Recent trends in and outlook for the Global

Recent trends in and outlook for the Global and South African economies Nico Kelder Department of Research and Information The Chemicals Value Chain Roadshow Port Elizabeth 9 March 2016

Global economy

Global economy: World growth decelerated in 2015 • The global economy faced numerous headwinds in 2015, including macroeconomic uncertainties, lower commodity prices, currency and equity market volatility, slower growth in China, deflation risks, as well as uncertainty about US monetary policy tightening. • Subdued global growth recorded in 2015 (slowest rate in post-crisis period) as growth in emerging markets moved to a lower gear, whereas advanced economies reported a very modest uptick in their expansion rates. • Sub-Saharan Africa was one of the most affected regions, as growth slowed to 3. 5% in 2015, from 5% in 2014. This largely due to adverse developments in commodity markets, but weaker domestic demand also played a role. • Brazil and Russia faced deep recessions in 2015 and their growth outlooks remain dire for 2016. • China’s economy continued on a decelerating growth path to its lowest expansion rate since 1990. • Global growth prospects are set to remain unsatisfactory in 2016, with the World Economic Climate Indicator pointing to downside risks across various regions and countries. 3

Global economy: Manufacturing showing mixed performance • Global Manufacturing PMI continued on its declining trend in December 2015, reaching a 3 -month low, recovering marginally in January. • The average PMI for 2015 was lower than the PMIs for both 2013 and 2014. • Manufacturing output in the US is taking strain, with the Jan. 2016 PMI being 10% lower than a year earlier. • Operating conditions in China’s manufacturing sector deteriorated through 2015 and into 2016. • Eurozone saw its manufacturing conditions improve in 2015 – the PMI in Dec. was the highest since April 2014. 4

Global economy: Equity markets tumbled sharply at the start of the year Movements in global equity markets from their most recent high up to 8 March 2016 UK: -13. 0% US S&P: -6. 1% US DJIA: -6. 8% France: -15. 7% Germany: -21. 0% China: -43. 9% Hong Kong: -29. 1% Japan: -19% Malaysia: -10. 3% Bear markets Corrections Brazil: -20. 4% SA: -4. 6% Australia: -11. 5% 5

Outlook for the global economy: Modest uptick in economic growth • After stumbling in 2015, a modest uptick in global growth is forecast by the IMF for 2016. • Growth in the US is expected to edge slightly higher despite concerns over its export performance (due to a strong US Dollar and subdued global demand), whilst its industrial sector is taking some strain. • The Eurozone should benefit from stronger consumer spending and easy monetary policy. This would outweigh a weaker export performance. • China’s growth momentum is set to ease further over the outlook period due to a moderation in investment activity, with its manufacturing sector taking further strain. • Brazil and Russia will remain in recession in 2016, but strong growth is anticipated for India. • Sub-Saharan Africa may experience slightly higher growth (4% in 2016), but lower commodity prices will pose a drag on many of the region’s economies. • Downside risks to global growth include geo-political tensions, heightened equity market volatility, China’s slower growth momentum, lower commodity prices, substantial capital outflows from emerging markets, as well as monetary policy tightening in the US (next Fed rate hike expected in 2 nd half of 2016). 6

Outlook for the global economy: IMF projections 7

South African economy

SA economy: Economic growth sharply lower • SA economy’s growth momentum on a decline over the past 4 years and presently under immense pressure. • The weakness is sectorally widespread, particularly in the goods-producing segments of the economy. • Drought conditions impacted severely on agricultural output during 2015, with a contraction of 8. 4% in its real GDP. • Manufacturing activity is still constrained by weak demand conditions, among other factors, with growth having stalled in 2014 and 2015. • The rebound in mining output (mainly due to low base effects) should be shortlived, with the outlook remaining bleak over the short- to medium term. Note: Figures in brackets refer to % share of GDP in 2015 • Tight budgetary conditions due to a revenue squeeze are being reflected in a substantial growth moderation in general government services. 9

SA economy: Manufacturing sector under severe strain • SA’s manufacturing sector is taking severe strain at present. • Output growth has stagnated in the past two years (with 0% growth in 2015). • A combination of adverse domestic and external factors are negatively affecting manufacturing activity and investment decisions. • General business conditions were very challenging in 2015 and expectations are that these may be even more so in the current year. • Manufacturers have indicated that fixed investment in machinery and equipment will remain fairly subdued over the next 12 months. • Due to strong linkages with various suppliers of goods and services, the weakness in the manufacturing sector will extend also into many other sectors in the domestic economy. 10

