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Dr Roelof Botha
The state of the South African economy
With perspectives on agriculture
& the status of
South Africa’s sovereign bondsThe strategic importance of agriculture
With reflections on the state
of the economy
Dr Roelof Botha
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Notes on the global
outlook & the exchange
rate
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• EU under threat – from Brexit to Frexit?
• Nationalism on the rise in the northern hemisphere
• Consolidation of democracy in Brazil
• India’s economy outperforming China
• Negative real interest rates in high-income countries
• Trump vs. the rest of the world
• Commodity slump hammers sub-Saharan Africa
• Severe weather patterns likely to persist
• Africa’s population continues to rise
• Food insecurity prevails
• Heightened international terrorism
Change is the only constant
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SA not alone in facing lower growth - average real GDP growth
rates before and after recession (Source: IMF)
0
0.5
1
1.5
2
2.5
3
3.5
4
Emerging
Europe
Other
advanced
US Euro Area Japan
1998-'07
2008-'16
%
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Economic growth forecasts – selected countries(Source: IMF)
-1.5
0
1.5
3
4.5
6
7.5
Russia UK US Sub-Saharan
Africa
China India
2016
2017
%
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Gold price and the US$/rand exchange rate
(Sources: SARB; Bloomberg; Bullionvault; own calculations)
60
70
80
90
100
110
120
130
Q3'12 4
Q1'13 2 3 4
Q1'14 2 3 4
Q1'15 2 3 4
Q1'16 2 3 4
Index; Q4 2014 = 100
Gold
price
$/rand exchange rate
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Structural decline in average S&P 500 dividend yield
(Sources: Multipl.com; R Shiller)
1
2
3
4
5
6
1947-'56 1957-'66 1967-'76 1977-'86 1987-'96 1997-'06 2007-'16 2016
%
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Increase in average price/earnings ratio of S&P 500 companies
(Sources: Multipl.com; R Shiller)
5
8
11
14
17
20
23
26
1947-'56 1957-'66 1967-'76 1977-'86 1987-'96 1997-'06 2007-'16 2016
Ratio
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Real effective exchange rate (REER) of the rand starting to
eliminate undervalued position (Sources: SARB; own calculations)
65
70
75
80
85
90
95
100
105
110
115
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Feb'17
REER
Avg. (93.32)
Foreign currency unit/R; Index; 2010 = 100
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The Southern African economy
Prospects for
sustained growth
Agriculture focus
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Number of SA households in the expenditure category of
R650k per annum (avg.) (Sources: Stats SA; own calculations)
0
150
300
450
600
750
900
1050
Indian Coloured White Black
2011
2015
Number
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% change in average household income 2005 to 2015
0
25
50
75
100
125
150
White Indian Coloured Black
%
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Land ownership in SA according to land audit
verification survey (Source : Dept. of Land Reform)
Organisation 0.5
Municipality 3.9
Traditional 5.2
Unknown 3.6
Public entity 0.5
Private 0.9Government
Dept. 5.8
Total 20.4m ha
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Land ownership in SA according to land audit booklet
(Source : Dept. of Land Reform)
Privately owned
96.6
Unaccounted 8.4
State owned
17.1
Total 122.1m ha
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Land ownership estimate (desktop research) – million
hectares (Sources : Dept. Land Reform; E Pringle;
Sanparks )
Municipalities 3.6Unknown 8.4
State land &
forests 12.2
Land claims 7.4
Private 64.8
Private sales -
blacks 2
National parks 4.1
Provinces 3.1
Homelands 16.4
Total 122m ha
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Du Pont food security index 2016 – BRICS, Africa & Europe
20 30 40 50 60 70 80 90
Africa (average)
India
South Africa
China
Russia
Brazil
Europe (average)
Index
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Aspects of current food insecurity in Southern Africa(Sources: SADC - media release June 2016; own research)
41 million people affected (23% of the rural population)
21 million of these require urgent assistance
2.7 million children suffering from severe acute malnutrition
Drought-related livestock deaths estimated at more than 1 million
On-going depletion & degradation of water sources & reservoirs
Cereal harvest shortfall of 9.6 metric tons in 2016
Currency depreciation exacerbating rising food inflation
Food insecurity projected to peak in mid 2017
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1. Farm worker development
2. Education programmes & facilities
3. Personal upliftment programmes
4. Bursary schemes for non-employees
5. Training programmes for non-employees
6. Healthcare programmes
7. Provision of recreational facilities
8. Housing
9. Provision of basic infrastructure
Key areas of corporate social investment spending by
agribusiness in SA
(Source: PwC)
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Composition of GDP 2015 – R billion (Source : Stats SA )
Govt. - 618
Manufacturing -
463
Construction - 143
Finance & bus.
