South Africa Business Forecast Report Q3 2013

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BUSINESS FORECAST REPORT

Q3 2013www.businessmonitor.com

SOUTH AFRICAINCLUDES 10-YEAR FORECAST TO 2022

Tepid Growth Ahead

ISSN 1745-0713Published by Business Monitor International Ltd.

Copy Deadline: 19 April 2013

2 Business Monitor International Ltdwww.businessmonitor.com

SOUTH AFRICA Q3 2013 S

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3Business Monitor International Ltd www.businessmonitor.com

Contents

Executive Summary ................................................................................................................................. 5Core Views ......................................................................................................................................................................................5Major Forecast Changes ................................................................................................................................................................5Key Risks To Outlook ....................................................................................................................................................................5

Chapter 1: Political Outlook .................................................................................................................... 7SWOT Analysis .......................................................................................................................................................... 7BMI Political Risk Ratings ........................................................................................................................................ 7Domestic Politics ...................................................................................................................................................... 8On The Ground: Big-Picture Scenarios

We envisage three big-picture scenarios for South Africa following a trip to the country in March. Our core view is for insidious stagnation, but we also see potential for radical reform and severe instability.

TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................ 8

Foreign Politics ....................................................................................................................................................... 10BRICS Bank: Opportunities And Limitations

Proposals to create a new 'BRICS Bank' capable of rivalling the World Bank and IMF has potential to be a game-changer in the global economy, at least over the long term. However, there are significant obstacles to creating and managing such an entity in the near term.

Long-Term Political Outlook .................................................................................................................................. 11Political Trials And Tribulations Over The Coming Decade

Many issues threaten South Africa's political stability over the long term, not least the inequalities still stemming from the apartheid era and the foreign policy challenge of Zimbabwe. Although our core scenario envisages no major change to the political backdrop, we present a number of alternative scenarios.

Chapter 2: Economic Outlook ............................................................................................................... 15SWOT Analysis ........................................................................................................................................................ 15BMI Economic Risk Ratings ................................................................................................................................... 15Economic Activity .................................................................................................................................................. 16Tepid Growth Ahead

We forecast tepid economic growth for South Africa over the medium term, forecasting that real GDP will expand by 2.8% in 2013 and 3.3% in 2014. Although private consumption is expected to remain relatively robust, private investment is likely to suffer due to elevated political risk.

TABLE: QUARTERLY REAL GDP ........................................................................................................................................................................ 16TABLE: ECONOMIC ACTIVITY ............................................................................................................................................................................. 17

Monetary Policy ...................................................................................................................................................... 18Policy Stuck In A Stagflationary Rut

We hold to our view that the South African Reserve Bank will keep the repo rate on hold at 5.00% over the whole of 2013. Although South Africa faces a weak growth outlook and risks are to the downside, inflation has been ticking upward and is likely to go higher still. This stagflationary scenario will likely force South African Reserve Bank's Monetary Policy Committee to maintain the status quo.

TABLE: MONETARY POLICY ............................................................................................................................................................................... 18Current Account To Remain Structural Weakness

We forecast that South Africa's current account deficit will remain wide over the medium term, predicting that it will be 6.5% of GDP in 2013 and 6.2% in 2014. Inflows to the capital and financial account have traditionally propped up the balance of payments, but with investor risk appetite on shaky ground, this trend can no longer be assured.

TABLE: CURRENT ACCOUNT .............................................................................................................................................................................. 20

Fiscal Policy ............................................................................................................................................................ 22Budget Deficit To Narrow Gradually

South Africa's new budget signals that the treasury is likely to keep the deficit under control despite various economic and political challenges. We forecast a budget shortfall of 5.0% of GDP in fiscal year 2013/14, falling to 3.9% of GDP by FY15/16.

TABLE: FISCAL POLICY .......................................................................................................................................................................................22


SOUTH AFRICA Q3 2013

Chapter 3: 10-Year Forecast .................................................................................................................. 25The South African Economy To 2022 .................................................................................................................... 25Structural Constraints To Curb Long-Term Growth

While we forecast relatively stable real GDP growth rates over the coming 10 years, ongoing structural shortcomings will continue to limit South Africa's long-term growth potential. High unemployment and powerful trade unions present key challenges to the authorities.