SA economy: Substantially lower share by manufacturing • After many decades as the single largest sub-sector in the SA economy, manufacturing’s share declined sharply since the early 1990 s. • The financial and business services sector has overtaken it as the largest sub-sector in 2002. • Manufacturing is now the fourth largest sub-sector, with a nominal share of 13% in overall GDP in 2015. • The manufacturing sector is faced by increasing challenges in a more competitive global trading environment. 11

SA economy: Manufacturing sector trends Output remains below pre-crisis levels Weak investment activity, whilst outlook worsened Business conditions are unsatisfactory at present and could be deteriorating in 2016 Uptick in employment not likely to continue in 2016 as growth outlook worsens 12

SA economy: Chemical sector’s significance Chemical sector plays an important role in the SA economy: • Contribution to national GDP in 2014 stood at 2. 8% • Accounted for 21% of manufacturing output in 2015 • Employs approximately 142 000 people directly • Value of exports in 2015 measured R 121 billion, or 20% of all manufactured exports • Substantial export orientation, with the export propensity as follows: − Petroleum products = 22. 9% − Basic chemicals = 54. 9% − Other chemicals = 21. 7% − Plastic products = 18. 5% • Business confidence remained at low levels throughout 2015, having measured just 24 index points by Q 4, being the lowest since Q 4 2013. • Looking ahead for 2016, survey respondents (BER manufacturing survey) have indicated a sharp drop in fixed investment in machinery and equipment for 2016. • Business conditions in 2016 are expected to remain largely unsatisfactory. 13

SA economy: Chemical sector in 2014 Economy-wide impact in the SA economy • SA’s chemical industry (Basic chemicals & Other chemicals) employed 77 300 people in 2014, whilst its own value add (GDP) stood at R 46. 8 billion. • However, through its backward linkages with various suppliers of goods and services providers, the chemical sector was ultimately responsible for approximately 540 000 jobs economy-wide, with overall GDP to the value of R 220 billion being associated with activities related directly and/or indirectly with this sector in 2014. Indirect impact GDP = R 44. 2 bn Chemical sector in 2014 Jobs = 107 280 Economy-wide impact across all sectors of SA economy First round impact GDP = R 46. 8 bn Employment = 77 339 GDP = R 51. 9 bn Jobs = 137 590 GDP = R 221. 0 bn Jobs = 540 476 Induced impact GDP multiplier = 4. 72 Jobs multiplier = 7. 00 GDP = R 78. 2 bn Jobs = 218 267 14

SA economy: Chemical sector – export and import intensities • Chemical sector has become increasingly focused on global markets as its export propensity rose sharply over time, making the sector quite vulnerable to market developments around the globe. • Furthermore, the sector is facing increased import competition as the relative share of imports in domestic demand increased strongly from around 23% in 2004 to 45% by 2014. 17

SA economy: Chemical sector reporting growth moderation • Relatively subdued rates of growth have been reported by the chemical sector in more recent years. • This was particularly the case for the basic chemical products sub-sector, with a modest contraction in output levels having been recorded in 2015. • The “other” chemical sector saw its output falling in 2014, but rebounding again last year. • For the chemical sector at large, it would appear as if both domestic and export sales took some strain in 2015, as general business conditions have been deteriorating (BER survey). • Rising cost pressures and insufficient demand have been mentioned as being constraining factors to do business. 18

SA economy: Chemical sector challenges & opportunities Challenges include the following: • Poor logistical services and transport costs • Electricity supply constraints & costs • Unfavourable investment environment • Lack of sufficient skills in certain segments of the industry • Insufficient demand • Rising operating costs • Increased import competition Opportunities include the following: • Exports to rest of Africa (agro-, mining- and industrial chemicals, speciality chemicals) • Weaker rand to increase price competitiveness (improved export performance) • Import replacement opportunities in domestic market 19