Ser. - 744
Trade & catering -
535
Transport &
comm. - 354
Agriculture - 84
Personal ser. -
203
Mining - 287
Elec. & water - 130
(Total R3.6 trillion)
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Composition of household expenditure 2015 – R billion
(Source : SARB)
Housing & utilities -
360
H/hold equipm. -
158
Transport - 403
Recreation - 170
Education - 84
Food - 496
Alcohol - 114
Health - 166
Commun. - 70
Clothing - 124
(Total R2.4 trillion)
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Total Primary Agriculture Output
R244bSecondary Agriculture
(Processing)
R391b
Wholesale trade R345b
Retail trade R347b
Restaurants & caterers R43b
Electricity & Water R39bn
Finance R155b
Estimated output
(turnover) for all
agricultural activity
In SA - 2015
CommunicationR63b
Transport & Construction R26b
Total linked turnover R1.65
trillion
Meat, fish, fruit & veg
Dairy
Grain mills
Beverages
Tobacco
Sawmilling
Leather products
Other food
Agriculture Value Added R84
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Primary agriculture trade balance (R91b surplus since 2013)
(Source: SARS)
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exports
Imports
Rb
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Secondary agriculture trade balance (R39b surplus since 2013)
(Source:
SARS)
0
10
20
30
40
50
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exports
Imports
Rb
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Top-10 agriculture export trade growth partners in Africa (annual avg. 2010 – ʹ15) (Sources: SARS; own calc.)
5 10 15 20 25 30 35 40 45
Mauritius
DR Congo
Angola
Seychelles
Malawi
Mozambique
Nigeria
Zambia
Congo
Algeria
%
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Agriculture exports to SADC 2010 & 2016 (at constant 2015
prices) (Sources: SARS; own calc.)
0
4
8
12
16
20
24
Oils & fats Animals Veg. & fruit Prep. Food
2010
2016
Rb
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• Positive population growth
• Sustained growth in per capita incomes
• Strong regional growth
• Diversification of crops & products
• Alignment with diet revolutions
• Beneficiation
• Improving food security in sub-Saharan Africa
• High ratio of operating surplus to value added
• Cooperation with local authorities in maintaining infrastructure
• Agri-tourism
Opportunities & growth drivers for the development of the agriculture sector (selection)
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Key arguments supporting a
sovereign credit downgrade
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The Zuma era’s dismal scorecard for South Africa’s global competitiveness (Source: WEF - 2016)
Indicator 2009 2016 Decline
Govt. procurement - hi-tech products 34 99 -65
Wastefulness of govt. spending 29 88 -59
Pay & productivity 81 98 -17
Favouritism by govt. officials 50 115 -65
Diversion of public funds 49 96 -47
Public trust in politicians 50 109 -59
Quality of primary education 104 126 -22
Burden of govt. regulation 95 116 -11
Government debt 54 73 -19
Cooperation between labour & employers 123 138 -15
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Speculation over downgrade fuelled by the increase in total public
sector gross debt as % of GDP since the recession…
25
30
35
40
45
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%
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…while the rand/$ exchange rate was on a 12-month roller-coaster ride… (Sources: Oanda; own
research)
12.5
13.5
14.5
15.5
16.5
04-
Dec
13-
Dec
17-
Dec
16-
Jan
25-
Feb
29-
Feb
04-
Apr
20-
May
24-
Jun
28-
Jun
12-
Aug
02-
Sep
22-
Sep
12-
Oct
02-
Nov
18-
Nov
30-
Nov
R/$
Nene dismissal
Gordhan
appointment
US$ strength
Gordhan budget
Hawks/Moyane vs Gordhan
US to maintain
low rates
Strong US economic data
Brexit
Post-Brexit fears
Local elections & surge in gold price
Hawks vs Gordhan 2
Rise in China iron ore imports
Gordhan charged
Charges against
Gordhan dropped
Gold price slides
SA bond
status
retained
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…and SA’s leading business cycle indicator continues to lag
behind that of key trading partners… (Source: SARB)
75
85
95
105
115
125
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2'16 Q3'16 Q4'16
US
SA
Index, 2010 = 100
Other
countries
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…whilst a 24-quarter positive GDP growth trend comes to a
halt in Q1 2016 (Source: Stats SA)
-3
-1.5
0
1.5
3
4.5
Q1'0
8 3
Q1'0
9 3
Q1'1
0 3
Q1'1
1 3
Q1'1
2 3
Q1'1
3 3
Q1'1
4 3
Q1'1
5 3
Q1'1
6 3
Year-on-year %
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…caused mainly by the commodity price declines between
2011 and 2015 (Source: World Bank)
0 10 20 30 40 50 60
Gold
Oranges
Aluminium
Bananas
Platinum
Maize
Coal
Sugar
Iron ore
Cotton
%
decline
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The repo rate and inflation – inconsistency in gap tolerance(Sources: Stats SA; SARB)
3.9
4.3
4.7
5.1
5.5
5.9
6.3
6.7
7.1
Q2'11 3 4
Q1'12 2 3 4
Q1'13 2 3 4
Q1'14 2 3 4
Q1'15 2 3 4
Q2'16 3 4
Repo rate
CPI
%
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Money market interest rates in South Africa currently
