economic and business drivers of turbocharged growth in sa christopher hart senior treasury...
TRANSCRIPT
Economic and business drivers of turbocharged
growth in SA
Christopher HartChristopher Hart
Senior Treasury EconomistSenior Treasury Economist
Absa Group TreasuryAbsa Group Treasury
The internationalcontext
Key GlobalTrends
1.Slowing growth due to
higher interest rates, oiland consumer debt
2.Major structural problemswith key currencies - $,
EUR, JPY
3.Rise in commodity prices:
long term bull market inprogress.
4.Higher precious metal
prices
Drivers of USD: will the 2005 recovery last?
Twin deficitburden
USD 2005 recovery supporting pillars
Economicgrowth
RisingInterest
rates
HomelandInvestment
Bill
USD bear market – 2005 just a correction in a 10-year trend
Reserves rebalancing, lower growth and a turn in the interest rate cycle to contribute to dollar weakness. Uncertainty over policy direction of the new Fed Governor and termination of the Homeland Investment inflows could result in
significant dollar weakness over the next two months i.e. $1.28/EUR
Global growth not synchronised. Likely to slow in 2006
Eurozone growth to accelerate but not to strong levels. Convergence with the US expected. US growth weaker than expected, dipping
towards 2,0% by mid 2006. Burden of higher interest rates, oil price and consumer indebtedness to weigh on the US economy.
Globalcurrency
Stress
USDFurther protractedweakness required
EURSubstantial deep-seated problems
Other currencies:Competitive devaluation
Currency stress – precious metal price divergence from other commodities and the euro.
Growing investment demand, a drop in new mine supplies and increasing Central Bank interest to buy have been contributing
factors. The divergence between gold and the euro will continue due to protracted problems in the eurozone. Gold to outperform platinum.
CRB commodities index – strong performance expected after the global slowdown
Could come under some pressure over the next two to three quarters due to slowing global economy but primary upward trend could last for
a further 15 years or more.
Moving to6% growth(or higher!)
Rand: continued strength possible with strong investment inflows
Investor inflows essential to sustain higher economic growth.
12
S.A.: lower inflation, higher growth
The first time since the early 1970’s. Will continue as with virtuous circle intact. The implication for investor perceptions and investment
performance is highly significant.
SA Economic Growth and Inflation: 1993 to 2004
1994
1995
1996
1997
2002
2004
1998
2000
2001
2003
2005
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 CPI
GDP
S. AfricanGrowth
ResourcesRevenue
Cost ofCapital
Hurdle RateProductivity
improvement
Global Investment Trends
Developedmarket
economies
Emergingmarket
economies
Commodityproducers
Investmentflows
Population trendsEconomic growth differentialsRisk and returnCost advantagesGlobalizationDollar divestment (Islam, China etc)
Economicgrowth shift
Investmentboom
Consumptionboom
Momentum in consumer demand is slowing but growth is expected to be boosted by investment. This would bring greater balance to the economy and inflationary pressure could be further reduced.
The SA economy: on the verge of an investment flood
Structural growth now possible
Barclays – Absa takeover. Stature of investor and substance of the deal to encourage others
The financial sector to see more investment
Vodacom / Vodafone
Commodity boom: backward integration, fund investment, green and brownfield development
Commodity boom: regional growth boost
Utilities: SNO, Transnet, ESKOM, Local authority infrastructure, World Cup
Strong demand to attract other multinationals not yet represented in Southern Africa
Investor attraction through superior investment returns
Asset Class 1-Year%
3-Years%
7-Years%
World Bonds -6,9 5,7 4,5
Emerging Mkt Bonds
11,9 17,2 15,0
S.A. Bonds -1,6 26,8 17,0
World Equity 10,0 19,3 3,1
Emerging Mkt Equity
34,5 38,4 15,9
S.A. Equity 29,5 43,2 28,3
S.A. Cash -4,5 21,3 10,0
S.A. Listed Property
32,6 58,2 62,6
S.A. Direct Property
12,0 35,8 15,6
SA investment outperformance expected to resume over the next year.
Investment Returns: strong and consistent S.A. outperformance supported by a strengthening currency
Strategicmanagementimplication
Proactive?Wishful
Thinking?
Mindset / pastexperience
Embracing thechallenge
Management by wishful thinking – hoping for the rand to weaken and rescue the income statement. Bonuses paid on undeserved windfalls. Lobbying for protection against competition.
Proactive management – planning the long-term survival of the business by benchmarking against best practice and achieving it. Being globally competitive despite currency strength.
Business strategy under current circumstances
Price
Efficiency
Volumes
Global competition greaterand survival depends on
efficiency gains
Volume needs to grow toraise profitability
Pricing power weak understrong currency conditions
Alternative Business strategy: High value-added businesses
High degree of specialisation
Greater use of technology
Personalised services
Customisation production where economies of scale do not exist
Development and retention of scarce skills
Inflation andInterest rates
22
Inflation:serious forecast
failure
Consumerdemand
Currentaccount
Oil priceConsumer
debt
Wageincreases
Inflation: Q3-2005 peak. Downward trend in progress from 4th quarter 2005
SA Inflation % average
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
Jan
-94
Jul-
94
Jan
-95
Jul-
95
Jan
-96
Jul-
96
Jan
-97
Jul-
97
Jan
-98
Jul-
98
Jan
-99
Jul-
99
Jan
-00
Jul-
00
Jan
-01
Jul-
01
Jan
-02
Jul-
02
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
CPI CPIX PPI
Consensusforecast
Where inflation isActuallyheading
Consumption boom is slowing in the SA economy
Growth is still strong but the base is high and growth has started to slow. This will continue without any further stimulus.
The slowing internal growth momentum is also reflected in credit and money supply
Credit and money supply growth is expected to ease further over the next few quarters.
Interest rate outlook: Markets and economic fundamentals have shifted rapidly
since October when a hike was virtually promised
Further few months of data can be expected to shift more favourably towards cuts
A peak in global interest rates will be clearer
The rand is expected to be below the R6,00 level
CPIX is expected to be closer to the 3,0% than the 6% level
A lower to steadier oil price is also anticipated
A rate cut in April or June 2006 is considered a reasonable possibility
