the political backdrop, we present a number of alternative scenarios.
Chapter 2: Economic Outlook ............................................................................................................... 15SWOT Analysis ........................................................................................................................................................ 15BMI Economic Risk Ratings ................................................................................................................................... 15Economic Activity .................................................................................................................................................. 16Tepid Growth Ahead
We forecast tepid economic growth for South Africa over the medium term, forecasting that real GDP will expand by 2.8% in 2013 and 3.3% in 2014. Although private consumption is expected to remain relatively robust, private investment is likely to suffer due to elevated political risk.
TABLE: QUARTERLY REAL GDP ........................................................................................................................................................................ 16TABLE: ECONOMIC ACTIVITY ............................................................................................................................................................................. 17
Monetary Policy ...................................................................................................................................................... 18Policy Stuck In A Stagflationary Rut
We hold to our view that the South African Reserve Bank will keep the repo rate on hold at 5.00% over the whole of 2013. Although South Africa faces a weak growth outlook and risks are to the downside, inflation has been ticking upward and is likely to go higher still. This stagflationary scenario will likely force South African Reserve Bank's Monetary Policy Committee to maintain the status quo.
TABLE: MONETARY POLICY ............................................................................................................................................................................... 18Current Account To Remain Structural Weakness
We forecast that South Africa's current account deficit will remain wide over the medium term, predicting that it will be 6.5% of GDP in 2013 and 6.2% in 2014. Inflows to the capital and financial account have traditionally propped up the balance of payments, but with investor risk appetite on shaky ground, this trend can no longer be assured.
TABLE: CURRENT ACCOUNT .............................................................................................................................................................................. 20
Fiscal Policy ............................................................................................................................................................ 22Budget Deficit To Narrow Gradually
South Africa's new budget signals that the treasury is likely to keep the deficit under control despite various economic and political challenges. We forecast a budget shortfall of 5.0% of GDP in fiscal year 2013/14, falling to 3.9% of GDP by FY15/16.
TABLE: FISCAL POLICY .......................................................................................................................................................................................22
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4 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
Chapter 3: 10-Year Forecast .................................................................................................................. 25The South African Economy To 2022 .................................................................................................................... 25Structural Constraints To Curb Long-Term Growth
While we forecast relatively stable real GDP growth rates over the coming 10 years, ongoing structural shortcomings will continue to limit South Africa's long-term growth potential. High unemployment and powerful trade unions present key challenges to the authorities.
TABLE: LONG-TERM MACROECONOMIC FORECASTS ................................................................................................................................... 25
Chapter 4: Business Environment ........................................................................................................ 27SWOT Analysis ........................................................................................................................................................ 27BMI Business Environment Risk Ratings ............................................................................................................. 27Business Environment Outlook ............................................................................................................................. 28Institutions ............................................................................................................................................................... 28TABLE: BMI BUSINESS AND OPERATION RISK RATINGS .............................................................................................................................. 28TABLE: BMI LEGAL FRAMEWORK RATING ....................................................................................................................................................... 29TABLE: LABOUR FORCE QUALITY ..................................................................................................................................................................... 30
Infrastructure ........................................................................................................................................................... 31TABLE: TRADE AND INVESTMENT RATINGS .................................................................................................................................................... 31TABLE: AFRICA ANNUAL FDI INFLOWS ......................................................................................................................................................... 32
Market Orientation ................................................................................................................................................... 33TABLE: TOP EXPORT DESTINATIONS, 2004-2011 ............................................................................................................................................ 33
Operational Risk ...................................................................................................................................................... 34
Chapter 5: Key Sectors .......................................................................................................................... 35Defence & Security ................................................................................................................................................. 35TABLE: DEFENCE EXPENDITURE ....................................................................................................................................................................... 36
Autos ........................................................................................................................................................................ 39TABLE: AUTOMOTIVE SALES ............................................................................................................................................................................ 40TABLE: AUTOMOTIVE PRODUCTION ................................................................................................................................................................ 41
Other Key Sectors ................................................................................................................................................... 43TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS ................................................................................................................................. 43TABLE: FOOD & DRINK SECTOR KEY INDICATORS ........................................................................................................................................ 43TABLE: PHARMA SECTOR KEY INDICATORS ................................................................................................................................................... 44TABLE: TELECOMS SECTOR KEY INDICATORS ............................................................................................................................................... 44TABLE: FREIGHT SECTOR KEY INDICATORS ................................................................................................................................................... 44
Chapter 6: BMI Global Assumptions .................................................................................................... 45Global Outlook ......................................................................................................................................................... 45Lowering Our US And Eurozone Growth ForecastsTABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 45TABLE: DEVELOPED STATES, REAL GDP GROWTH, % .................................................................................................................................. 46TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % .......................................................................... 46TABLE: EMERGING MARKETS, REAL GDP GROWTH, % ................................................................................................................................. 47
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5Business Monitor International Ltd www.businessmonitor.com
Executive Summary
Core Views BMI sees the South African economy continuing its uneven recovery
over the medium term, with real GDP expected to grow by just 2.8%
in 2013. Although the consumer sector is holding up, the supply
side is lagging behind, and there are widespread concerns that the
recovery is not sufficiently broad-based. A key downside risk stems
from industrial unrest in the mining sector.
We forecast that South Africa's repo rate will be kept steady at 5.00%
over the medium term. Although South Africa faces a weak growth
outlook and risks are to the downside, inflation is likely to tick up
during the course of 2013. This stagflationary scenario will likely
force the South African Reserve Bank's Monetary Policy Committee
to maintain the status quo.
Political risk is heightened amid industrial unrest in the mining and
agricultural sectors. Furthermore, there is an ongoing debate regard-
ing nationalisation of key industries including mining. However, we
do not see nationalisation as an imminent threat.
Major Forecast Changes No major forecast changes.
Key Risks To Outlook A sustained bout of global risk aversion with an attendant sharp
outflow of portfolio funds would threaten South Africa's precarious
balance of payments.
A sudden uptick in domestic political risk, such as an escalation of
the industrial unrest blighting various sectors, is a key risk.
A sustained period of high oil prices would exacerbate the already-
sizeable current account deficit.
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Brief Methodology
7Business Monitor International Ltd www.businessmonitor.com 7Business Monitor International Ltd www.businessmonitor.com
SWOT Analysis
Strengths Broad political stability is likely to persist owing to the African National
Congress (ANC)'s dominance at a national and provincial level.
Relatively strong, independent institutions include the judiciary and
security services.
Weaknesses Persistently high levels of poverty have led to political disenfranchise-
ment and the attraction of new political groupings.
Corruption allegations have tainted the party's image and raised
suspicions over its excessive influence over the judicial system.
Opportunities The establishment of the Congress of the People, a splinter group of
the ANC, and the rising popularity of the Democratic Alliance bode
well for South Africa's democratic environment over the longer term.
Threats In terms of land reform, the willing buyer/willing seller principle may
be dropped in order to speed up the process, although a Zimbabwe-
style 'land grab' is unlikely.
The growing influence of the country's left-wing factions poses an
ongoing risk to South Africa's relatively market-friendly institutions.
BMI Political Risk RatingsWhile South Africa boasts one of Africa's most sophisticated political
systems, significant risks to short-term stability remain. Considering
the country's high degree of unionisation, the threat of industrial action
and disruption to economic activity is a constant concern. In particular,
demands for greater social expenditure and labour protectionism could
undermine South Africa's reform credentials.
