Transcript Analysis – in English

African Business Outlook
Part of the Global Business Outlook
A joint survey effort between
Duke University,
The South African Institute of
Chartered Accountants,
Africa Investment Advisors
and
CFO magazine
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
1
CFO Global and African Business Outlook – Overview
Global Business Outlook
Duke University has surveyed CFOs around the world every quarter since 1996, most of those years jointly with CFO magazine. The survey takes the pulse of the
business community and has a strong record of predicting future economic activity. The results are relied upon by Central Bankers, Analysts, Investors, and are widely
reported in the press.
SAICA, AIA, and the African Business Outlook
SAICA joined the survey in 2013, helping to found the African Business Outlook, with an initial focus on the South African economy. Nigeria was added to the survey
sample in late 2015. African Investment Advisors joined the survey team in Spring 2016, with an objective of solidifying participation by Nigerian CFOs and also expanding
into Kenya.
The analysis in this report will enable participating firms to make important business decisions as they can benchmark themselves against their global peers and also aid
investors interested in Africa.
Key Survey Facts
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
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Survey Respondents: 113
 Of which, 47 from Nigeria, 47 from South Africa, and 19 from other parts of Africa.
 Unless otherwise stated, the analysis represents responses from across Africa.
 Due to the increase in respondents from Nigeria in the last two quarters, care should be taken when comparing to previous results, which were comprised
primarily of responses from South Africa.
Sample includes CFOs from both public and private companies representing a broad range of industries, including:
 Retail/Wholesale, Mining/Construction, Manufacturing, Transportation/Energy, Communications/Media, Technology, and Banking/Finance/Insurance.
Certain questions are constant each quarter, to capture trends in corporate optimism, expected hiring and capital investment plans, inflation, wages, and many
other categories.
Other questions change each quarter to examine topical economic issues and newsworthy business or political events that may affect the corporate finance
landscape.
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
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African Business Optimism Compared to the Rest of the World
African CFOs are the least optimistic in the world about their countries economic outlook over the next year. However, they are
more optimistic about their own companies than Europe and Latin America.
Country / Region
Global Trends
Country Business Optimism Index
Jun 2016 Response
50
70
40
60
30
50
20
40
10
Jun 2015
Sep 2015
Dec 2015
Mar 2016
Latin America
United States
Asia
Africa
Jun 2016
Europe
0
Nigeria
South Africa
Own Company
Own-Firm Business Optimism Index
80
70
60
60
40
50
20
40
Jun 2015
Sep 2015
Dec 2015
Mar 2016
Latin America
United States
Asia
Africa
Jun 2016
0
Nigeria
Europe
South Africa
West Africa
Notes: Presented data are the mean value for each region or country, Scale from 0-100
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
3
Optimism Regarding Economy, African Details
Optimism about the domestic economy in South Africa remains low, and is still significantly lower than the rest of Africa. Nigerian
CFOs are more optimistic about the domestic Nigerian economy.
South Africa, Last Four Quarters
Country Average
Q2 '16
All Africa Avg
Q1 '16
No Change
Q4 '15
Less Optimistic
More Optimistic
Q3 '15
0%
20%
40%
60%
West Africa
Nigeria
80%
Trends in South Africa Optimism
CFOs are less optimistic about the domestic economy
 CFOs from South Africa (83%) grow less optimistic, more so than CFOs from
the Rest of Africa (41%)
 Last quarter, about the same number (85%) of South African CFOs reported
becoming less optimistic about the domestic economy
0%
20%
40%
60%
80%
Nigerian Optimism
CFOs are optimistic about the domestic economy
 A large percentage of CFOs from Nigeria (59%) have
become more optimistic, more than CFOs from South Africa
(11%) and from West Africa (40%)
 More CFOs from Nigeria became more optimistic in Q2
2016 (59%) compared to Q1 2016 (42%).
When ranked on a 100 point scale, the South African Optimism Index (for the economic prospects of the domestic economy over the
next year) decreased from 38.3 in Q1 2016 to 37.6 in Q2 2016, and is significantly lower than Africa as a whole at 47.5.
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
4
Own Company Optimism, African Details
CFOs are becoming more optimistic about their own companies in South Africa. CFOs in Nigeria and Africa in general also follow
this trend and are more optimistic about their own companies than about the domestic economy.
Company Optimism by Region
South African Own-Company Optimism, Last 4 Qtrs
Q2 '16
No Change
Q1 '16
Less Optimistic
All Africa Avg
West Africa
Q4 '15
More
Optimistic
Q3 '15
0%
10%
20%
30%
40%
50%
60%
Nigeria
0%
70%
Trends in African Optimism
CFOs are more optimistic about their own companies
 Across Africa, a majority of CFOs higher own-firm optimism (62) compared to
last quarter (59)
 Significantly fewer CFOs from South Africa (36%) are more optimistic about
their own firms than are CFOs from the Rest of Africa (61%)
 Compared to Q1 ’16 (54%), fewer South African CFOs (34%) report being less
optimistic about their own companies this quarter.
