Economic challenges and opportunities SA will be facing over the next 5 years

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Information about Economic challenges and opportunities SA will be facing over the next 5...

Published on September 5, 2016

Author: FrostandSullivan

Source: slideshare.net

1. Challenges & Opportunities Manufacturing and Economic Growth Outlook www.frost.com Craig.Parker@Frost.com

2. Craig.Parker@Frost.comwww.frost.com AGENDA 1) INTRODUCTION  Overview  Key influencers, challenges and enablers 2) MACROECONOMIC OVERVIEW  External influencers and challenges 3) DOMESTIC ECONOMY  Growth trajectory  Key domestic influencers to manufacturing sector – supply & demand factors  Manufacturing sector growth 4) GROWTH DRIVERS AND OPPORTUNITIES IN AFRICA  Realistic expectations  Explore growth & key enablers  Where do the opportunities lie Craig Parker Programme Manager, Mobility Africa craig.parker@frost.com

3. External Influences: Macroeconomic Overview

4. Craig.Parker@Frost.comwww.frost.com Global growth remains constrained External factors to hinder manufacturing growth  Global GDP growth expected to average 3.2% in 2016 with downward revision possible  Low global inflation  Declining commodity prices  Depreciating currencies in emerging markets (South Africa, Brazil, Russia, Mexico, Columbia)  Decline in demand for emerging market assets - slowdown in capital inflows  Global realignments – trade spillover from China0.00 50.00 100.00 150.00 200.00 250.00 2012M1 2012M4 2012M7 2012M10 2013M1 2013M4 2013M7 2013M10 2014M1 2014M4 2014M7 2014M10 2015M1 2015M4 2015M7 2015M10 2016M1 2016M4 Index(2005=100) Food & Beverage Metals Fuel Indices of Major Commodities, 2012-2016 (2005 = 100) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2014 2015 2016 2017 2018 2019 2020 2021 GDPGrowth(%) Advanced economies European Union Emerging markets Sub-Saharan Africa GDP Growth & Forecast ,2014-2021 Source: IMF and Frost & Sullivan

5. Craig.Parker@Frost.comwww.frost.com Low commodity prices 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 2014 2015 2016 2017 2018 2019 2020 2021 TradeGrowth(%) Index(2005=100) Crude Oil Index Trade Volume (% Change)  OPEC strong supply  Higher expected supply from Iran  Resilience of global demand  Weaker medium-term growth prospects  Non-fuel commodity prices also weakened – metal & agricultural commodities – China & Asian slowdown  What does this mean for oil importers vs. exporters?  Distributional shift  Where are we going? Source: IMF and Frost & Sullivan $104.07 $135.36 $50.79 $55.21 $34.75 $42.39 $50.52 $35.93 Crude Oil Iron Ore 2013 2015 2016 2021 USD per barrel USD per ton Crude Oil &TradeVolume Growth ,2014-2021 Crude Oil & Iron Ore Prices, 2013-2021 (2005 = 100) -67% -69%

6. Craig.Parker@Frost.comwww.frost.com Interest rates, low inflation and stronger US dollar 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 2012/01/01 2012/05/01 2012/09/01 2013/01/01 2013/05/01 2013/09/01 2014/01/01 2014/05/01 2014/09/01 2015/01/01 2015/05/01 2015/09/01 2016/01/01 USDIndex(1997=100) US Dollar Trade Weighted Index (1997=100) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 Inflation(%) World Sub-saharan Africa Source: IMF and Frost & Sullivan US Dollar Index, 2012-2016 Inflation Comparison & Forecast, 2013-2021  US economy proving resilient – housing and labour recovery, with subdued investment and exports  2.4% growth predicted for 2016  FED raising rates slowly with caution – emerging market impact  EU – bond buying (QE) and zero interest rate  Emerging markets – imported, supply inflation  Lower consumer spending  Stronger dollar anticipated - more pressure on currency sensitive emerging economies

7. Craig.Parker@Frost.comwww.frost.com Trade spillover and China correction  Correction after rapid growth – heavy investment in public infrastructure & manufacturing  Nature of industries built contributed to slowdown  Structural nature – long term growth a function of labour, capital and productivity  Working age pop peaked in 2012  Investment peaked (49% of GDP)  Tech gap decreasing  Drivers of slowdown:  Debt – 250% of GDP – 100% increase since 2008 – housing sector slowdown (25% of GDP)  Global manufacturing slowdown – 59% GDP contribution  Steel commodity prices – automotive sector slow 7.7% 6.9% 6.5% 6.2% 2.6% 1.4% 1.8% 2.0% 2012 2015 2016 2017 GDP Growth Inflation China GDP Growth & Inflation, 2012-2017 46.5% 41.8% 37.0% 2012 2016 2021 Investment (% of GDP) China Investment Outlook, 2012-2021 Source: IMF and Frost & Sullivan