Chapter 1: Political Outlook
S-T Political Rank TrendMauritius 82.7 1 =Senegal 75.6 2 =Botswana 72.9 3 =Ghana 72.1 4 =Benin 71.7 5 =Namibia 70.8 6 =Burkina Faso 70.4 7 =Gabon 69.6 8 =Angola 69.0 9 =Cameroon 67.5 10 =Congo-Brazzaville 67.5 10 =South Africa 67.3 12 =Togo 65.4 13 =Tanzania 65.4 13 =Mozambique 64.6 15 =Equatorial Guinea 64.0 16 =Rwanda 64.0 16 =Zambia 63.8 18 =Cte d`Ivoire 59.6 19 =Sierra Leone 53.3 20 =Uganda 51.7 21 =Chad 51.5 22 =Kenya 51.2 23 =Niger 51.0 24 =Nigeria 47.9 25 =Ethiopia 47.5 26 =Guinea-Bissau 36.2 27 =Zimbabwe 34.8 28 =Guinea 31.2 29 =Mali 27.7 30 =Congo, Dem. Rep. 25.8 31 =Sudan 24.6 32 =Regional ave 59.0/Global ave 65.3/Emerging markets ave 62.8
L-T Political Rank TrendMauritius 81.5 1 =Botswana 70.4 2 =South Africa 68.8 3 =Ghana 68.6 4 =Burkina Faso 64.2 5 =Namibia 62.7 6 =Tanzania 62.3 7 =Mozambique 61.3 8 =Senegal 60.5 9 =Gabon 60.4 10 =Benin 55.8 11 =Rwanda 54.3 12 =Togo 54.2 13 =Zambia 54.2 13 =Uganda 53.7 15 =Kenya 52.7 16 =Cte d`Ivoire 50.9 17 =Equatorial Guinea 49.2 18 =Nigeria 48.8 19 =Sierra Leone 48.0 20 =Cameroon 45.7 21 =Niger 44.7 22 =Angola 44.6 23 =Congo-Brazzaville 43.7 24 =Guinea-Bissau 39.4 25 =Ethiopia 37.7 26 =Guinea 37.4 27 =Zimbabwe 34.6 28 =Mali 33.4 29 =Sudan 28.2 30 =Chad 26.6 31 =Congo, Dem. Rep. 26.0 32 =Regional ave 52.6/Global ave 63.1/Emerging markets ave 59.5
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8 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
Domestic Politics
On The Ground: Big-Picture Scenarios
BMI VIEWWe envisage three big-picture scenarios for South Africa following a
trip to the country in March. Our core view is for insidious stagnation,
but we also see potential for radical reform and severe instability.
BMI travelled to South Africa in March 2013 to assess local sentiment and gain on-the-ground insight into the political and
economic outlook for the country. We met with a number of
banks, corporates and government bodies including the South
African Reserve Bank, Eskom, Investec, Werksman, Stanlib and local subsidiaries of AstraZeneca and Bain, each of whom shared their thoughts on South Africa's prospects.
We found that there was a strong consensus that the economic
outlook for the country is concerning. South Africa is widely
viewed as likely to continue on its current trajectory, characterised
by frequent industrial unrest, weak growth, a depreciating rand
and general foreign investor risk aversion. Several of the people
that we spoke with asked us if we could see any way that the
nation could pull itself out of this trend, or if there was potential
for things to get even worse. We outlined three medium-term
scenarios and assigned a probability to each. Here, we present
these scenarios and include some of the comments that were
made in the meetings.
Core Scenario: Insidious StagnationUnder our core scenario, to which we ascribe an 85% prob-
ability, there will be little change on the political scene. The
African National Congress (ANC) will very likely continue to
govern in an indecisive manner owing to a lack of cohesion
within the party and could continue to attract criticism over
apparent patronage politics at the top. President Jacob Zuma
will very likely manage to maintain the fragile Tripartite Al-
liance between the ANC, the Congress of South Africa Trade
Unions (COSATU) and the South African Communist Party
(SACP), which would enable him to stay at the helm of the
ANC and retain the presidency in 2014. However, Zuma's
TABLE: POLITICAL OVERVIEW System of Government Parliamentary democracy, universal suffrage; 400 parliamentary seats (five-year term); executive power rests
with the cabinet.
Head of State (and Government) President Jacob Zuma
Last Election Presidential April 2009; Parliamentary April 2009
Composition of Current Government African National Congress (ANC) 264 seats in parliament; Democratic Alliance (DA) 67 seats; Congress of the People (COPE) 30 seats; Inkatha Freedom Party (IFP) 18 seats; Independent Democrats (ID) 4 seats. Eight other smaller parties share the remaining 17 seats in parliament. The ANC has held the majority in parliament since the end of apartheid in 1994.
Key Figures President Jacob Zuma President and leader of ANC; Kgalema Motlanthe Deputy President; Helen Zille DA Leader; Mosiuoa Lekota COPE Leader; Blade Nzimande General Secretary of the South African Communist Party (SACP); Zwelinzima Vavi General Secretary of the Congress of the South African Trade Unions (COSATU); Gill Marcus Central Bank Governor; Pravin Gordhan Finance Minister; Ebrahim Patel Minister of Economic Development
Main Political Parties ANC Founded in 1912 and based on a socialist ideology, the ANC became the dominant political party at the end of apartheid in 1994. With the aid of its tripartite alliance partners, COSATU and SACP, the ANC has ruled South Africa since then.
Congress of the People Established in October 2008 following the dismissal of former president Thabo Mbeki, COPE is a splinter party of the ANC. Spearheaded by former Defence Minister Mosioua Lekota, COPE wants to offer an alternative to the ruling party, with a more 'progressive' economic and political agenda.
Democratic Alliance Based on liberal principles, the DA emerged in its present form in 2000, and represents the main South African opposition party.
South African Communist Party Founded in 1912, the SACP has never contested a parliamentary election since the return to the multi-party system in 1994. As a member of the tripartite alliance, it has always had an important influence on the government, and its powers are likely to grow following the victory of Jacob Zuma.
Extra-Parliamentary Faction Congress of the South African Trade Unions (COSATU) With a membership of more than 2mn, COSATU (also a member of the tripartite alliance) constitutes an important political force in South Africa.
Next Election Presidential 2014; Parliamentary 2014
Ongoing Disputes Mass immigration from adjacent countries, especially from Zimbabwe, has led to tense relationships between the South African government and its neighbours.
Key Relations/Treaties South Africa is part of the Southern African Development Community, and all other major international organi-sations, such as the UN and the WTO.
BMI Short-Term Political Risk Rating 67.3
BMI Structural Political Risk Rating 68.8
Source: BMI
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9Business Monitor International Ltd www.businessmonitor.com
POLITICAL OUTLOOK
need to keep his left-wing allies on board while still following
market-friendly policy will probably result in little in the way
of reform. Meanwhile, the unions will continue to leverage off
their strong bargaining position, calling for sporadic strikes that
result in higher labour costs for companies.
We expect that the mining sector will suffer particularly over
the medium term, since firms are already struggling with high
wage bills following strong pay rises secured by workers in the
aftermath of the deadly shooting of workers at the Marikana mine
in August 2012. Indeed, several companies have been forced
into shaft closures in recent months, especially in the platinum
sector. Many people we spoke with emphasised electricity as
an additional concern given that national power supplies are
running extremely low and they are vulnerable to industrial
unrest at power stations.
Intermittent outages, coupled with weakening consumer demand
due to higher living costs, and against a backdrop of generally
weak global demand, augur for sluggish economic growth. We
are forecasting real GDP growth of 2.8% in 2013 and 3.0-4.0%
over the subsequent years. This subdued trajectory and the vari-
ous political risk factors will very likely give foreign investors
cause to shy away from making significant direct investments
into South Africa. However, short-term portfolio inflows will
very likely remain decent given the yields on offer (the repo rate
is currently at 5.00%). Nevertheless, the current account deficit
looks set to remain sizeable (around 5-7% of GDP), causing the
rand to continue depreciating.