20%
40%
60%
80%
Trends in African Optimism
CFOs are more optimistic about their own companies
 A majority of CFOs from Nigeria are increasingly optimistic about
their own companies (64), about the same as last quarter.
 There was a decrease in the number of less optimistic Nigerian
CFOs (14%) compared to Q1 2016 (34%)
 CFOs from West Africa became more optimistic about their
companies in Q2 2016 (70%) compared to Q1 2016 (40%).
When ranked on a 100 point scale, the South African Own-Company Optimism Index (for the financial prospects over the next year of each CFO’s own company) fell
slightly from 58.6 in Q1 2016 to 58.3 in Q2 2016. This is lower than Africa as a whole, which increased from 59 to 62.
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
5
Top 10 Most Pressing Concerns
CFOs in South Africa and Nigeria feel that economic uncertainty, currency risk, and government
policies are the most pressing concerns.
South Africa
Economic uncertainty
Currency risk
Government policies
Volatility of political situation
Regulatory requirements
Difficulty attracting /retaining qualified employees
Rising wages and salaries
Weak demand for products/services
Employee morale
Employee productivity
African Business Outlook
Nigeria
Economic uncertainty
Government policies
Currency risk
Inflation
Cost of borrowing
Access to capital
Weak demand for products/services
Rising input or commodity costs
Difficulty attracting /retaining qualified employees
Reliability and cost of electricity
Duke University / SAICA / CFO Magazine
June 2016
6
Most Pressing Concerns, Details and Comparisons
Most CFOs in South Africa and Nigeria agree that economic uncertainty is their most pressing concern. Most CFOs in South
Africa believe that the depreciation of the currency is the next major cause for concern. However, their Nigerian counterparts
are more worried about the impact of the new government’s polices on their operations. Other CFOs in West Africa are
concerned about difficulty accessing cheap sources of capital.
Weak demand for your
products/services
Unrest in the general population
Cost of borrowing
Corporate tax code
Difficulty attracting
/retaining qualified…
Volatility of political
situation
Reliability and cost of electricity
Rising input or commodity costs
West
Africa
South
Rising wages and salaries
Africa
Nigeria
Employee productivity
Inflation
Access to capital
Government policies
Currency risk
Regulatory requirements
Economic uncertainty
Employee morale
0%
African Business Outlook
10%
20%
30%
40%
50%
60%
Duke University / SAICA / CFO Magazine
0%
June 2016
5%
10%
15%
20%
25%
30%
7
Business Plans
Capital expenditures will increase by 10% in Nigeria and other parts of West Africa buy only by 2% in South Africa. Of the
surveyed areas, only Nigeria expects to increase fulltime employment. Wages and salaries will increase by about 7% across Africa.
Productivity (output per
hour worked)
Cash on the balance sheet
Prices of your products
Number of domestic full-time employees
Marketing/ advertising
spending
Health care costs
West
Africa
Technology spending
South
Africa
Number of domestic temporary
employees
Research and development spending
Nigeria
Wages/Salaries
Dividends
Earnings
Capital spending
Revenue
0%
African Business Outlook
20%
40%
-15%
60%
Duke University / SAICA / CFO Magazine
June 2016
-10%
-5%
0%
5%
10%
15%
8
Political Risk and Uncertainty
How would you rate the degree of political uncertainty or political risk in your country?
Moderate
100%
Large
100
90
80
70
60
50
80%
60%
40%
40
30
20
10
20%
0%
0
US
Europe
Asia
Latin
America
Africa
Small
Nigeria
Moderate
South Africa
Large
West Africa
Africa has the highest degree of political risk, followed by Latin America
 93% of African CFOs think their country’s political risk is moderate-to-high, compared to 90% for Latin America
 Within Africa, South Africa has the highest political uncertainty, with more than 80% saying it is severe
 Due to the upcoming election and Washington gridlock, the US also faces high political risk
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Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2016
Primary Sources of Political Risk
CFOs from South Africa and Nigeria rank the following sources of political risk and uncertainty that is
causing their firms to be more cautious in their business plans
South Africa
Nigeria
Government gridlock or dysfunction
Government gridlock or dysfunction
Proposed regulations
Threat of terrorism
Social policies [socioeconomic or racial activism, etc.]
Proposed regulations
Upcoming elections
Protests against current administration
Protests against current administration
The potential for tax reform
The potential for tax reform
Minimum wage
Minimum wage
Environmental / climate policies
Environmental / climate policies
Social policies [socioeconomic or racial activism, etc.]
Other
Upcoming elections
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
10
Primary Sources of Political Risk, Details
African CFOs identify Government gridlock or dysfunction (68%) as the primary source causing business
caution, followed by proposed regulations (50%) and Protests against the current administration (38%).
Government gridlock or dysfunction
Minimum wage
Proposed regulations
Environmental / climate policies
Protests against current administration
Trade alliances [e.g., Trans-Pacific Partnership]
Social policies [socioeconomic or racial
activism, etc.]