TABLE: LONG-TERM MACROECONOMIC FORECASTS ................................................................................................................................... 25

Chapter 4: Business Environment ........................................................................................................ 27SWOT Analysis ........................................................................................................................................................ 27BMI Business Environment Risk Ratings ............................................................................................................. 27Business Environment Outlook ............................................................................................................................. 28Institutions ............................................................................................................................................................... 28TABLE: BMI BUSINESS AND OPERATION RISK RATINGS .............................................................................................................................. 28TABLE: BMI LEGAL FRAMEWORK RATING ....................................................................................................................................................... 29TABLE: LABOUR FORCE QUALITY ..................................................................................................................................................................... 30

Infrastructure ........................................................................................................................................................... 31TABLE: TRADE AND INVESTMENT RATINGS .................................................................................................................................................... 31TABLE: AFRICA ANNUAL FDI INFLOWS ......................................................................................................................................................... 32

Market Orientation ................................................................................................................................................... 33TABLE: TOP EXPORT DESTINATIONS, 2004-2011 ............................................................................................................................................ 33

Operational Risk ...................................................................................................................................................... 34

Chapter 5: Key Sectors .......................................................................................................................... 35Defence & Security ................................................................................................................................................. 35TABLE: DEFENCE EXPENDITURE ....................................................................................................................................................................... 36

Autos ........................................................................................................................................................................ 39TABLE: AUTOMOTIVE SALES ............................................................................................................................................................................ 40TABLE: AUTOMOTIVE PRODUCTION ................................................................................................................................................................ 41

Other Key Sectors ................................................................................................................................................... 43TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS ................................................................................................................................. 43TABLE: FOOD & DRINK SECTOR KEY INDICATORS ........................................................................................................................................ 43TABLE: PHARMA SECTOR KEY INDICATORS ................................................................................................................................................... 44TABLE: TELECOMS SECTOR KEY INDICATORS ............................................................................................................................................... 44TABLE: FREIGHT SECTOR KEY INDICATORS ................................................................................................................................................... 44

Chapter 6: BMI Global Assumptions .................................................................................................... 45Global Outlook ......................................................................................................................................................... 45Lowering Our US And Eurozone Growth ForecastsTABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 45TABLE: DEVELOPED STATES, REAL GDP GROWTH, % .................................................................................................................................. 46TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % .......................................................................... 46TABLE: EMERGING MARKETS, REAL GDP GROWTH, % ................................................................................................................................. 47


Executive Summary

Core Views BMI sees the South African economy continuing its uneven recovery

over the medium term, with real GDP expected to grow by just 2.8%

in 2013. Although the consumer sector is holding up, the supply

side is lagging behind, and there are widespread concerns that the

recovery is not sufficiently broad-based. A key downside risk stems

from industrial unrest in the mining sector.

We forecast that South Africa's repo rate will be kept steady at 5.00%

over the medium term. Although South Africa faces a weak growth

outlook and risks are to the downside, inflation is likely to tick up

during the course of 2013. This stagflationary scenario will likely

force the South African Reserve Bank's Monetary Policy Committee

to maintain the status quo.

Political risk is heightened amid industrial unrest in the mining and

agricultural sectors. Furthermore, there is an ongoing debate regard-

ing nationalisation of key industries including mining. However, we

do not see nationalisation as an imminent threat.

Major Forecast Changes No major forecast changes.

Key Risks To Outlook A sustained bout of global risk aversion with an attendant sharp

outflow of portfolio funds would threaten South Africa's precarious

balance of payments.

A sudden uptick in domestic political risk, such as an escalation of

the industrial unrest blighting various sectors, is a key risk.

A sustained period of high oil prices would exacerbate the already-

sizeable current account deficit.

Brief Methodology

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SWOT Analysis

Strengths Broad political stability is likely to persist owing to the African National

Congress (ANC)'s dominance at a national and provincial level.

Relatively strong, independent institutions include the judiciary and

security services.

Weaknesses Persistently high levels of poverty have led to political disenfranchise-

ment and the attraction of new political groupings.

Corruption allegations have tainted the party's image and raised

suspicions over its excessive influence over the judicial system.

Opportunities The establishment of the Congress of the People, a splinter group of

the ANC, and the rising popularity of the Democratic Alliance bode

well for South Africa's democratic environment over the longer term.

Threats In terms of land reform, the willing buyer/willing seller principle may

be dropped in order to speed up the process, although a Zimbabwe-

style 'land grab' is unlikely.

