Transcript Presentation to the WTO - World Trade Organization

Presentation to the WTO
Seminar on Exchange Rates and Trade
The influence of global liquidity on the South African Rand and the
currency’s negative effect on the manufacturing sector
27th March 2012
By: Stewart Jennings – PG Group CEO and South African Manufacturing Circle Chairman
A snapshot of the SA economy
NOTE: The views expressed in this presentation are those of the SA Manufacturing Circle and not
the SA Government
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The economy has experienced pedestrian growth during the largest resource boom in the
history of mankind (2002 – 2008).
Projected economic growth levels for the immediate future are amongst the lowest in Africa
(2012 forecast at 2.7%).
The SA Rand (ZAR) is one, if not the most volatile currency in the world.
South Africa operates a free float exchange rate and an open capital account.
South Africa has a very efficient and well regulated banking system that weathered the
2008/2009 financial crisis extremely well.
South Africa has a very efficient stock market (JSE).
Customs duty levels are extremely low, and were reduced considerably in the late 1990’s as
SA opened its economy after the fall of the apartheid government.
South Africa is still very much a developing country, with significant challenges in poverty,
shortage of skilled labour, education deficiencies and in particular unemployment – with
levels reaching between 23% - 34% depending on the definition of unemployment.
South Africa adopted very much a developed country economic model and sacrificed growth
for inflation targeting.
All the above conspired towards an underperforming growth rate, in which the financial and
retail sectors have grown disproportionately to the manufacturing and agri sectors.
Imports from developing countries with significant government incentives have taken
advantage of the factors detailed above.
GDP growth % (average 2011 – 2012)
China
Angola
India
Mozambique
Zambia
Nigeria
Tanzania
Zimbabwe
Botswana
DRC
Kenya
Malawi
Nambia
US
EU
0
Source: IMF, RMB FICC Research
2
4
6
8
10
SA 2011 – 3.1%
Forecast 2012 – 2.7%
Top ten fastest growing economies 2011-16:
Non-OECD countries to sustain global growth
Source: IMF, RMB FICC Research
SA GDP growth (government estimate)
Source: Stanlib
Real GDP Growth (%): Supply Side - Mining, Agriculture, Manufacturing
and Electricity, Gas & Water production shrink in 2011 3rd Quarter
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
Agriculture
14.4
9.2
-1.7
-6.0
-4.3
Mining & Quarrying
32.4
15.1
-4.2
-4.2
-17.4
Manufacturing
-4.0
5.3
12.8
-8.8
-1.9
Electricity, Gas & Water
-2.2
5.6
3.1
1.0
-2.6
Construction
-0.8
0.8
1.2
0.8
1.8
Wholesale & Retail Trade
4.4
4.5
2.4
5.2
6.1
Transport & Communication
2.2
2.6
4.1
4.3
2.3
Finance & Real Estate
1.8
2.8
5.3
2.7
4.5
General Government
2.8
3.8
3.1
5.8
3.9
Personal Services
1.8
2.2
2.8
2.7
2.5
GDP at Market Prices
2.7
4.3
4.7
1.3
1.4
Source: Stats SA
Trade Balance - Balance of trade
R billion
R billion
80
6
75
4
70
2
65
0
60
55
-2
50
-4
45
-6
40
-8
35
30
-10
Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
Trade balance (right axis)
Source: SARS
Imports (left axis)
Exports (left axis)
Prices & interest rates - food, energy and electricity
prices putting pressure on inflation outlook
percent
Jan-2012 Headline Inflation : 6.1%
7
6
2011
Average
5
2010
Average
4
3
Jan-2012 Core Inflation: 3.9%
2
Headline CPI Inflation
Inflation Targeting Range Bound
Annual Average Headline CPI Inflation
Source: SARB & Stats SA
Core Inflation
Repo Rate
Prospects on other key macro variables
Constant 2005
prices
2009
2010
2011e
2012f
2013f
GDP
% change
-1.7
2.8
2.5
3.0
3.3
Fixed investment
% change
-2.2
-3.7
5.6
5.8
6.9
Household Consumption
% change
-2.0
4.4
2.9
3.4
3.6
Government Consumption
% change
4.8
4.6
4.5
4.5
4.5
Exports (goods & services)
% change
-19.5
4.7
1.9
1.7
2.1
Imports (goods & services)
% change
-17.4
9.6
6.5
5.9
6.7