Best-Case Scenario: Radical ReformOur alternative scenarios are driven by potential changes on
the political scene. In a best-case scenario, to which we as-
cribe a 5% probability, radical reform takes place. There are
several possible causes of this: Zuma could step down from the
presidency; the ANC splinters; the new Agang party (led by
renowned anti-apartheid activist Mamphela Ramphele) joins
forces with the Democratic Alliance and manages to win vot-
ers from the ANC, enabling it to come to power; or there is an
economic crisis (balance of payments, most likely) that prompts
a wholesale rethink of policy.
Under this scenario, there would be better, more inclusive
national dialogue that would result in new impetus in the drive
towards alleviating poverty, creating jobs and reducing crime.
Somehow, the government would be able to foster a sense of
solidarity that would reduce the tendency toward public unrest.
Many people commented in our meetings that the power of the
unions is a huge impediment to business, and this best-case
scenario could also include lower levels of unionisation. Since
the education level of the workforce is another commonly cited
problem encountered by businesses, the best-case scenario
would also encompass a modernisation of the education system.
A reduction in government bureaucracy would also take place in
a best-case scenario, helping South African companies to focus
on opportunities in the wider Africa region and fully leverage
their position on the continent (favourable funding, deep ex-
pertise, superior infrastructure, etc). Furthermore, a reversal of
the 'brain drain' would likely occur, with skilled South Africans
returning to the country. Under this scenario, foreign investor
interest would quickly pick up, pushing up real GDP growth
and causing the rand to strengthen. The budget deficit would
likely widen, however, as the reform drive would necessitate
higher government spending.
Worst-Case Scenario: Severe Instability We assign a 10% probability to a worst-case scenario in which
there is severe political and economic instability. This could,
for example, be prompted by the formation of a very left-wing
political party, which SACP could choose to join up with.
Alternatively, COSATU could become more aggressive in its
demands, causing strikes to flare up significantly across multiple
sectors. Or the ongoing concerns regarding corruption and the
trustworthiness of the police could be exacerbated, destabilising
the ANC and provoking massive protests.
Problems With Doing Business In South AfricaMost Problematic Factors For Doing Business, % Of Responses
0.5
0.8
1.1
1.8
1.9
3.2
3.5
5.5
8.0
9.8
11.5
16.1
16.8
19.6
0 5 10 15 20 25
Tax rates
Tax regulations
Inflation
Poor public health
Foreign currency regulations
Policy instability
Access to financing
Poor work ethic in national labour
Inadequate supply of infrastructure
Crime and theft
Corruption
Restrictive labour regulations
Inadequately educated workforce
Inefficient government bureaucracy
Source: World Economic Forum Global Competitiveness Report 2011-2012. From a list of 1-15 factors, respondents were asked to select the five most problematic and rank them in order. The bars in the chart show the responses weighted according to their rankings.
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10 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
Under this scenario, the economy could grind to a halt due to
industrial unrest, and the rand could go into free fall as foreign
investors rush to pull their money out of South Africa. We could
also see sudden, sharp interest rate hikes in a bid to rein in the
currency losses such a move would cripple businesses and
consumers, causing a plunge into recession. Meanwhile, the 'brain
drain' would get worse, with skilled workers forced to move
abroad for work. Last but not least, South Africa would lose its
standing in Africa, as other nations such as Kenya, Ghana and
Nigeria gain traction as alternative gateways to the continent.
Foreign Politics
BRICS Bank: Opportunities And Limitations
BMI VIEWProposals to create a new 'BRICS Bank' capable of rivalling the World
Bank and IMF has potential to be a game-changer in the global econ-
omy, at least over the long term. However, there are significant obsta-
cles to creating and managing such an entity in the near term.
The leaders of the BRICS (Brazil, Russia, India, China and
South Africa) nations met in Durban, South Africa, in March
for their annual summit, and proposals have emerged for the
creation of a new development bank to rival the World Bank,
and possibly even the IMF. If the new 'BRICS Bank' were to
come into existence, it could have far reaching consequences
for the global economy, as it would mean that there would be a
real alternative to the Western-dominated World Bank and IMF.
This alternative anchor would further reinforce the notion that
global wealth and power is shifting east and south.
The Rationale For A BRICS BankThere are three main factors driving the creation of a BRICS Bank:
Firstly, the world's leading financial institutions, the World
Bank and IMF, remain dominated by Western countries, ie, the
US and Europe. The so-called Bretton Woods institutions were
created in 1944, before the end of World War II, and many feel
that their leadership and decision-making powers clearly do not
reflect the contemporary global economy in which China, Brazil,
Russia, India and South Africa are now much bigger players.
Secondly, the BRICS nations are in a position to afford to be able
to create such a bank. They have a combined US$4.4trn worth
of foreign currency reserves, of which China has US$3.3trn.
During the global financial crisis of 2008-2009, Brazil actu-
ally contributed US$10bn to the IMF, rather than the other
way round. The BRICS countries are also arguably much more
financially experienced than ever before, with India, Brazil and
Russia having overcome severe financial crises in the 1990s and
under relatively prudent management. As emerging nations, the
BRICS may also feel that they are better placed than the US
and Europe to understand the challenges and needs of other
developing countries.
Thirdly, the BRICS states are becoming increasingly assertive
politically, with all five acting as major economic and geopoliti-
cal powers in their respective regions. Furthermore, the BRICS
countries reflect every continent in the world except North
America and perceive themselves collectively to represent the
'global south'.
What Would It Look Like?At the time of writing, it is unclear whether other developing
countries would be allowed to participate in a BRICS Bank, but
we assume that this would be the case, for otherwise the scope
of the new lender would be too limited. The proposals indicate
that the bank would mainly be focused on infrastructure develop-
ment, which is a key priority of Brazil and India in particular,
as well as other developing nations. China reportedly favours
initiating the bank with US$100bn in capital, whereas India is
said to favour US$50bn, which would dovetail with Russia's sug-
gestion that each founding member should contribute US$10bn.
In addition, there are discussions about creating a pool of for-
eign currency reserves for the purposes of rescuing countries in
financial crisis. This could potentially be modelled on the Chiang
Mai Initiative, which consists of China, Japan, South Korea and
10 Southeast Asian countries and has access to US$240bn of
emergency funds.
There are major question marks surrounding the conditions
under which a BRICS Bank would lend to other countries.
The World Bank and IMF typically lends through a range of
conditions, such as a commitment from the borrower to public
spending cuts, greater transparency, reduced corruption and free
market reforms. It is unclear if the BRICS Bank would impose
such stringent conditions. If the bank were to be more casual in
its terms of lending, then it could emerge as a more attractive
option than the World Bank and IMF, raising questions about
their raison d'tre. The decline of Western financial influence
would mean reduced political influence.
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11Business Monitor International Ltd www.businessmonitor.com
POLITICAL OUTLOOK
Potential Obstacles To Management Although the BRICS nations clearly want to see global financial
institutions that reflect their rising power, there are significant
obstacles to the creation and smooth running of a BRICS Bank.
Chief among these is the issue of which country gets the biggest
say in its decision-making.
Geopolitics: China, Russia and India are all geopolitical competitors. China and Russia are competing for influence in
Central Asia and the Far East, while India and China are rivals
in Southeast Asia, the Himalayan region, the Indian Ocean and
Africa. All three regard themselves as emerging or re-emerging
world powers and would thus want to exert a big a sway as pos-
sible in the bank. As the richest and most powerful member,
China would be its natural leader, but any attempt by Beijing
to dominate the lender would cause resentment in Moscow and
New Delhi. This could paralyse the new bank in a time of crisis.