8. Craig.Parker@Frost.comwww.frost.com Macroeconomic outlook 1.8% 1.9% 2010-2015 Average 2016-2021 Average Advanced economies 1.2% 1.9% 2010-2015 Average 2016-2021 Average European Union 7.4% 6.3% 2010-2015 Average 2016-2021 Average Emerging and developing Asia 5.4% 5.2% 2010-2015 Average 2016-2021 Average ASEAN-5 3.0% 1.9% 2010-2015 Average 2016-2021 Average Latin America and the Caribbean 3.6% 3.4% 2010-2015 Average 2016-2021 Average Middle East and North Africa 4.9% 4.2% 2010-2015 Average 2016-2021 Average Sub-Saharan Africa Note: Indonesia, Malaysia, the Philippines, Singapore and Thailand  Why growth slowing in emerging markets?  Subdued investment  Risk aversion  Geopolitical tensions  Commodity ‘super-cycle’ & trade spillover from China  Currency pressure: Developed stronger, developing weaker with capital flow constraints Source: IMF and Frost & Sullivan

9. Local Influences: Domestic Economy, Policy & Investment

10. Craig.Parker@Frost.comwww.frost.com Domestic Influences to South Africa’s Economy  Political risk and uncertainty  Greatest threat to economic stability> rand volatility  Rand volatility linked to uncertainty and risk aversion  Growth outlook remains uncertain  Ratings important to investors – Standard & Poor’s and Fitch to release reviews in June. Moody’s left rating at Baa2 – 2 levels above sub-investment grade  FDI in 2015  Developed economies up to $963b (2nd highest level)  EU gained traction  US at $384b highest since 2000  Developing Asia rose by 15% to $548b  Africa declined by 31% to $38b: Nigeria (-27%), Mozambique (- 21%)  South Africa dramatic decline, 74% to $1.5b 2.22% 2.21% 1.55% 1.28% 0.61% 1.21% 2.06% 2.40% 2.40% 2.40% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 South Africa Growth Outlook (GDP), 2012-2021 R10.00 R11.00 R12.00 R13.00 R14.00 R15.00 R16.00 R17.00 South Africa Exchange Rate, 2012-2021 Source: IMF and Frost & Sullivan

11. Craig.Parker@Frost.comwww.frost.com Manufacturing Influencers & Challenges: Supply & Demand 4.6% 6.5% 2015 Average Inflation 2016 3 Month Average South Africa Export Performance Down by 17.5%, 2012-2015 Inflation Comparison, 2015 & 2016 Supply  Input costs – fuel price, electricity hikes & commodity prices  Rand volatility  Labour disruption Demand  Asian slowdown  Commodity ‘super cycle’  Europe & US uptick  Brexit?  Local consumer demand – interest rates and monetary policy conundrum Total Sales January- April 2016 150,807 Total Sales January- April 2015 204,471 2013 Total – 649,216 2014 Total – 644,259 2015 Total – 617,927 (-4.1%) SA Automotive Sales 8.96 7.25 7.03 2.33 9.22 5.77 5.54 2.14 Verhicles Machinery Iron & Steel Electrical Equipment 2012 2015 Exports($billion) Source: Dti, StatsSA, NAAMSA and Frost & Sullivan

12. Craig.Parker@Frost.comwww.frost.com Manufacturing Sector Growth Enablers  Rand depreciation for export competitiveness?  Feedback mechanism was not working  Improved demand from Europe  Shift in export dependence & diversification of markets to Africa  Macroeconomic challenges, but small scale business has opportunities – business incubation and World Bank view on Africa  Value chain enhancement and SMME involvement in larger value chains – SEZ’s  Possible small business incubation policy? (Department of Small Business Development – DSBD) – R475m from National Budget South Africa Export Partners, 2011 & 2015 China 12% United States of America 7% Germany 5% Namibia 4% Botswana 4%Japan 7% United Kingdom 4% India 3% ROW 54% China 9% United States of America 8% Germany 7% Namibia 5% Botswana 5% Japan 5% United Kingdom 4% India 4% ROW 53% 2011 2015 20 40 60 80 100 120 140 160 MO012012 MO032012 MO052012 MO072012 MO092012 MO112012 MO012013 MO032013 MO052013 MO072013 MO092013 MO112013 MO012014 MO032014 MO052014 MO072014 MO092014 MO112014 MO012015 MO032015 MO052015 MO072015 MO092015 MO112015 MO012016 MO032016 Index(2010=100) Food and beverages Basic chemicals Basic iron and steel products General purpose machinery Household appliances Electrical machinery South Africa Production Indices, 2012-2016 Source: Dti, StatsSA and Frost & Sullivan