Current Account Balance
% of GDP
-3.9
-5.2
-6.5
-7.6
-8.8
Consumer Inflation
Period average
7.1
4.3
5.8
7.1
6.7
Producer Inflation
Period average
0.0
6.0
9.0
10.3
7.4
Exchange Rate R/$
Period average
8.67
7.4
7.00
6.86
6.55
% of labour force
23.9
24.9
24.7
24.1
23.5
Unemployment Rate
Source: PAIRS
Unemployment - The unemployment rate remains high
25.70%
25.20%
25.20%
25.30%
25%
25%
24%
2010 Q1
2010 Q2
Source: Stats SA
2010 Q3
2010 Q4
23.90%
2011 Q1
2011 Q2
2011 Q3
2011 Q4
Youth and adult employment ratios in SA and selected
emerging market economies
Source: ILO (Key indicators of the labour market, 6th Ed. ), Statistics SA quarterly labour force survey, June 2010
Employment decoupled from economic growth
Has deindustrialisation and the currency played a role?
800
450
700
400
Labour
Relations
Act (1995)
600
350
500
300
400
250
300
200
200
150
Economic activity
Employment
100
100
Source: ADCORP
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
1952
1948
1944
50
1940
0
Total Non-Agricultural Employment (1940-1944=100)
Economic Activity (Gross Domestic Product at market prices, constant 2005
prices, 1940-1944=100)
Employment vs. Economic Activity
Free market response #1: SA’s contract labour force vs.
permanent employment
110
160
Permanent employment
105
140
Atypical employment
120
100
100
95
80
60
90
40
85
20
80
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Unemployment remains the major challenge facing SA
• Unfortunately unemployment has increased over the last 18 years, with
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deindustrialisation being a major factor – 13% unemployment in 1994 to 37%
currently
Official labour force size: 17.4 million of which 13 million formally employed
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4.4 million South Africans are currently unemployed
2.0 million permanently discouraged about their prospects of finding work
2.1 million people underemployed (Stats SA)
• 2.7 million (61%) of those officially unemployed have been out of work for
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more than a year
Nearly half (46%) of the economically active population is idle, with a
staggering proportion (74%) of these under the age of 24
By any measure, unemployment is easily South Africa’s most pressing
socioeconomic problem
Who are the unemployed?
• Youth, black African, never worked before
• The current exchange rate environment has contributed towards this
situation.
South Africa’s GDP outdone by the BRIC countries
Source: IMF, RMB FICC Research, August 2011
Best performing sectors in SA
Index
Breakdown of GDP by sector
Construction
Finance
Transport/Communication
Retail
Manufacturing
Mining
Agriculture
SA global competitiveness
Source: World Economic Forum
The SA Rand – volatility and competitiveness
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Following a bout of weakness in 2001 and 2002, the Rand has generally strengthened, and with extreme
fluctuations.
The Rand has proved to be the most volatile global currency.
Government has decided not to consistently intervene in the currency, and generally has favoured a strong
currency to strengthen the country’s balance of payments and reduce inflation by attracting short term
investment inflows.
Economic policy is strongly influenced by the robust and strong banking, services and retail sectors, who are also
supported by the financial media.
However, unemployment has grown significantly under this policy with the economy underperforming.
Jobs have not been created in the two most important sectors, manufacturing and agri industries.
While the policy has kept inflation in check, it has dampened economic growth and resulted in a number of
sectors underperforming with subdued growth following the 2008/2009 recession.
Interest rates have remained relatively high and the SA Reserve Bank has over an extended period applied a very
conservative interest rate policy. Interest rates have been stable for the past 12 months.