Divergent Economic Interests: The BRICS group is economi-cally incoherent to say the least, and this will affect their priorities.
Brazil and Russia are already middle-income, highly urbanised
economies, whereas China and India are still low-income coun-
tries that have massive rural populations. This means they have
differing development challenges. Meanwhile, Brazil, Russia and
South Africa are big commodity exporters, whereas China and
India are major importers. In addition, the original four BRIC
countries are all competing against one another economically. For
example, China's demand for Brazilian commodities is leading
to fears in Brazil of a dependency relationship and concerns that
Brazilian manufactured goods will be replaced by competition
from China. In demographic terms, China and India stand out
with more than a billion people each, whereas Brazil and Russia
have less than 200mn people. Brazil, India and South Africa
are all 'young' countries, whereas China and Russia are ageing
rapidly. Finally, South Africa, due to its smaller population and
economy, doesn't rank as highly as the other BRIC states, which
are all in the top 10 world's biggest economies.
Lack Of Ideological Coherence: China and Russia are both quite state-directed economies, whereas India has moved away
from this model and Brazil has been more laissez-faire than
the other four BRICS for many years. Politically, Brazil and
India are both vibrant democracies, whereas Russia, China and
South Africa are de facto or de jure one-party states. This lack
of ideological coherence will also affect the BRICS Bank's
world view. Furthermore, even if the BRICS Bank were to
become fully operational, China and Russia could still pursue
unilateral assistance to other countries outside the framework
of the new lender.
US Can Undermine BRICS Bank: After the 1997-1998 Asian financial crisis, Japan attempted to establish an Asian Monetary
Fund but was thwarted from doing so by the US, which wanted
the IMF to remain the dominant global crisis-beating institution.
Now, as momentum for the BRICS Bank builds, Washington
can still exert influence on the BRICS states, because all or
most of them very likely still value their relationship with the
US above their ties with fellow BRICS states although this
may eventually change.
Global Problems Require Global SolutionsWith the world increasingly interconnected, as evidenced by
the severity of the 2008-2009 crisis, the smooth functioning
of the global economy will require coordination by the major
economies. This is evident from the way that the G-20 has come
to supersede the G-7 or G-8. Thus, if the BRICS Bank does
come into existence, we believe it would not work unassisted.
The World Bank and IMF have decades of experience behind
them and would still serve a purpose.
Long-Term Political Outlook
Political Trials And Tribulations Over The Coming Decade
BMI VIEWMany issues threaten South Africa's political stability over the long
term, not least the inequalities still stemming from the apartheid era
and the foreign policy challenge of Zimbabwe. Although our core sce-
nario envisages no major change to the political backdrop, we present
a number of alternative scenarios.
South Africa's political environment has several weak spots that
could disrupt the relative stability that has prevailed in recent
times. Although the country has one of the most advanced and
entrenched democracies in Sub-Saharan Africa, many issues will
need to be resolved over the coming years. The risks are clearly
illustrated by our long-term political risk ratings, where a low
score for the 'characteristics of society' component drags South
Africa's overall rating down to 68.8 out of 100.0. In particular,
threats stem from the high levels of poverty and inequality that
prevail in spite of the relative affluence of the nation as a whole.
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12 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
Threats And Challenges To StabilitySouth Africa faces several challenges, some of which are long-
standing, and some of which have become more pressing in
recent times:
Legacy Of Apartheid: The policy of racial segregation enforced by the National Party between 1948 and 1994 has left a lasting
legacy in South Africa, with the minority ethnic whites (9.6% of
the population) retaining disproportionate influence over finan-
cial and business affairs, compared with ethnic black Africans
(79.0% of the population). Although the degree of 'skewing'
is difficult to estimate, the data certainly suggest that income
distribution is very uneven across the country. For example, the
United Nations Development Programme (UNDP) calculates
that South Africa has a Gini index of 57.8. This is reflected in
BMI's long-term political risk ratings, where we assign South Africa a score of just 2/10 for 'income distribution'.
The disparity in wealth risks stirring up racial tensions, especially
in areas where rich 'white' suburbs are juxtaposed with 'black'
slums. These risks are particularly acute given the legacy of
'townships' (areas on the outskirts of towns and cities that were
reserved for non-whites under apartheid). These townships still
tend to be inhabited by impoverished black people. Furthermore,
many townships remain underdeveloped, lacking basic amenities
such as clean water and electricity.
In a bid to redress the inequalities brought about by apartheid,
the South African government has introduced a Black Economic
Empowerment policy, aimed at giving previously disadvantaged
groups ('black people', as defined under the Black Economic
Empowerment Act of 2003) economic opportunities. However,
it has arguably exacerbated racial tensions through advantaging
the previously disadvantaged and disadvantaging the previously
advantaged. Furthermore, it has created a 'brain drain' effect,
whereby white professionals go abroad to seek opportunities in
countries where they may be hired more easily.
Poverty And Joblessness: Poverty is widespread in South Africa, despite the nation being by far the most developed in
Sub-Saharan Africa. The UNDP estimates that 42.9% of the
population lives on less than US$2 per day, and this is reflected
in the 5/10 score we accord to South Africa in the 'poverty'
element of our long-term political risk ratings. A significant
proportion of this poverty stems from the high degree of un-
employment: joblessness is high, at around 25% of the labour
force. This poverty and high unemployment presents heightened
risk of social unrest. In turn, this risk is exacerbated by the high
degree of unionisation prevalent in South Africa, since unions
can provide a forum for galvanising discontent. It is estimated
that the Federation of Unions of South Africa currently repre-
sents more than 500,000 members. High levels of poverty and
unemployment also tend to generate crime, and South Africa's
notoriously high crime levels attest to this relationship. Around
50 people are killed each day, and violent robberies are com-
monplace in some areas including Johannesburg.
Differing Levels Of Government: The post-apartheid (post-1994) years have seen significant changes in administrative
structures, and there is some contention surrounding the nature
of the relationship between central and provincial governments.
There are nine provinces (which in 1997 replaced the previous
system of four provinces) plus 10 black 'homelands', four of
which were considered independent by the South African gov-
ernment. Although the current system is a federal one, there is
considerable debate surrounding the various power structures,
especially among groups advocating a greater degree of autonomy
from the central government.
Zimbabwe: Political unrest in neighbouring Zimbabwe has presented a considerable foreign policy challenge for South
Africa. Former South African president Thabo Mbeki was re-
peatedly accused of turning a blind eye to the alleged misdeeds
of Robert Mugabe and his cronies prior to the formation of the
government of national unity, causing discontent among the
South African populace.
On a separate note, prolonged instability has generated an
influx of refugees from Zimbabwe. This is putting pressure
on already strained resources such as housing, posing a risk of
social tensions. The explosion of xenophobic violence against
Mozambican immigrants in the Guateng province in May 2008
certainly illustrates this risk.
HIV/AIDS: South Africa suffers a high prevalence of HIV/AIDS; a nationwide study conducted by the South African
Department of Health in 2010 found that 30.2% of pregnant
women (aged 15-49) were living with HIV in 2010. This presents
social risks, since a high HIV/AIDS rate results in a high level
of orphaned children. Furthermore, many South Africans feel
that the government has not done enough to counter the rising
threat of the disease. Mbeki famously refused to accept medi-
cal evidence of the virus during his tenure, hampering efforts
to introduce treatments.