The growing influence of the country's left-wing factions poses an

ongoing risk to South Africa's relatively market-friendly institutions.

BMI Political Risk RatingsWhile South Africa boasts one of Africa's most sophisticated political

systems, significant risks to short-term stability remain. Considering

the country's high degree of unionisation, the threat of industrial action

and disruption to economic activity is a constant concern. In particular,

demands for greater social expenditure and labour protectionism could

undermine South Africa's reform credentials.

Chapter 1: Political Outlook

S-T Political Rank TrendMauritius 82.7 1 =Senegal 75.6 2 =Botswana 72.9 3 =Ghana 72.1 4 =Benin 71.7 5 =Namibia 70.8 6 =Burkina Faso 70.4 7 =Gabon 69.6 8 =Angola 69.0 9 =Cameroon 67.5 10 =Congo-Brazzaville 67.5 10 =South Africa 67.3 12 =Togo 65.4 13 =Tanzania 65.4 13 =Mozambique 64.6 15 =Equatorial Guinea 64.0 16 =Rwanda 64.0 16 =Zambia 63.8 18 =Cte d`Ivoire 59.6 19 =Sierra Leone 53.3 20 =Uganda 51.7 21 =Chad 51.5 22 =Kenya 51.2 23 =Niger 51.0 24 =Nigeria 47.9 25 =Ethiopia 47.5 26 =Guinea-Bissau 36.2 27 =Zimbabwe 34.8 28 =Guinea 31.2 29 =Mali 27.7 30 =Congo, Dem. Rep. 25.8 31 =Sudan 24.6 32 =Regional ave 59.0/Global ave 65.3/Emerging markets ave 62.8

L-T Political Rank TrendMauritius 81.5 1 =Botswana 70.4 2 =South Africa 68.8 3 =Ghana 68.6 4 =Burkina Faso 64.2 5 =Namibia 62.7 6 =Tanzania 62.3 7 =Mozambique 61.3 8 =Senegal 60.5 9 =Gabon 60.4 10 =Benin 55.8 11 =Rwanda 54.3 12 =Togo 54.2 13 =Zambia 54.2 13 =Uganda 53.7 15 =Kenya 52.7 16 =Cte d`Ivoire 50.9 17 =Equatorial Guinea 49.2 18 =Nigeria 48.8 19 =Sierra Leone 48.0 20 =Cameroon 45.7 21 =Niger 44.7 22 =Angola 44.6 23 =Congo-Brazzaville 43.7 24 =Guinea-Bissau 39.4 25 =Ethiopia 37.7 26 =Guinea 37.4 27 =Zimbabwe 34.6 28 =Mali 33.4 29 =Sudan 28.2 30 =Chad 26.6 31 =Congo, Dem. Rep. 26.0 32 =Regional ave 52.6/Global ave 63.1/Emerging markets ave 59.5



Domestic Politics

On The Ground: Big-Picture Scenarios

BMI VIEWWe envisage three big-picture scenarios for South Africa following a

trip to the country in March. Our core view is for insidious stagnation,

but we also see potential for radical reform and severe instability.

BMI travelled to South Africa in March 2013 to assess local sentiment and gain on-the-ground insight into the political and

economic outlook for the country. We met with a number of

banks, corporates and government bodies including the South

African Reserve Bank, Eskom, Investec, Werksman, Stanlib and local subsidiaries of AstraZeneca and Bain, each of whom shared their thoughts on South Africa's prospects.

We found that there was a strong consensus that the economic

outlook for the country is concerning. South Africa is widely

viewed as likely to continue on its current trajectory, characterised

by frequent industrial unrest, weak growth, a depreciating rand

and general foreign investor risk aversion. Several of the people

that we spoke with asked us if we could see any way that the

nation could pull itself out of this trend, or if there was potential

for things to get even worse. We outlined three medium-term

scenarios and assigned a probability to each. Here, we present

these scenarios and include some of the comments that were

made in the meetings.

Core Scenario: Insidious StagnationUnder our core scenario, to which we ascribe an 85% prob-

ability, there will be little change on the political scene. The

African National Congress (ANC) will very likely continue to

govern in an indecisive manner owing to a lack of cohesion

within the party and could continue to attract criticism over

apparent patronage politics at the top. President Jacob Zuma

will very likely manage to maintain the fragile Tripartite Al-

liance between the ANC, the Congress of South Africa Trade

Unions (COSATU) and the South African Communist Party

(SACP), which would enable him to stay at the helm of the

ANC and retain the presidency in 2014. However, Zuma's

TABLE: POLITICAL OVERVIEW System of Government Parliamentary democracy, universal suffrage; 400 parliamentary seats (five-year term); executive power rests

with the cabinet.