In recent times the Rand has again experienced strong volatility moving from R6.60 - R8.80 – R7.56 over the last 5
months of 2011 / 2012, reflecting a range of a 33% fluctuation. It has currently resumed a strengthening trend
which is very concerning for the supply side of the economy.
Factors influencing the Rand:
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Market risk (high)
Political risk (low)
Carry trade (high)
Capital flows (high)
The Rand recovery in the first few months of 2012 has been broad based and the Rand has strengthened in
relation to low yielding currencies, and outperformed commodities and EM peers. It has also had a high
correlation to equity markets but also to bond markets and commodity prices.
The Rand strength situation has stimulated significant debate in the country on how the problem can be
addressed. The Reserve Bank has purchased foreign currency at selected intervals, but more recently has stood on
the sidelines, and the debate is ongoing.
2001/07/06
2001/10/06
2002/01/06
2002/04/06
2002/07/06
2002/10/06
2003/01/06
2003/04/06
2003/07/06
2003/10/06
2004/01/06
2004/04/06
2004/07/06
2004/10/06
2005/01/06
2005/04/06
2005/07/06
2005/10/06
2006/01/06
2006/04/06
2006/07/06
2006/10/06
2007/01/06
2007/04/06
2007/07/06
2007/10/06
2008/01/06
2008/04/06
2008/07/06
2008/10/06
2009/01/06
2009/04/06
2009/07/06
2009/10/06
2010/01/06
2010/04/06
Rate of exchange impact
Strength & Volatility:
Uncompetitive exports
Surge of Imports
Forex levels do not reflect the inflation
differential
RAND/USD, RAND/EURO & RAND/POUND EXCHANGE RATES
(Since July 2001….)
20
18
16
14
12
10
8
6
4
2
0
USD
POUND
Exchange rates
Source: I-Net Bridge
USD/ZAR and inflation
% year-on-year
40
Real trade weighted rand
30
Manufacturing volumes
20
appreciation
10
0
-10
-20
-30
1999
2001
Source: Inet-Bridge, RMB FICC Research
2003
2005
2007
2009
2011
Rand volatility
Source: Datastream
Volatility against the USD since 2008
Volatility %
CNY
ARS
THB
TWD
SGD
PHP
MYR
INR
ILS
RUB
IDR
JPY
EUR
DKK
GBP
CAD
CHF
MXN
TRY
SEK
CZK
NOK
NZD
KRW
AUD
PLN
ZAR
BRL
0
5
Source: Bloomberg, RMB FICC Research
10
15
20
25
8
6
4
2
0
-2
-4
-6
-8
SA GDP
Jul-11
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Aug-08
Mar-08
Oct-07
May-07
Dec-06
Jul-06
Feb-06
Sep-05
SA GDP vs exchange rate
Nominal effective exchange rate
SA GDP
ZAR/USD
EUR/USD
CNY/USD
ZAR/USD
ZAR/EUR
ZAR/CNY
Note: The Primary Axis reflects values for USD and EUR, while Secondary Axis reflects values for CNY
2012/01/01
2010/12/01
2009/11/01
2008/10/01
2007/09/01
2006/08/01
2005/07/01
2004/06/01
2003/05/01
2002/04/01
2001/03/01
2000/02/01
1999/01/01
1997/12/01
1996/11/01
1995/10/01
14
12
10
8
6
4
2
0
1994/09/01
2011/09/01
2010/09/01
2009/09/01
2008/09/01
2007/09/01
2006/09/01
2005/09/01
2004/09/01
2003/09/01
2002/09/01
2001/09/01
2000/09/01
1999/09/01
1998/09/01
1997/09/01
1996/09/01
1995/09/01
1994/09/01
USD vs ZAR, EURO & CNY
ZAR vs USD, CNY & Euro
0.3
3
0.25
2.5
0.2
2
0.15
1.5
0.1
1
0.05
0.5
0
0
Foreign ownership of local bonds for key emerging
markets
Source: Stanlib
Capital outflows and currency depreciation in emerging
markets
Percent Change in Nominal Effective Exchange Rate (Jul.-Dec. 2011)
Source: World Bank
Relative 3 month carry return
NZD
MXN
ZAR
AUD
TRY
CLP
INR
BRL
PLN
RUB
HUF
CAD
NOK
KRW
THB
GBP
CZK
CNY
IDR
ILS
CHF
EUR
JPY
-5
0
5
10
15
This years renewal foreign appetite for SA bonds has
more than compensated for the outflow from the JSE
R'bn
30
20
10
0
-10
-20
-30
Jan-10
Jul-10
Jan-11
Equities
Jul-11
Bonds
Total
Jan-12
The Wiggle-Room Index from minimum to maximum space
Minimum flexibility - 100
Egypt
India
Poland
Brazil