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13Business Monitor International Ltd www.businessmonitor.com
POLITICAL OUTLOOK
Scenarios For Political ChangeSo far, President Jacob Zuma has sustained the difficult balanc-
ing act of keeping left-wing allies on board while maintaining
market-friendly policies. However, we see two major develop-
ments that could unfold over the coming years:
Fragmentation Of Left-Wing Alliance: The ruling African National Congress (ANC) enjoys support from the powerful,
left-wing Congress of South African Trade Unions and the South
African Communist Party. However, this support may wane over
time given the economic hardship that many South Africans
continue to suffer in the aftermath of the 2009 recession. Im-
portantly, some people feel that the government is insufficiently
sympathetic with its policies. For example, the South African
Reserve Bank hikes interest rates when inflation looms in spite
of the difficulties this poses for borrowers, especially those with
mortgages. Furthermore, the South African rand is allowed to
strengthen in line with market forces, even though this pushes
exporters to the brink of uncompetitiveness. The loss of support
from any of the ANC's major allies would be a serious blow
for the party, and would be likely to lead to a diminution of its
power in parliament; at present, the ANC holds 264 out of 400
parliamentary seats.
Opposition Rises: Related to the above point, the opposition could emerge as a more powerful force over the coming years.
At the April 2009 elections, the Democratic Alliance (DA)
won 16.7% of all votes. This may seem fairly marginal, but
anecdotally, the party has gained more support since then, as
voters have become increasingly disenchanted with the status
quo. As the party has more time to strengthen its support base,
the potential for the DA to pose a more serious challenge to the
ANC in the next elections is not negligible.
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15Business Monitor International Ltd www.businessmonitor.com
SWOT Analysis
Strengths The government has pursued a prudent fiscal policy since 1994, al-
lowing it to increase public expenditure during economic downturns.
The state has rich mineral resources and is the continent's financial
hub.
Despite a decrease in profitability, South Africa's banking sector has
remained broadly stable amid the global recession and subsequent
recovery.
Weaknesses Currency volatility over the years has hampered industry planning.
Lack of investment in education under apartheid has left a legacy of
high structural unemployment and poverty, which will take a genera-
tion to meaningfully reduce.
Opportunities Increasing the trend rate of growth is essential to long-term plans to
alleviate poverty. The government is planning a raft of microeconomic
reforms, including improved skills training, to address this.
Threats The government's Black Economic Empowerment initiative is likely
to increase equality in the participation and ownership of financial
resources, although over the medium term the costs of compliance
will be high.
High levels of HIV/AIDS will reduce long-term growth.
Following the 2009 elections, the government is taking a more
populist stance, significantly increasing fiscal spending and poten-
tially nationalising key industries (although the latter is not our core
scenario).
BMI Economic Risk RatingsGiven South Africa's close links with the global economy, the country
remains heavily exposed to the external environment. South Africa's
current account deficit constitutes an ongoing liability, as a renewed
decline in capital flows could make the financing of the shortfall a chal-
lenge over the medium term. That said, the threat of a major economic
crisis will remain limited.
Chapter 2: Economic Outlook
S-T Economy Rank TrendBotswana 71.9 1 =Gabon 63.3 2 =Nigeria 63.1 3 =Mauritius 60.0 4 +Angola 58.3 5 =South Africa 57.9 6 =Congo-Brazzaville 53.3 7 =Zambia 50.8 8 =Cte d`Ivoire 48.8 9 =Rwanda 48.3 10 =Uganda 47.5 11 +Cameroon 47.3 12 =Niger 47.3 12 =Tanzania 46.0 14 =Kenya 44.8 15 +Senegal 44.4 15 =Togo 44.2 17 =Burkina Faso 43.1 18 =Benin 42.3 19 =Equatorial Guinea 41.5 20 =Sierra Leone 40.2 21 =Ethiopia 38.8 23 =Mali 38.8 23 =Ghana 37.9 25 =Mozambique 36.9 22 -Namibia 36.7 26 =Chad 36.5 27 =Guinea 34.6 28 =Guinea-Bissau 32.9 29 =Zimbabwe 30.6 30 =Congo, Dem. Rep. 29.8 31 =Sudan 20.2 32 =Regional ave 45.7/Global ave 55.0/Emerging markets ave 53.3
L-T Economy Rank TrendSouth Africa 62.9 1 =Mauritius 60.5 2 =Botswana 57.5 3 =Gabon 57.1 4 =Nigeria 56.7 5 =Angola 52.6 6 =Tanzania 50.3 7 =Uganda 47.2 8 =Rwanda 46.0 9 =Zambia 46.5 10 =Ghana 44.6 11 =Kenya 44.0 12 =Namibia 43.6 13 =Cte d`Ivoire 41.9 14 =Burkina Faso 41.7 15 =Cameroon 41.7 15 =Ethiopia 40.5 17 =Senegal 40.3 18 =Chad 39.4 19 =Equatorial Guinea 39.4 19 =Niger 39.3 21 =Sierra Leone 39.0 22 =Togo 38.4 23 =Benin 38.1 24 =Mozambique 37.8 25 =Mali 37.3 26 =Congo-Brazzaville 36.3 27 =Congo, Dem. Rep. 28.5 28 =Guinea 28.4 29 =Guinea-Bissau 23.5 30 =Zimbabwe 22.3 31 =Sudan 18.9 32 =Regional ave 43.5/Global ave 53.7/Emerging markets ave 51.3
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16 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
ing continued to play an important role in propping up growth,
albeit increasing by a lacklustre 2.4% q-o-q SAAR in Q412.
Gross fixed capital formation (GFCF) was also a key pillar of
support in the quarter, growing by 4.3% but, as outlined below,
this trend is unlikely to continue.
Given BMI's prediction of stagnation in the eurozone and a slowdown in China in the second half of 2013, South Africa looks
set to continue to suffer from a weak global growth environ-
ment and potentially high investor risk aversion amid frequent
industrial unrest. Taking into account BMI's view for real GDP growth in the US of just 2.1% in 2013, a slight contraction of
0.1% in the eurozone and a marked cooling of gross fixed capital
formation in China, we forecast that the South African economy
will post real GDP growth of just 2.8%.
We maintain our core view that economic growth will be driven
by the demand side (ie, wholesale and retail trade, financial and
personal services) while the supply side (especially mining) will
continue to remain weak. Breaking GDP down by expenditure,
we see private consumption adding 2.1 percentage points (pp) to
headline growth in 2013; government consumption contributing
0.7pp; exports adding 0.7pp; GFCF adding 0.4pp; and imports
subtracting 1.2pp.
Expenditure BreakdownPrivate Consumption Outlook: We remain fairly positive on private consumption, forecasting real growth of 3.2% in 2013,
following growth of 3.5% in 2012. In our view, two factors
bode well for consumer spending: high nominal wage growth
and the low interest rate environment, which is likely to keep a
lid on debt servicing costs. Regarding the latter point, we expect
SARB to keep the repo rate steady at 5.00% over the coming 12
months. Although the weak growth environment may prompt
calls for a rate cut, inflation is heading higher, and risks are firmly
to the upside given firm maize prices and the relative weakness
Economic Activity
Tepid Growth Ahead
BMI VIEWWe forecast tepid economic growth for South Africa over the medium
term, forecasting that real GDP will expand by 2.8% in 2013 and 3.3%
in 2014. Although private consumption is expected to remain relatively
robust, private investment is likely to suffer due to elevated political
risk.