amongst the highest in the world (nominal) (Source: EIU)
-1 0 1 2 3 4 5 6 7 8
Japan
UK
Hong Kong
US
Poland
Australia
China
Malaysia
Mexico
India
South Africa
%
Euro area
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Why SA’s
sovereign debt
remains at
investment
grade
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Ratings agencies often ignore a number of fundamental
indicators, such as the recovery of taxation revenue (at constant
2015 prices)…
500
600
700
800
900
1000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Rb
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…and the existence of a highly diversified composition of taxation
revenue by emerging market standards (FY 2016/17- Rb)…
Fuel & elec. 73
Companies 200
VAT 301
Property tax 16
Excise duties 44
Skills levy 18Dividend tax 25
Customs duties
55
Individuals 443
Total R 1.2 trillion
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…furthermore, government’s borrowing requirement as % of total
gross debt continues to decline (fiscal years, National Treasury
forecasts for 2017-’19)…
4
6
8
10
12
14
16
18
20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
%
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…as well as, arguably, the most important gauge of a country’s
creditworthiness – the total public debt/GDP ratio, where South
Africa compares favourably with most key trading partners
0 20 40 60 80 100
Russia
Mexico
Australia
China
South Africa
Malaysia
Brazil
India
Germany
UK
Singapore
USA
%
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-7.5
-6
-4.5
-3
-1.5
0
1.5
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
% (fiscal years)
Fiscal stability is also reflected in a budget deficit/GDP ratio that
is only marginally above 3% and forecast to decline further
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According to the World Economic Forum, South Africa remains the
most competitive large economy in sub-Saharan Africa - out of 144
countries
30 40 50 60 70 80 90 100 110
Ethiopia
Gabon
Kenya
Zambia
Ivory Coast
Namibia
Botswana
Rwanda
South Africa
Mauritius
Ranking
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-250
-200
-150
-100
-50
0
50
100
150
200
250
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
R billion
South Africa possesses balance of payments stability, due to a
huge financial account surplus (Source: SARB; Note: 2016 = preliminary)
Financial account
Current account
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Commodity price slump showing signs of bottoming out
(Source: World Bank)
30
50
70
90
110
130
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Nov
'16
Indices; 2010 = 100
Energy
Agriculture
Metals & minerals
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The recession is over – prepare for higher growth
Dr Roelof Botha
Some more reasons for modest optimism
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South Africa has some stunning competitiveness strengths to build on (Source: WEF - 2016)
South Africa’s highest-ranked competitiveness indicators (selection out of 138 countries)
Auditing & reporting standards 1
Soundness of banks 2
Financial services meeting business needs 2
Regulation of securities exchange 3
Efficiency of legal framework 9
Quality of air transport infrastructure 10
Strength of investor protection 14
Quality of management schools 21
Capacity for innovation 25
Domestic market size 27
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South African households have a lower debt/disposable income
ratio than most key trading partners
60 80 100 120 140 160 180
South Africa
Germany
Italy
France
US
Japan
UK
South Korea
Sweden
Australia
%
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Total assets of SA long-term insurers reaches new record high
0.5
0.8
1.1
1.4
1.7
2
2.3
2.6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
R trillion
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Tourist arrivals from overseas (Jan to September)(Source: Stats SA)
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2008 2009 2010 2011 2012 2013 2014 2015 2016
Million
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Real retail trade sales regularly reach new record highs, also in
Q4 2016…
102
104
106
108
110
112
Q1'14 2 3 4 Q1'15 2 3 4 Q1'16 2 3 4
Index; 2012 = 100
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…explained by continued progress with employment creation in
South Africa (2.1 million jobs created since Q1 2010)…
13.8
14.05
14.3
14.55
14.8
15.05
15.3
15.55
15.8
Q2'0
9 4
Q2'1
0 4
Q2'1
1 4
Q2'1
2 4
Q2'1
3 4
Q2'1
4 4
Q2'1
5 4
Q2'1
6 4
Million
Source: Stats SA
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South Africa’s real GDP per capita has reached a structurally higher level & the country is classified by the UN as “upper middle income"
50
53
56
59
62
65
68
71
74
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
R ‘000 (constant ‘15p)
Source: SARB
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Leadership, smart policies
& teamwork required!