13. Growth Drivers & Opportunities within Africa

14. Craig.Parker@Frost.comwww.frost.com African Growth Summary Service sector to account for 58% of continent’s GDP with highest contribution from Wholesale and Retail Sector East Africa the emerging trade and economic powerhouse by 2020 Mozambique and Ivory Coast to have the highest GDP growth rate by 2020, Africa HNWI has increased by 175% (2000-2014) to 165 000 with South Africa and Nigeria having respectively 50 000 and 16 000.This segment is scheduled to grow to 243 000 by 2024. Highest concentration of Millionaire globally is inVictoria island $4.5 Trillion economy by 2025, the 2nd most fastest growing region by 2025 Africa, the 2nd most preferred destination for FDI after Asia- Pacific in 2014 $ €£ Source: Frost & Sullivan

15. Craig.Parker@Frost.comwww.frost.com The Urbanization of Africa and the Development of Smart Cities Almost Half of the African Population is Expected to Be Living in Urban Areas by 2025 Rising Urban Population Proportion (% of total population) across Africa, 2000, 2014, 2025 AFRICA 34.5 40.0 44.9 Western Africa 34.7 41.4 51.4 Southern Africa 53.8 61.2 66.1 Eastern Africa 25.2 30.3 20.6 48.4 51.4 54.3 Northern Africa Middle Africa 36.8 43.5 49.0 Cairo, Egypt 2000 2014 2025 Megacities Lagos, Nigeria Kinshasa, Congo Source: Frost & Sullivan Africa is expected to get 5 smart cities by 2030 and a consolidated investment of $59.8billion through PPP funding. Rwanda Smart City $10 Billion (2013– 2018) Modderfont ein Smart City $7 Billion (2014–2030) Konza Techno City $14.5 Billion (2010–2030) Hope City, Ghana $10 Billion (2013–2023) Abuja Centenary City $18.3 Billion (2013–2018)

16. Craig.Parker@Frost.comwww.frost.com Mega Corridor Infrastructure Development Source: UN-Habitat, 2014; Frost & Sullivan Combined population >18.0 Million Combined GDP of $127,592,000. North-South Corridor The Greater Ibadan Lagos Accra (GILA) Corridor The North Delta Region Combined Population: 533.0 Million Combined GDP of $833.00 billion or 58% of Africa’s GDP More than 50% of National GDP Abidjan Ouagadougou Ibadan Accra Luanda Kinshasa Cape Town Durban Johannesburg Dar-es-Salaam Nairobi Addis Ababa A Future Corridor Development 1,000-km Abidjan- Ouagadougou Corridor Trans-Cunene Corridor between DRC with SA through Angola and Namibia Kampala-Nairobi- Mombasa urban corridor (900 km) A B B C C a Mega Corridors, Africa, 2025 $ Combined population of 77.0 Million $ $ b c a b c

17. Craig.Parker@Frost.comwww.frost.com FreeTrade Zone: New Avenues for Inter-RegionalTrade The Proposed Free Trade Area (T-FTA) between SADC, COMESA, and EAC is expected to drive imports by an average of 60% by 2020 Tripartite Free Trade Area Connecting 3 Regional Trade Blocs in Africa Libya Egypt Sudan Ethiopia Djibouti Kenya Uganda D.R. Congo Tanzania Rwanda Burundi Angola Namibia Botswana South Africa Lesotho Mozambique Zimbabwe Zambia Swaziland Mauritius Comoros Seychelles COMESA+ SADC To promote development through increased economic integration of North, East, and South Africa Intra-Africa Trade Value Forecast, Africa, 2014–2020 26 58% 57% Countries GDP Share Population Share COMESA SADC EAC Common Market of East and South Africa South African Development Community East African Development Creation of continent- wide free market by 2017 which will lead to an economic GR of 6% to 7% Expansion of African consumer market for BRIC economies Opportunity for increased Foreign Direct Investment (FDI) and Infrastructure Development Source: African Development Bank ; CONSTAT; ECOSTAT; SADC Trade; Frost & Sullivan 108.05 285.66 0 50 100 150 200 250 300 2014 2020 TradeValue($Million) CAGR: 17.5%

18. Craig.Parker@Frost.comwww.frost.com TheWealthy Africans Africa is expected to have one of the highest growth rates among all markets in key wealth brackets Source: Credit Suisse Global Wealth Databook 2014; Frost & Sullivan 2013 2023 % Growth Africa 1,868 2,858 53% Asia 41,114 58,588 43% Australasia 3,828 4,526 18% Europe 60,504 73,396 21% Latin America 9,677 13,711 42% Middle East 7,052 9,498 35% North America 43,626 52,536 20% 2013 2023 % Growth Asia 488 809 66% Africa 25 38 52% Australasia 21 25 19% Europe 505 629 25% Latin America 94 136 45% Middle east 108 146 35% North America 441 532 21% UHNWIS (net assets +$30 M) Billionaires (net assets +$1,000 M) Forecast 10-year global growth by wealth bracket,Global,2013-2023