The latest data from the South African Reserve Bank (SARB)
and Statistics South Africa reinforce our view of sluggish growth
stemming from the adverse external environment and elevated
domestic political risk. In Q412, the economy as a whole grew by
2.1% quarter-on-quarter on a seasonally adjusted and annualised
basis (q-o-q SAAR), bringing full-year 2012 growth to 2.5% (for
comparison, growth stood at 3.5% in 2011). The breakdown of
GDP by expenditure for Q412 revealed that household spend-
TABLE: QUARTERLY REAL GDPHousehold
Expenditure Government Expenditure
Gross Fixed Capital Formation
Exports Imports Total GDP
Q111 6.3 9.3 5.8 7.3 7.0 4.8
Q211 3.1 -0.5 5.2 6.1 6.7 1.9
Q311 3.2 4.8 6.8 8.0 18.5 1.9
Q411 4.4 7.8 7.3 4.4 11.0 3.3
Q112 4.0 1.9 4.6 -3.0 4.8 2.5
Q212 3.2 3.7 5.4 -6.1 -0.5 3.4
Q312 2.7 8.3 5.6 1.6 12.0 1.2
Q412 2.4 -0.7 4.3 -4.3 -12.4 2.1
Note: % chg q-o-q, SAAR. Source: South African Reserve Bank, BMI
Edging Along, SlowlyReal GDP Growth, % & Components' Contribution, pp
-3
-2
-1
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013f 2014f 2015f
Net exports InvestmentGovernment consumption Private consumptionTotal GDP
f = BMI forecast. Source: BMI, South African Reserve Bank
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17Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
of the rand. The latest consumer price inflation prints are 5.9%
year-on-year (y-o-y) in February and 5.4% in January. Amid this
stagflationary scenario, the SARB Monetary Policy Committee
will likely choose to maintain the status quo.
Certainly, the latest data on retail sales and credit extended to
private households suggest that the consumer remains in decent
shape in spite of indebtedness. Retail sales grew by 1.9% y-o-y
in January, which is not stellar but nevertheless still positive.
Meanwhile, credit extended to private households grew by a
robust 9.9% y-o-y. That said, we expect a generally weaker
consumer sector in 2013 compared with 2012 given that rising
inflation will likely eat into people's purchasing power.
Government Spending Outlook: As regards government spending, we hold a relatively upbeat view, forecasting real
growth of 3.5% in 2013. The treasury is proactively nurturing
the economic recovery, withdrawing fiscal stimulus gradually
and tolerating a fiscal deficit over the medium term. The budget
presented by the treasury in February illustrates this: the finance
ministry intends to run fiscal deficits equaling 4.6% of GDP
in fiscal year 2013/14 and 3.9% of GDP in 2014/15, in line
with its 'gradual fiscal consolidation' policy. The public sector
is proving a key driver of job creation in the current climate,
helping to boost consumer spending and keep unemployment
under control although joblessness remains high, recorded at
24.9% in Q412.
Investment Outlook: The outlook for investment is less posi-tive: we are forecasting real GFCF growth of just 2.0% in 2013
following 5.7% in 2012. Our view is predicated on the likelihood
of global risk appetite remaining weak amid a 'muddle-through'
in the eurozone and a slowdown in China in the second half
of the year. South Africa's manufacturing sector is particularly
vulnerable in this regard given its reliance on external demand;
although the ongoing weakness of the rand will likely provide
a timely boost to competitiveness. We have also factored in
tainted foreign investor perceptions following the Marikana
massacre and subsequent bouts of industrial unrest. Certainly,
the credit default swap market suggests that general investor
sentiment towards South Africa has deteriorated in recent months.
Lacking Confidence Business Confidence Index, 2010 = 100
90
95
100
105
110
115
120
125
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13
Source: South African Chamber of Commerce and Industry; BMI
Consumer Sector Holding UpRetail Sales & Credit To Private Households, % y-o-y 3mma
-10
-5
0
5
10
15
20
25
30
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2
Retail Sales, % y-o-y, 3mmaCredit Extended To Private Households, % y-o-y, 3mma
Source: BMI, Statistics South Africa, South African Reserve Bank
TABLE: ECONOMIC ACTIVITY2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Nominal GDP, ZARbn [1] 2,256.5 2,406.4 2,659.4 2,917.5 3,155.2 3,409.1 3,727.0 4,074.0 4,457.5 4,877.4
Nominal GDP, US$bn [1] 272.8 285.8 363.3 401.7 384.4 379.3 390.4 422.5 457.7 495.8
Real GDP growth, % change y-o-y [1] 3.6 -1.5 3.1 3.5 2.5 2.8 3.3 3.5 3.6 3.6
GDP per capita, US$ [1] 5,530 5,745 7,246 7,961 7,577 7,441 7,623 8,215 8,860 9,557
Population, mn [2] 49.3 49.8 50.1 50.5 50.7 51.0 51.2 51.4 51.7 51.9
Unemployment, % of labour force, eop [3] 21.9 24.3 24.0 23.9 24.9 24.0 23.3 22.6 21.9 21.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Reserve Bank/BMI calculations; 2 World Bank/UN/BMI; 3 Statistics South Africa.
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18 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
largest iron ore producer.
Turning to imports of goods and services, we are forecasting real
growth of 4.0% in 2013, which would be a notable slowdown
from the 6.3% growth seen in 2012. In our view, the weakness
of the rand will keep import costs elevated, weighing on demand
somewhat. Furthermore, the aforementioned slowdown in the
growth of investment spending will also very likely keep a lid
on import growth.
Monetary Policy
Policy Stuck In A Stagflationary Rut
BMI VIEWWe hold to our view that the South African Reserve Bank will keep the
repo rate on hold at 5.00% over the whole of 2013. Although South Afri-
ca faces a weak growth outlook and risks are to the downside, inflation
has been ticking upward and is likely to go higher still. This stagflation-
ary scenario will likely force South African Reserve Bank's Monetary
Policy Committee to maintain the status quo.
In line with the expectations of both BMI and the market, the South African Reserve Bank's (SARB) Monetary Policy Com-
mittee (MPC) opted to keep the benchmark repo rate on hold at
5.00% on March 20. The MPC continues to face a stagflationary
Furthermore, the latest data on business confidence from the
South African Chamber of Commerce and Industry indicate that
domestic investment will likely cool. The business confidence
index stood at 93.0 in February (based to 2010 = 100) and has
remained depressed relative to pre-global financial crisis levels.
Net Exports Outlook: We see the overall impact of net exports being negative. Exports will likely see weak growth at best, but
we also expect imports to rise, having a deleterious impact on
headline real GDP growth.