Vietnam
Pakistan
Turkey
Argentina
Hungary
82
82
82
79
79
78
78
70
70
South Africa
Taiwan
Venezuela
Czech Republic
Mexico
Colombia
Malaysia
Thailand
Philippines
Hong Kong
65
63
63
60
60
58
57
55
50
48
Peru
Russia
Singapore
South Korea
Chile
China
Indonesia
Saudi Arabia
42
40
40
30
28
25
23
20
Source: The Economist, 28 January 2012
The Rand’s influence on the agricultural and
manufacturing sectors
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The South African economy faces a low growth scenario and needs future government intervention to stimulate
growth. The government has decided to embark on fiscal stimulus rather than loosen monetary policy.
The open efficient financial markets facilitate carry trade inflows, which cause the volatility.
Very difficult to manage hedging strategies and sign long term contracts.
Inflation is not being caused by demand, but by cost push, mainly from administered price increases i.e. electricity
has increased by at least 140% over 4 years and a further 16% in April 2012.
Thus manufacturers are having their margins squeezed by cost push inflation, and the strong currency that inhibits
exports and encourages imports, forcing benchmark pricing down.
The situation is exacerbated by imports from South East Asia with countries that provide significant government
incentives and managed currencies.
The above has resulted in a significant slowdown in the manufacturing and agri industries, with growing
unemployment resulting. In addition, in SA 22 people depend on one person employed for at least part of their
livelihood.
Economic models have proved that the agri industry and the manufacturing sector are the two largest creators of
jobs, and thus have the greatest multiplier effect in the economy.
There is thus a strong case for a more aggressive monetary policy to improve the competitiveness of the Rand to
make both exports and domestic sales more competitive.
The weakening would not be inflationary in the immediate short term due to:
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Significant spare capacity in manufacturing
Economies of scale will reduce the cost of manufacture
Create employment and through the multiplier effect grow consumption
Small business development and incubator companies depend on large business to thrive. Small business feeds on
large business, and cannot grow in a low growth scenario. Thus a more competitive exchange rate is essential to
boost GDP growth and encourage private sector investment.
We are facing a tough world with intense competition and aggressive trade behaviour, which is eroding jobs. There
is currently no free market at work due to the distortion mentioned above. A number of countries are using
market distortions on a large scale.
The current uncertainty in Europe exacerbates the situation and forces additional liquidity and European volumes
may be diverted to the SA market. In addition the forecasted recessionary conditions in Europe places extra
pressure on developing countries with non competitive currencies.
South African deindustrialisation
Manufacturing Growth and Contribution to GDP
Manufacturing contribution to GDP (%)
22
21
20
19
18
17
16
1970
1977
1984
1991
Contribution to GDP
1998
2005
Trend
Countries exposed to the Euro crisis via the trade channel
Source: LBCM & IMF
23 The crisis – China comes out tops – GDP per person
Q4 2007 – Q2 2011 % change
Source: Frontier Advisory
Currency stability comparison
Case studies from SA industry
1.
Glass Container Industry
• The industry has suffered significantly under the exportation of bulk product for bottling outside of SA.