SA economy: Trade balance showing an improvement • SA recorded a trade deficit of R 79 billion in 2015 (R 121 bn in 2014), with its merchandise exports having been under strain despite the substantial currency depreciation. • Subdued global demand, low commodity prices and a worsening domestic operating environment, along with adverse climatic conditions, have all impacted on the country’s export performance. • Although exports of motor vehicles increased strongly by 26% in nominal value terms to R 105 bn in 2015, the automotive sector at large (including parts and accessories), still recorded a trade deficit of R 28 bn. • For the entire manufacturing sector the trade deficit stood at almost R 340 bn in 2015. • Despite a much weaker exchange rate, the manufacturing sector still finds it extremely challenging to increase its exports in a meaningful manner. • Weak demand conditions in key export markets (e. g. Europe and rest of Africa), but also elsewhere in the globe, are adversely impacting on manufactured exports. 20

SA economy: Manufactured export basket highly concentrated • Manufacturing exports are highly concentrated with motor vehicles (17. 2% share) topping the ranks in 2015, followed by basic iron and steel (11. 4%). • Top-10 manufacturing sectors (as per graph), out of a total of 120 subsectors, accounted for 58% of total manufactured exports in 2015. • Need to diversify the export basket, both in terms of geographical destinations and the product mix, to make the country less vulnerable to global developments. • SA to embark on a concerted and coordinated initiative to promote our exports into the rest of the African continent as a platform to grow the local manufacturing sector. 21

SA economy: Africa has become a very important trading partner • The rest of the African continent has become an increasingly important market for SA exports, Export value particularly manufactured goods. • By 2015, about 29% of total merchandise exports were destined to countries elsewhere in R 5. 5 bn Africa, mainly within SADC. R 11. 9 bn R 36. 6 bn • SA’s trade surplus with Africa measured R 176 bn in 2015, compared to R 107 bn in 2010. R 69. 8 bn R 10. 4 bn • Manufactured goods accounted for 87% of the entire export basket to the rest of Africa. This is R 62. 0 bn by far the largest share compared to any other R 9. 8 bn leading destination for SA manufactured exports. R 9. 1 bn R 7. 5 bn • Noteworthy is the fact that 42% (or R 254 bn) of SA’s total manufactured exports to the world at R 30. 9 bn large were sold in other African markets in 2015. R 12. 0 bn R 8. 0 bn R 10. 0 bn • Leading exports products include non-electrical machinery and equipment (e. g. mining and agricultural machinery); processed food; motor vehicles & parts; other chemical products; petroleum products; basic chemicals, as well as fabricated metal products. 22

SA economy: Exports of chemical products likely to be under pressure • The rest of the African continent accounts for a substantial share for all of SA’s chemical exports, with a share of 36% and 65%, respectively, for basic chemicals and “other” chemicals. • Considering the fairly high export focus, particularly for the “other” chemical sector, some role players could find it challenging to maintain their market share in key markets, such as the rest of Africa. • Although the US economy is forecast to expand at a fairly strong pace, its importance as a market is quite limited for the “other” chemicals sector, but new market opportunities could be explored. • A better economic performance by the EU should also provide market development opportunities. 23

SA economy: More jobs being created, yet unemployment remains high • Despite substantial weakness in the SA economy during 2015, more jobs were created. • For the year as a whole, 698 000 new jobs were added, the majority within the financial and business services sub-sector (+ 234 000). • The community services sector (incl. government), added 123 000 jobs, followed by the agricultural sector (+ 118 000) and construction (+105 000). • The manufacturing sector, in turn, shed 11 000 jobs in 2015, with its employment numbers at present about 373 000 below the pre-crisis levels. • Employment levels in the private sector are currently only 3. 8% (+458 000 jobs) higher than in Q 4 2008. • Unemployment levels remained very high at 24. 5% in Q 4 2015, with 5. 2 million people having been unable to find work. • Subdued growth outlook for SA economy over the short-term does not bode well for substantial employment creation. 24

SA economy: Inflation outlook is worsening – more rate hikes expected • Inflation was on an upward trend for most of 2015, averaging 4. 6% for the year as a whole and rising to 6. 2% in January 2016. • Core inflation’s declining trend in 2015, has been reversed in January 2016. • Items that reported higher prices during 2015 included municipal services (e. g. water, sanitation and electricity), bread and cereals, education, as well as household appliances and tableware, among others. • Despite rising cost pressures, companies were not able to pass on these higher prices to consumers in light of subdued demand conditions. • The inflation outlook has worsened quite substantially in light of the persistent drought and a significantly weaker Rand. CPI inflation forecast to average 6. 4% and 6. 9% in 2016 and 2017, respectively. • Hence, the Monetary Policy Committee (MPC) is likely to hike the repo rate by another 50 bps before year-end. 25