Looking first at exports of goods and services, we are forecasting
growth of 3.0% in 2013. Focusing on one of South Africa's key
exports, BMI's Mining analysts are forecasting annual growth in gold output to average 1.4% over the five-year forecast period
in spite of the potential for industrial unrest, rising to 6.0mn
ounces by 2017 from 5.7mn ounces in 2013. For coal which
accounts for the majority of the mining sector's value our
analysts forecast a swifter increase in output, with production
reaching 284mn tonnes by 2017, marking average annual growth
of 2.4%. This is particularly important as it comes at a time of
tight global coal supplies. Iron ore is also notable; the sector is
set for significant expansion over the long term, driven primarily
by Kumba Iron Ore (majority-owned by Anglo American). For this metal, we expect output to reach 68mn tonnes in 2017,
from current levels of around 59mn tonnes. However, given
aggressive expansion plans in the west of the continent, it is pos-
sible that South Africa could be usurped by Guinea as Africa's
TABLE: MONETARY POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Consumer price index, % y-o-y, eop [4] 6.3 3.5 6.1 5.7 6.2 5.8 5.7 5.7 5.7
Consumer price index, % y-o-y, ave [4] 7.2 4.3 5.0 5.7 6.1 6.0 5.8 5.7 5.7
Producer prices, % y-o-y, eop [4] 0.7 5.8 9.8 6.1 6.0 6.2 6.1 6.1 6.1
Producer prices, % y-o-y, ave [4] 0.2 6.0 8.3 7.0 6.1 6.1 6.2 6.1 6.1
M1, ZARbn [5] 806.3 862.8 946.9 1,035.0 1,123.0 1,218.5 1,322.0 1,434.4 1,556.3
M1, % change y-o-y [5] 7.0 7.0 9.7 9.3 8.5 8.5 8.5 8.5 8.5
M2, ZARbn [5] 1,588.3 1,677.3 1,797.5 1,867.8 2,026.6 2,198.8 2,385.7 2,588.5 2,808.5
M2, % change y-o-y [5] 1.7 5.6 7.2 3.9 8.5 8.5 8.5 8.5 8.5
Central Bank policy rate, % eop [1,5] 7.00 5.50 5.50 5.00 5.00 5.00 5.50 5.50 5.50
Lending rate, %, eop [2,5] 10.5 9.0 9.0 8.5 8.5 8.5 9.0 9.0 9.0
Lending rate, %, ave [2,5] 11.7 9.8 9.0 8.8 8.5 8.5 8.8 9.0 9.0
Real lending rate, %, eop [3,6] 4.2 5.5 2.9 2.8 2.3 2.7 3.3 3.3 3.3
Real lending rate, %, ave [3,6] 4.6 5.5 4.0 3.1 2.4 2.5 3.0 3.3 3.3
3-month money market rate, % eop [7] 7.3 5.6 5.8 5.8 5.8 5.8 5.8 5.8 5.8
Real 3-month money market rate, %, eop [3,7] 1.0 2.1 -0.3 0.1 -0.4 0.0 0.1 0.1 0.1
3-month money market rate, %, ave [7] 8.3 6.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6
Real 3-month money market rate, %, ave [3,7] 1.1 2.3 0.6 -0.1 -0.5 -0.4 -0.2 -0.1 -0.1
Notes: e BMI estimates. f BMI forecasts. 1 Repo rate; 2 Prime rate; 3 Real rate strips out the effects of inflation. Sources: 4 Statistics South Africa; 5 South African Reserve Bank; 6 South African Reserve Bank/BMI; 7 BMI.
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19Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
scenario in which domestic economic activity is flagging but infla-
tion is rising, meaning that the central bank's only viable option
is to keep rates static. SARB Governor Gill Marcus commented
that 'the MPC continues to assess the monetary policy stance to
be appropriately accommodative given the persistence of the
negative output gap. At the same time, further accommodation
remains constrained by the upside risks to the inflation outlook'.
As regards the outlook for economic growth, the SARB's view
chimes with our own tepid outlook. The central bank is forecast-
ing real GDP growth of just 2.7%, slightly below BMI's (and Bloomberg consensus) projection of 2.8%. The factors underpin-
ning this are both external and internal, with the eurozone still
'muddling through' its crisis, and the domestic economy beset
by industrial unrest and difficulties in the mining sector. Marcus
emphasised that the risks to South Africa's growth trajectory
are to the downside, commenting that 'the unresolved labour
disputes in the mining sector pose a significant risk to eco-
nomic growth through their negative impact on export revenues,
employment growth and investor perceptions of South Africa'.
Although the growth outlook is concerning, the MPC is being
forced to hold off from cutting rates given that inflation is ticking
upward. Headline consumer price inflation (CPI) was recorded
at 5.9% y-o-y in February 2013, up from 5.4% in January, while
core inflation (which excludes food, non-alcoholic beverages,
petrol and energy) rose to 5.5% from 5.0%. Price growth looks
set to continue its upward trajectory owing to the weakness of
the rand and high wage settlements in certain industries. The
rand is particularly concerning given that it will very likely
weaken further due to the wide current account deficit and
adverse foreign investor sentiment. Indeed, we expect infla-
tion to pierce the upper band of the SARB's targeted 3.0-6.0%
range over the coming months. For 2013 as a whole, the SARB
forecasts that inflation will average 5.9%, slightly below our
own projection of 6.1%.
Taking all the above into account, we expect that the 'stagfla-
tion scenario' will continue for several months at least, and we
maintain our expectation for the repo rate to be kept static at
5.00% over the whole of 2013.
Risks To OutlookGiven the ongoing weakness of the rand, there is a risk that the
SARB may hike the repo rate in a bid to stabilise the currency.
However, in our view this would only happen in an 'emergency'
scenario in which the rand goes into free fall. The SARB is
generally very disciplined at sticking to its dual mandate to
foster sustainable growth and keep inflation under control, and
intervenes only to smooth out large fluctuations in the volatil-
ity of the rand. Furthermore, the MPC is currently stressing
that the weak exchange rate can have positive effects as well.
Marcus commented on March 20 that the current level of the
rand 'provides an opportunity for the manufacturing sector in
particular to become more competitive despite the challenging
export environment'.
Inflation Ticking UpInflation, % y-o-y
0
2
4
6
8
10
12
Dec
-09
Feb-
10Ap
r-10
Jun-
10Au
g-10
Oct
-10
Dec
-10
Feb-
11Ap
r-11
Jun-
11Au
g-11
Oct
-11
Dec
-11
Feb-
12Ap
r-12
Jun-
12Au
g-12
Oct
-12
Dec
-12
Feb-
13
Headline inflation Food inflationTransport inflation
Source: BMI, Statistics South Africa
Rates Still On HoldInflation & Repo Rate, %
2
4
6
8
10
12
14
16
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2Ja
n-13
CPI, % y-o-yRepo Rate, %
Source: BMI, Statistics South Africa, South African Reserve Bank
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20 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
6.2% in 2014, following the 6.3% recorded in 2012. Moreover,
we highlight the risk that inflows to the capital and financial ac-
count will wane due to subdued investor appetite during potential
flare-ups in political risk, and therefore be insufficient to cover
the current account deficit. However, although this may result
in foreign reserves being drawn down, we do not believe the
balance of payments will become a critical weakness in South
Africa's macroeconomic profile.
Focusing on the outlook for exports, we are forecasting a rebound
in nominal growth to 7.7% in 2013 (in rand terms), following
an increase of just 2.8% in 2012, when gold, platinum and
coal production were severely hampered by industrial unrest.
Although we expect strikes and protests to continue taking
place sporadically, our core view is that industrial unrest will
not occur on the same scale as that seen in the aftermath of the
August 2012 deadly shooting of miners in Marikana. Further-
more, the external environment is likely to be fairly supportive:
we forecast that the US and China (two of South Africa's key
export markets) will see real GDP growth of 2.1% and 7.5%
respectively in 2013, helping to bolster demand. BMI's Mining analysts are forecasting that gold output will rise by 1.1% in
2013 to 5.7mn ounces (moz) and coal production will rise by
2.2% to 259mn tonnes (mnt), while platinum output continues
Balance Of Payments
Current Account To Remain Structural Weakness
BMI VIEWWe forecast that South Africa's current account deficit will remain wide
over the medium term, predicting that it will be 6.5% of GDP in 2013
and 6.2% in 2014. Inflows to the capital and financial account have
traditionally propped up the balance of payments, but with investor risk
appetite on shaky ground, this trend can no longer be assured.
The latest data reinforce our view that South Africa's current
account deficit will remain wide, posing a notable but not criti-
cal risk to macroeconomic stability. In Q412, the deficit stood
at 6.5% of GDP, marginally down from the 6.8% recorded in
Q312 but substantially above the 2.30-4.0% range recorded over
2009-2011. The widening of the shortfall during 2012 was due
to weak export growth, robust import demand and a widening
of the deficits on the income and current transfers accounts.
