Growth Scenarios for South Africa in 2014

Growth Scenarios for South Africa in 2014

CAUTION: Bumpy Road Ahead

Shattered Expectations

3

2013 Has Defied Many Expectations

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

GDP Growth (Oct 2012 Prediction) GDP Growth (April 2013 Prediction) GDP Growth (October 2013 Prediction)

GD

P G

row

th (

%)

2012 2013 2014 2015

South Africa’s GDP Forecast as Downgraded By the IMF in the Past Year

Source: IMF and Frost & Sullivan

4

2013 Has Defied Many Expectations (Continued)

1.31.5

2.3

1.51.7

2.0

2012 2013 2014

Developed Economies (2012 Prediction)

Developed Economies (2013 Prediction)

5.35.6 5.9

4.94.5

5.1

2012 2013 2014

Emerging Economies (2012 Prediction)

Emerging Economies (2013 Prediction) Source: IMF and Frost & Sullivan

Developed Economy Growth Revised Upward

for 2013

Emerging Economy Growth Revised Downward

for 2013

Slow recovery in Europe has

weakened growth prospects for 2014

Stronger growth in the United States

now expected in 2014

Developed economies are expected to

drive global growth despite growth

downgrade for 2014

Lessons Learned

6

What Did We Learn From 2013?

• Stagnation of economic growth in

Europe

• Depreciation of the rand

• Market reaction to policy decisions

• Growth momentum slowdown in

BRICS

7

Why Did the Slowdown Persist in Europe?

Source: Economist, OECD and Frost & Sullivan

Public debt remains

high

Fiscal spending

constraints

Investment slump

8

Strong Correlation with Low Growth Expectations and

High Sovereign Debt

Czech Republic

Germany

Greece

Spain

France

Italy

Hungary

Poland

Romania

United Kingdom

Turkey

R² = 0.820

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

GD

P A

ve

rag

e G

row

th 2

01

2-2

01

5 (

%)

Debt Risk Scale (1 = low risk; 10 = high risk)

European Debt Risk and Growth

The debt risk scale was calculated taking into account the level of sovereign debt, the growth of this debt, openness of the economy and

the level of financial flows the country is responsible for Source: Frost & Sullivan analysis

9

Why Did the Slowdown Persist in Europe? (Continued)

0.0

5.0

10.0

15.0

20.0

25.0

France Germany Greece Italy Portugal Spain

Un

em

plo

ym

en

t R

ate

(%

)

2008 2009 2010 2011 2012 2013 2014

Unemployment Continues to Grow in Many Countries

Source: OECD and Frost & Sullivan

10

Why Did the Slowdown Persist in Europe? (Continued)

Source: Economist, OECD and Frost & Sullivan

Growth expectations

remain strained

European growth

engine relies on

Germany

High tech industries

and energy

11

Depreciation and Volatility of the Rand

7.00

7.50

8.00

8.50

9.00

9.50

10.00

10.50

11.00

R/$

Ex

ch

an

ge

Rate

13% depreciation

in 25 days

21.25% depreciation from

beginning of 2013 to end of

November 2013

Source: SARB and Frost & Sullivan

12

Causes of Rand Depreciation in 2013 - Capital Outflows

-10000

-5000

0

5000

10000

15000

20000

25000

Net

Pu

rch

as

es

(R

Milli

on

)

Foreign Purchases of Bonds and Stocks, South Africa, 2012 to July 2013

Source: SARB and Frost & Sullivan

13

Causes of Rand Depreciation in 2013 - Lack of Exports

R60.12 bn

R44.03 bn

R(34.62) bn

R(76.1) bn

2010 2011 2012 2013 (Jan to October)

• Lack of Exports

• Trade balance under pressure

South Africa’s Restated Trade Deficit, 2010 to October 2013

Source: SARS and Frost & Sullivan

• Weaker rand should raise demand for exports and lower demand for imports

• Weak global demand not allowing rand to appreciate

14

Emerging Market Currency Devaluation

-11.8%

-10.0%

-12.6%

-3.2%

-8.9%

-15.4%

Brazilian real Chilean peso Indian rupee Mexican peso Russian ruble South African rand

Selected Emerging Economy Currencies, Year to Date 2013

Source: IMF and Frost & Sullivan

15

Slowdown In Many Emerging Markets

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

World European Union

Emerging market and developing economies

Central and eastern Europe

Developing Asia

Latin America and the

Caribbean

Sub-Saharan Africa

United States China

GD

P G

row

th A

ve

rag

e (

%)

2005 to 2007 Average 2013 to 2015 Average

Average GDP Growth for Most Regions Except Sub-Saharan Africa is Significantly Lower After the

Financial Crisis

Source: IMF and Frost & Sullivan

Scenario Analysis - What to look out for in 2014

Continued Recession and Slower-than-

Expected Recovery in Europe

18

General Decline in Exports to Europe

1200.0

1400.0

1600.0

1800.0

2000.0

2200.0

2400.0

2600.0

Ja

n-1

1

Feb

-11

Ma

r-11

Ap

r-11

Ma

y-1

1

Ju

n-1

1

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Feb

-12

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

Nov-1

2

Dec-1

2

Ja

n-1

3

Feb

-13

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Ju

n-1

3

Ju

l-1

3

Au

g-1

3

Ex

po

rts

($ M

illi

on

)