• In 2005, 32% of exports left in SA in bulk form, this has increase to a 53% forecast for 2012. This has an
effect on the entire Western Cape.
• The wine industry has calculated that for every 10 million litres of wine shipped in bulk, 107 jobs were
lost.
• Over the last two years Rand strength, when compared to the UK£ contributed at least 20% to the
price differnetial.
• PPI in SA has increased by 9% compared to 3% in the UK.
• In addition, the number of bottles imported into SA forecasted for 2012 has increased by 26% or 26
million units. This is both in relation to empty and filled glass containers.
Product
% wine bulk exports - RSA
Cider
Food
Spirits
Wine
Beer
Soft drinks
Total imports
Growth
60%
50%
40%
30%
20%
10%
Imports related to price
F11 (‘000)
51 000
33 000
12 000
6 341
102 341
F12 (‘000)
46 276
39 000
18 000
12 000
10 200
3 000
128 476
26%
115 276
90%
0%
2005
2006
2007
2008
2009
2010
2011
2012
Case studies from SA industry
2.
SA Fruit Canning Industry
• Close to ZAR 6,0 billion turnover.
• More than 30 fruit & vegetable factories across SA’s rural areas; + 15,000 factory
workers.
• Raw Product sourced from more than 1,800 farms; over 20 000 farm workers.
• Supports more than 175,000 dependants.
• >400 000 tons of fruit per annum.
• >250 000 tons of vegetables per annum.
• >90% of materials used are from local origin.
• Main employers in many rural areas in small towns where job opportunities are limited)
• Labour intensive environment:
– Creating Jobs & Employment Opportunities
– Uplifting Skills: Higher Skills level required within factories
• Direct contributor to Beneficiated Agriculture; providing Value-Added Products and
Food Security in Agro-Processing Sector.
• Significant and direct contributor to Rural Development, Community Upliftment and
Transformation Objectives.
Case studies from SA industry
2.
SA Fruit Canning Industry (continued)
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No room to pass on increases in export markets.
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SA industry largely price-followers in global markets.
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Result: Un-competitiveness of SA Industry.
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Margins have been completely eradicated i.e. drastically reduced export returns.
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Lead to reduced manufacturing base.
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Huge financial losses threatening future of the industry.
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Surge of imports onto local market.
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Locally manufactured goods cannot compete – threatening local manufacturing and jobs.
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Result: Decline in consumer demand.
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Local pineapple industry: Non-resumption of canning operations – largely attributed to economic
conditions.
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Major international company has disinvested in South Africa.
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SA canners exploring all options to remedy uncompetitive cost structures i.e. Mergers, etc.
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Reduced fruit intake.
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Low confidence in farming sector; decreased plantings, tree-pulling, etc.
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Massive investment of industry under threat i.e. land, infra-structure, etc.
Case studies from SA industry
2.
SA Fruit Canning Industry (continued)
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* ROE – Rate of exchange
Thus farmers are being squeezed
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Case studies from SA industry
3.
Paper Products
• In 2011 imports increased by 25.1% due to the strong currency from
119 000 toms in 2010 to 149 000 tons in 2011.
• Thus the strong currency has adversely impacted both volume and
pricing in the domestic market, and significantly reduced export
competitiveness.
Conclusion
• There is no doubt that the Rand level is directly affecting job creation and
FDI in South Africa and therefore growth.
• It is important that all large economies take note of what damage the
current, QE policies are having on emerging countries, and this coupled
with unfair trade practices, and certain countries employing currency
linking strategies is having a direct influence on the deindustrialisation of
South Africa.
• What are our options (note: SA does not have significant reserves to stabalise or
influence the currency):
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Peg the Rand
Lower interest rates to discourage the carry trade and stimulate GDP
Apply taxes to short term investments
Purchase foreign currency, costly due to interest rate differentials
Ensure global economies are cognisance of the damage they are doing to certain
emerging states
– More protection to nurture SA’s industrial / agricultural base, protect jobs and create
jobs