Over the medium term, we see a continuation of these trends,
forecasting a current account deficit of 6.5% of GDP in 2013 and
TABLE: CURRENT ACCOUNT2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Goods imports, US$bn [2] 65.8 81.7 100.5 102.7 102.2 104.4 110.6 118.3 128.8
Goods imports, % of GDP [2] 23.0 22.5 25.0 26.7 26.9 26.7 26.2 25.8 26.0
Goods exports, US$bn [2] 66.1 85.4 102.8 93.5 92.0 94.7 102.1 110.2 119.1
Goods exports, % of GDP [2] 23.1 23.5 25.6 24.3 24.2 24.3 24.2 24.1 24.0
Goods exports, % of imports [2] 100.4 104.5 102.2 91.0 90.0 90.7 92.3 93.2 92.4
Balance of trade in goods, US$bn [2] 0.3 3.7 2.3 -9.2 -10.3 -9.7 -8.5 -8.0 -9.7
Balance of trade in goods, % of GDP [2] 0.1 1.0 0.6 -2.4 -2.7 -2.5 -2.0 -1.8 -2.0
Services imports, US$bn [2] 14.7 18.4 19.6 17.7 16.9 16.7 17.4 18.1 18.8
Services imports, % of GDP [2] 5.2 5.1 4.9 4.6 4.5 4.3 4.1 4.0 3.8
Services exports, US$bn [2] 12.0 14.0 14.8 15.1 14.5 14.5 15.2 16.0 16.8
Services exports, % of GDP [2] 4.2 3.8 3.7 3.9 3.8 3.7 3.6 3.5 3.4
Goods and services exports, US$bn [2] 78.1 99.4 117.6 108.6 106.5 109.2 117.3 126.2 135.8
Goods and services exports, % of GDP [2] 27.3 27.4 29.3 28.3 28.1 28.0 27.8 27.6 27.4
Balance of trade in goods and services, US$bn [2] -2.5 -0.7 -2.5 -11.7 -12.7 -11.9 -10.7 -10.2 -11.8
Balance of trade in goods and services, % of GDP [2] -0.9 -0.2 -0.6 -3.0 -3.3 -3.1 -2.5 -2.2 -2.4
Income account balance, US$bn [2] -6.4 -7.2 -9.2 -8.5 -8.5 -8.6 -9.3 -10.0 -10.7
Income account balance, % of GDP [2] -2.2 -2.0 -2.3 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2
Net transfers, US$bn [2] -22.4 -16.8 -14.2 -31.4 -32.9 -34.6 -36.3 -38.1 -40.0
Net transfers, % of GDP [2] -7.8 -4.6 -3.5 -8.2 -8.7 -8.9 -8.6 -8.3 -8.1
Current account balance, US$bn [2] -11.5 -10.2 -13.6 -24.1 -24.8 -24.2 -23.8 -24.0 -26.6
Current account balance, % of GDP [2] -4.0 -2.8 -3.4 -6.3 -6.5 -6.2 -5.6 -5.3 -5.4
Openness to international trade, % [1,2] 46.2 46.0 50.6 51.0 51.2 51.0 50.3 49.9 50.0
Notes: f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 South African Reserve Bank/BMI calculations.
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21Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
to decline, falling by 1.2% to 4.5moz.
Turning to imports, these have been growing strongly since
2010, and demand remains high in spite of the relative weakness
of the rand. This ties in with the data on GDP by expenditure,
which show that consumer demand remains relatively buoyant.
Notwithstanding an expected slowdown in investment growth
following the Marikana massacre, we are forecasting nominal
growth of 9.0% (in rand terms) for imports in 2013 and 8.5%
in 2014, following a 15.4% expansion in 2012.
We see total import growth coming in lower in 2013 than 2012
because the anticipated continued depreciation of the South
African rand will keep the price of imported goods relatively
high in local currency terms, putting the brakes on growth.
Given the size of the current account deficits we are forecasting,
inflows to the capital and financial account will be crucial for
propping up South Africa's balance of payments. The latest data
are somewhat concerning in this regard: in Q412, net foreign
direct investment inflows were negative and net portfolio in-
flows were only just positive. Furthermore, the latest data from
the Johannesburg Stock Exchange regarding foreign purchases
of equities and bonds indicate that investor demand for South
African equities is waning.
Given the uncertainties in the political and economic environ-
ment, our core scenario is that inflows to the capital and financial
Somewhat Precarious FinancingCapital & Financial Account By Component, ZARbn
-150
-100
-50
0
50
100
150
Q10
8Q
208
Q30
8Q
408
Q10
9Q
209
Q30
9Q
409
Q11
0Q
210
Q31
0Q
410
Q11
1Q
211
Q31
1Q
411
Q11
2Q
212
Q31
2Q
412
Net FDINet portfolio flowsNet other investmentBalance on capital & financial accountCurrent account deficit
Source: BMI, South African Reserve Bank
Elevated Import Demand Imports, ZARbn
0
50
100
150
200
250
Q10
4
Q30
4
Q10
5
Q30
5
Q10
6
Q30
6
Q10
7
Q30
7
Q10
8
Q30
8
Q10
9
Q30
9
Q11
0
Q31
0
Q11
1
Q31
1
Q11
2
Q31
2
Source: BMI, South African Reserve Bank
Broadly Supportive External EnvironmentExports By Destination, ZARbn
0
10
20
30
40
50
60
70
80
90
100
2008 2009 2010 2011 2012
China United States JapanGermany India
Source: BMI, South African Department for Trade and Industry
Deep In DeficitCurrent Account By Component, ZARbn
-60
-50
-40
-30
-20
-10
0
10
20
30
Q30
7Q
407
Q10
8Q
208
Q30
8Q
408
Q10
9Q
209
Q30
9Q
409
Q11
0Q
210
Q31
0Q
410
Q11
1Q
211
Q31
1Q
411
Q11
2Q
212
Q31
2Q
412
Trade balanceServices balanceIncome balanceTransfers balanceOverall current account balance
Source: South African Reserve Bank
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22 Business Monitor International Ltdwww.businessmonitor.com
SOUTH AFRICA Q3 2013
account will be subdued over the coming quarters, resulting in
a weakening of South Africa's balance of payments position.
Fiscal Policy
Budget Deficit To Narrow Gradually
BMI VIEWSouth Africa's new budget signals that the treasury is likely to keep the
deficit under control despite various economic and political challenges.
We forecast a budget shortfall of 5.0% of GDP in fiscal year 2013/14,
falling to 3.9% of GDP by FY15/16.
The budget presented by Finance Minister Pravin Gordhan on
February 27 signalled that the South African treasury intends to
keep the budget deficit in check over the coming years in spite
of pressure to increase social spending. The budget shortfall for
the fiscal year running from April 2012-March 2013 (FY12/13)
came in at 5.3% of GDP owing to weak mining sector revenues
and slow economic growth, among other things. Although these
pressures will remain in place, the treasury intends to reduce the
budget deficit over the medium term, and is targeting a short-
fall of 4.6% of GDP in FY13/14, 3.9% in FY14/15 and 3.1%
in FY15/16. Furthermore, there are still plans to stabilise the
net public debt-to-GDP ratio by FY15/16. Our own forecasts
for the consolidated budget deficit are close to the treasury's,
although more cautious, at 5.0% of GDP in FY13/14, 4.5% in
FY15/16 and 3.9% in FY15/16. We believe that the government
will find it difficult to meet its targets on social spending, given
political pressure.
The continued commitment to fiscal prudence is encouraging,
and it shows that fears of a more lax policy stance amid rising
political pressure are overblown. Notably, the treasury has raised
its spending targets only marginally, and contrary to speculation
prior to the budget, there have been no increases in taxation on
the mining sector. This be
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