U.S. involvement in the Middle East
Upcoming elections
Immigration policy
Threat of terrorism
Nuclear deal with Iran
The potential for tax reform
0%
Nigeria
African Business Outlook
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
South Africa
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
West Africa
Duke University / SAICA / CFO Magazine
Nigeria
June 2016
South Africa
West Africa
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Effects on Business of Political Risk and Uncertainty
About three-fourths of South African and Nigerian CFOs say that political risk is causing their firms to
be more cautious in spending or making acquisitions.
Making Acquisitions
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
Yes
Spending or Hiring
No
Yes
Hiring
Spending
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
Yes
Nigeria
African Business Outlook
No
South Africa
No
West Africa
Duke University / SAICA / CFO Magazine
Yes
Nigeria
June 2016
No
South Africa
West Africa
12
Are African Firms Hesitant to Do Business in the US Due to US Political Risk?
Political Uncertainty in the United States has very little effect on the willingness of African companies
to do business in the United States or with United States companies.
100%
80%
60%
40%
20%
0%
No
Not Sure
Nigeria
African Business Outlook
South Africa
Duke University / SAICA / CFO Magazine
Yes
West Africa
June 2016
13
Do Trade Alliances Help African Companies and Their Countries?
African CFOs say that trade alliances have a predominantly positive effect on their county’s
economy (71%). The positive effect is more moderate on their own companies (58%)
100%
80%
60%
40%
20%
0%
Negative
African Business Outlook
No Effect
Positive
Nigeria - Country
Nigeria - Company
South Africa - Country
South Africa - Company
West Africa - Country
West Africa - Company
Duke University / SAICA / CFO Magazine
June 2016
14
Do Trade Alliances’ Affect African Employment?
African CFOs say that trade alliances have a moderate positive effect on the number of employees
they hire, though many firms say there is no effect.
80%
60%
40%
20%
0%
Negative
No Effect
Nigeria
African Business Outlook
South Africa
Duke University / SAICA / CFO Magazine
Positive
West Africa
June 2016
15
Cash on the Balance Sheet
CFOs from Nigeria and South Africa have their holdings of cash and marketable securities compared to previous years. CFOs
indicate that their companies have loose cash targets and attempt to increase cash holdings if it they fall too low
Is more cash/marketable securities being held?
Likelihood of deploying cash reserves in 12 months?
80%
80%
60%
60%
Nigeria
40%
40%
South Africa
20%
0%
More today
60%
More last year
No difference
20%
0%
West Africa
Yes
Is there an explicit target of cash/marketing
securities to hold?
40%
20%
0%
Yes, flexible
target/range
Yes, somewhat
tight
target/range
African Business Outlook
Yes, strict
target/range
No target
No
How quickly do you alter cash holdings when below the
range?
60%
50%
40%
30%
20%
10%
0%
Slowly
Duke University / SAICA / CFO Magazine
June 2016
Moderate speed
Fast
Very fast
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Will African Companies Deploy Their Cash Reserves?
Most African CFOs are willing to deploy their cash reserves (60%), which they plan to use for capital expenditures and investment.
The other 40% of CFOs are holding back because they lack excess cash and need a liquidity buffer.
Uses of deployed cash reserves
Reasons not to deploy cash reserves
Research and development
Purchase raw materials
Save cash as dry powder for future
investment opportunities
Purchase inventory
Holding cash until economic
uncertainty declines
Pay down debt/line of credit
Marketing and advertising
West
Africa
Increase hiring
South
Africa
Increase employee benefits/pay
Nigeria
Dividends or share repurchases
Do not need cash reserves as a
source of funds
Currently have few attractive
investment opportunities
Holding cash to save for potential
future liabilities
Cover operating losses
Capital spending or investment
Need cash as liquidity buffer (e.g.,
in casecredit markets tighten)
Acquisitions
Lack excess cash to deploy
Allow more lenient payment…
0%
African Business Outlook
We are borrowing instead of using
our cash on hand
20%
40%
60%
80%
Duke University / SAICA / CFO Magazine
0%
June 2016
10%
20%
30%
40%
50%
17
Return on Assets and Capacity Utilization
Despite the risks and uncertainties, South African and Nigerian companies expect an increase in ROA
over last year. However, South African companies expect a decrease in capacity utilization in the first
half of 2016.
South
Africa
Nigeria
Europe
Asia
Latin America
Approximate ROA in 2015
13.2%
15.2%
9.0%
13.0%
7.2%
Expected ROA In 2016
14.5%
19.0%
10.9%
14.9%
8.5%
% capacity in H2 2015
72.5%
70.0%
77.2%
78.0%
71.5%
% capacity planned for H1 of 2016
71.7%
70.0%
78.5%
79.4%
73.9%
Return-on-Assets
Capacity Utilization
African Business Outlook
Duke University / SAICA / CFO Magazine
June 2016
18