19. Craig.Parker@Frost.comwww.frost.com Infrastructure Spending Growth Infrastructure gap in SSA to drive infrastructure spending and PPP opportunities in the next decade • Strong drive to agricultural development in Zambia, Kenya and Nigeria • 40,000 MW Grand Inga Hydropower project (DRC, South Africa) • Significant gas development in Mozambique and Nigeria • Trans-Sahara natural gas project (Nigeria, Niger, Algeria) • Mombasa-Kigali railway and highway (Kenya and Tanzania) • North-South Africa corridor (South Africa, Zambia, Botswana, DRC, Malawi) • LAPSSET Corridor (Kenya, South Sudan, Ethiopia) Nigeria DRC Ghana South Africa Infrastructure spending to grow by more than 10% annually in SSA to 2025 48 countries in SSA (population 800 million) generate the same amount of power as Spain (population 45 million) Addressing Africa’s infrastructure deficit is estimated at $90bn new investment per year till 2025 Kenya Mozambique Angola Key Investment Destinations In SSA, 2015- 2025 Source: Frost & Sullivan

20. Craig.Parker@Frost.comwww.frost.com African Airport Infrastructure Development Major developments in air transport infrastructure underway in Africa Asia Pacific 34.6% Europe 21.4% North America 19.4% Middle East 11.5% Africa 8.5% Latin America 4.6% $467.9 B Global airport infrastructure investment in on-going projects $39.6 B African airport infrastructure investment in on- going projects Share of Global Airport Infrastructure Investment, On-going & Planned as of 2015 Source: Frost & Sullivan

21. Craig.Parker@Frost.comwww.frost.com LCPs across Nigeria’s Automotive and Food Industries Automotive companies can avail of tariff exemptions if all parts of the vehicle’s body are imported loosely Nigerian Automotive Industry Nigerian Food Industry Declining tariffs for increased use of local content under first phase of Nigeria’s Automotive Industry Development Plan for the period 2014-2019 Tariffs Fully built up imported cars Fully built up imported commercial vehicles Fully painted and glazed vehicle body is imported ‘Body in white’ is imported All parts of the body are imported loosely* Transition from one stage to another cannot cross 1 year 70% 35% 10% 5% 0% Source: National Automotive Council, Nigeria; Central Bank of Nigeria; Frost & Sullivan Some of the food items excluded from the foreign exchange market as of June 2015 * Complete knock down Targeted Impact:  Conservation of foreign resources  Encouragement of domestic production Targeted Impact: Program seeks to increase local production of batteries, tires, windscreens, radiators etc. Rice Margarine Meat and processed meat products Tomato/tomato paste Vegetables and frozen vegetable products Tinned fish in sauce/sardine

22. Craig.Parker@Frost.comwww.frost.com Tackling Nigeria’s Power Challenges Debilitating power shortages are an impediment to the country’s manufacturing sector with almost 40% of production costs going to power provision Source: The World Bank; Frost & Sullivan Power Challenges in Nigeria Share of population without electricity access -55.6% (2012) Power outages for an average of 46 days per year (2006-2007) with an average outage time of 6 hours About 40% of manufacturers production costs goes towards power provision compared to under 10% in developed countries (2015) Privatization of the Power Sector  Bulk of the state owned Power Holding Company of Nigeria (6 power generation and 11 distribution firms) was sold to the private sector in 2013 for about $2.5 billion  The government is looking to privatize 10 other power generation plants under the National Integrated Power Project or about $5.6 billion F&S Takeaways for the Power Sector  Privatization efforts do not appear to have been a success  With a new government it power, it remains to be seen how the power sector will be reformed.The new government has prioritized improvement in the sector.  Nigeria could increasingly tap into solar energy to meet its power generation needs

23. Craig.Parker@Frost.comwww.frost.com Africa growth drivers and opportunities – challenges ahead $645 $383 $138 $164 $150 $40 $108 $811 $408 $241 $249 $168 $91 $199 2010 2014 $373 $410 $342 $295 $157 $276 $66 $533 $470 $410 $393 $316 $279 $119 2010 2014 Nigeria DRC Ghana South Africa Kenya Mozambique Angola 3.4% 1.8% 3.4% 6.3% Ethiopia 6.9% Tanzania6.7% 7.5% 3.5% 5.7% Automotive Exports to Africa, 2010 and 2014 (US$ million) Machinery Exports to Africa, 2010 and 2014 (US$ million) Average GDP Growth Forecast, 2016-2021 Source: Trademap, IMF and Frost & Sullivan

24. Thank you Samantha James Corporate Communications Frost & Sullivan Africa Samantha.James@frost.com +27 (0) 21 680 3574

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