SA economy: Low confidence levels prevail • Business confidence fell sharply throughout 2015 to 36 points by Q 4 – the lowest reading in almost 6 years. • More than 60% of survey respondents are unhappy with prevailing business conditions. • Retailers’ confidence edged higher to a net balance of 40 points in Q 4 2015, after having plunged to a 15 -year low in Q 3. This is reflective of a very difficult consumer environment. • More than 80% of all vehicle dealers are unhappy about current economic conditions, with Q 4 2015 confidence levels at just 19 points, being at its lowest since the 2009 recession. • Low business confidence is indicative of an extremely challenging economic environment and operating conditions, therefore providing little confidence of a speedy return to a higher economic growth trajectory. 26

SA economy: Economic outlook has worsened substantially • Economic conditions in SA have been deteriorating over the past 2 to 3 years, with the downtrend intensifying in 2015. • The SARB’s leading business cycle indicator has dropped sharply since November 2014, from 98. 3 index points to 93. 5 by December 2015. • On a y-o-y basis, the leading indicator declined by 3. 1% in December 2015, the 26 th consecutive monthly decline. • Such a declining trend points towards very weak rates of economic growth in the current year, a situation which will be aggravated by severe drought conditions. • The manufacturing PMI for January 2016 came in at 47. 1 points, being the 7 th successive month below the crucial 50 -point mark (a PMI reading below 50 indicates a contraction and above 50 an expansion in output). • Manufacturing conditions are likely to remain challenging going forward as the index measuring the expected business conditions in 6 -months’ time stood at a low of just 44. 5 index points. 27

SA economy: Economic forecasts: Household expenditure • SA households are taking strain, with growth in consumer spending having decelerated sharply in 2015, from 2. 4% in Q 1 to 0. 9% in Q 3 (q-o-q). • High levels of indebtedness, a moderation in disposable income growth, rising living costs (e. g. electricity), higher personal income tax and other taxes, as well as rising interest rates are impacting on the ability and willingness of households to spend. • Consumer confidence dropped sharply in 2015 (to a 14 -year low in Q 2), pointing to a low propensity an willingness to spend in the current year. • The outlook is set to worsen substantially in 2016 as higher food prices, rising interest rates, poor employment prospects and the wealth effect of adverse trends in certain asset categories (listed shares, real estate) impact on consumers. • Growth in consumer spending is projected to slow to a mere 0. 3% in 2016, possibly edging higher to 1. 2% by 2017. • Spending on durable goods (e. g. motor vehicles, furniture) is expected to contract in 2016/17. 28

SA economy: Economic forecasts: Fixed investment • Fixed investment activity is forecast to contract by 0. 7% in real terms in 2016 and to remain weak in 2017/18, gaining momentum thereafter. • Real capital outlays by public corporations is expected to fall in next 3 years. • Fiscal restraint is likely to result in a slowdown in capex spending by general government in 2016 and 2017. • The private sector is expected to be very cautious in its investment plans. Factors impacting on investment decisions include a challenging global and local economic environment, spare production capacity across various industries, rising operating costs, as well as policy uncertainty in sectors such as mining and agriculture. • The adverse drought will have far-reaching implications for various sectors of the economy, impacting on investment activity. • Manufacturers have indicated that business conditions are likely to remain very difficult throughout the current year. 29

SA economy: Economic forecasts: GDP growth • SA’s GDP growth performance decelerated further in 2015 to 1. 3% (from an already poor 1. 5% in 2014), and its prospects have worsened substantially. • The impact of the drought will be widespread, while key sectors such as mining and manufacturing are expected to continue posting poor rates of growth, particularly in 2016. • The consumer environment remains extremely challenging in light of stretched household budgets and a worsening outlook for inflation and interest rates. • Exports are expected to remain under pressure in 2016 as growth and the structure of import demand in key foreign markets will be less satisfactory (e. g. rest of Africa) or largely unsatisfactory (e. g. China). • Business and consumer confidence is low and infrastructure constraints, especially electricity supply, and to a lesser extent transport & logistics, will continue to impact on investment decisions in 2016/17. • GDP growth for 2016 is forecast at 0. 4%, implying a year of stagflation (low growth and high inflation). 30

Thank you Nico Kelder Tel: +27 11 269 3385 E-mail: nicok@idc. co. za 31