18.5% DECLINE

3.1% DECLINE

Source: SARS and Frost & Sullivan

19

Export Decline of High Value Added Industries

$1.37 bn

$1.14 bn

$0.94 bn

$1.31 bn$1.29 bn

$1.15 bn

Q1 and Q2 2011 Q1 and Q2 2012 Q1 and Q2 2013

Exports of Machinery Automotive Exports

17.2%

17.6%

1.8%

11.2%

Manufacturing Exports to Europe, South Africa, Q1 and Q2, 2011, 2012 and 2013

Source: Trademap and Frost & Sullivan

20

Major Effects of European Stagnation

Stagnant export growth

Rand to remain under pressure

Increased supply-side inflation

Current account to remain under pressure

21

What is the Likelihood of European Stagnation Scenario

European

Stagnation

Likelihood

Ne

ga

tive

Eff

ec

t

Most likely

Mo

st

neg

ati

ve

GD

P G

row

thG

DP

Gro

wth

0%

1%

2%

3%

4%

-1%

-2%

US Fed Tapering Not According to Plan

23

Major Effects of US Monetary Policy Uncertainty

-100.00

-50.00

0.00

50.00

100.00

150.00

Brazil India Indonesia Malaysia Russia South Africa Turkey

Cu

rren

t A

cco

un

t B

alan

ce (

$ B

illio

n)

2010 2011 2012 2013

High Current Account Deficits will Place Added Pressure on Certain Emerging Economies, 2010-2013

Source: IMF and Frost & Sullivan

24

What is the Likelihood of Uncertainty in US Monetary

Policy

Likelihood

Ne

ga

tive

Eff

ec

t

Most likely

Mo

st

neg

ati

ve

GD

P G

row

thG

DP

Gro

wth

0%

1%

2%

3%

4%

-1%

-2%

Uncertainty

and delay

As

Planned

Increased Domestic Issues and Aversion to

Investment

26

Local Disruptions Contribute to Capital Flight

100

120

140

160

180

200

220

2008 2009 2010 2011 2012

Pro

tes

t G

row

th R

ate

(%

)

Annual Protest Growth Rate, South Africa, 2008 to 2012

Source: Multi-Level Governmental Initiative and Frost & Sullivan Analysis

27

Major Effects of Domestic Disputes

Capital flight

Currency depreciation

Lower FDI

Negative impact on manufacturing sector

Supply-side bottlenecks

Inflationary pressure

28

What is the Likelihood of Domestic Disturbance

Likelihood

Ne

ga

tive

Eff

ec

t

Most likely

Mo

st

neg

ati

ve

Loss of

control of

violent action

and protest

Spillover of

violent

labour action

Seasonal

strike action

& protest

GD

P G

row

th

0%

1%

2%

3%

4%

-1%

-2%

Violent labour

action

(manufacturing

& mining

Scenario Analysis and Possible Outcomes

30

How Bad Could It Be?

Percentage of Respondents Indicating the Economic Conditions in Their Country Are Undesirable

Source: Pew Research Centre

31

Most Likely Outcome for 2014

Likelihood

Ne

ga

tive

Eff

ec

t

Most likely

Mo

st

neg

ati

ve

Loss of

control of

violent action

and protest

Seasonal

strikes, elections, US

tapers to

expectation, EM

slowdown

GD

P G

row

th

0%

1%

2%

3%

4%

-1%

-2%

Seasonal

strikes, elections, serious

uncertainty to Fed

decisions, EM slowdown

Violent protest, EU

stagnation

EU recession

Uncontrolled violent

action and uprising

Who is Frost & Sullivan

33

Introduction to Frost & Sullivan

A trusted growth partner with 51 years of experience

• Frost & Sullivan is a global growth consulting company that partners with clients to support them to

grow their businesses

• Founded in 1961

• 10,000+ clients worldwide, including emerging companies, SME, the Global 1000 and the investment

community

• We offer services ranging from industry research, growth consulting, corporate training and

development, and events

• African office based in Cape Town

– Staff compliment of 60 focussed on Africa

Growth Partnership

Services

Growth Consulting GIL University Events

34

Introduction to Frost & Sullivan

A wide industry and technology breadth

uncovering new markets and creative growth ideas

Automotive&

Transportation

Aerospace & Defense Measurement &Instrumentation

Information &Communication Technologies

HealthcareInfrastructureEnergy & PowerSystems

Chemicals, Materials& Food

Electronics &Security

Industrial Automation& Process Control

AutomotiveTransportation & Logistics

ConsumerTechnologies

Minerals & Mining

35

Implementation Consulting;

Growth Team Membership;

GIL University

10 Growth Processes;

Growth Partnership Services

Growth Partnership Services;

Growth Workshops;

Growth Excellence Matrix;

Custom Research

Building insights that define successful growth for industry leaders

Service Offering

Our exclusive growth system focuses on the whole growth cycle

36

Craig ParkerSenior Economic Consultant

Tel: +27 21 680 3292E mail: Craig.Parker@frost.com

Contact details

Mani JamesRegional Director & Operations Manager

Tel: +27 21 680 3208Cell: +27 78 305 3124E mail: Mani.James@frost.com

Contacts

Samantha JamesCorporate Communications

Tel: +27 21 680 3265E mail: Samantha.James@frost.com