Head of State (and Government) President Jacob Zuma

Last Election Presidential April 2009; Parliamentary April 2009

Composition of Current Government African National Congress (ANC) 264 seats in parliament; Democratic Alliance (DA) 67 seats; Congress of the People (COPE) 30 seats; Inkatha Freedom Party (IFP) 18 seats; Independent Democrats (ID) 4 seats. Eight other smaller parties share the remaining 17 seats in parliament. The ANC has held the majority in parliament since the end of apartheid in 1994.

Key Figures President Jacob Zuma President and leader of ANC; Kgalema Motlanthe Deputy President; Helen Zille DA Leader; Mosiuoa Lekota COPE Leader; Blade Nzimande General Secretary of the South African Communist Party (SACP); Zwelinzima Vavi General Secretary of the Congress of the South African Trade Unions (COSATU); Gill Marcus Central Bank Governor; Pravin Gordhan Finance Minister; Ebrahim Patel Minister of Economic Development

Main Political Parties ANC Founded in 1912 and based on a socialist ideology, the ANC became the dominant political party at the end of apartheid in 1994. With the aid of its tripartite alliance partners, COSATU and SACP, the ANC has ruled South Africa since then.

Congress of the People Established in October 2008 following the dismissal of former president Thabo Mbeki, COPE is a splinter party of the ANC. Spearheaded by former Defence Minister Mosioua Lekota, COPE wants to offer an alternative to the ruling party, with a more 'progressive' economic and political agenda.

Democratic Alliance Based on liberal principles, the DA emerged in its present form in 2000, and represents the main South African opposition party.

South African Communist Party Founded in 1912, the SACP has never contested a parliamentary election since the return to the multi-party system in 1994. As a member of the tripartite alliance, it has always had an important influence on the government, and its powers are likely to grow following the victory of Jacob Zuma.

Extra-Parliamentary Faction Congress of the South African Trade Unions (COSATU) With a membership of more than 2mn, COSATU (also a member of the tripartite alliance) constitutes an important political force in South Africa.

Next Election Presidential 2014; Parliamentary 2014

Ongoing Disputes Mass immigration from adjacent countries, especially from Zimbabwe, has led to tense relationships between the South African government and its neighbours.

Key Relations/Treaties South Africa is part of the Southern African Development Community, and all other major international organi-sations, such as the UN and the WTO.

BMI Short-Term Political Risk Rating 67.3

BMI Structural Political Risk Rating 68.8

Source: BMI


POLITICAL OUTLOOK

need to keep his left-wing allies on board while still following

market-friendly policy will probably result in little in the way

of reform. Meanwhile, the unions will continue to leverage off

their strong bargaining position, calling for sporadic strikes that

result in higher labour costs for companies.

We expect that the mining sector will suffer particularly over

the medium term, since firms are already struggling with high

wage bills following strong pay rises secured by workers in the

aftermath of the deadly shooting of workers at the Marikana mine

in August 2012. Indeed, several companies have been forced

into shaft closures in recent months, especially in the platinum

sector. Many people we spoke with emphasised electricity as

an additional concern given that national power supplies are

running extremely low and they are vulnerable to industrial

unrest at power stations.

Intermittent outages, coupled with weakening consumer demand

due to higher living costs, and against a backdrop of generally

weak global demand, augur for sluggish economic growth. We

are forecasting real GDP growth of 2.8% in 2013 and 3.0-4.0%

over the subsequent years. This subdued trajectory and the vari-

ous political risk factors will very likely give foreign investors

cause to shy away from making significant direct investments

into South Africa. However, short-term portfolio inflows will

very likely remain decent given the yields on offer (the repo rate

is currently at 5.00%). Nevertheless, the current account deficit

looks set to remain sizeable (around 5-7% of GDP), causing the

rand to continue depreciating.

Best-Case Scenario: Radical ReformOur alternative scenarios are driven by potential changes on

the political scene. In a best-case scenario, to which we as-

cribe a 5% probability, radical reform takes place. There are

several possible causes of this: Zuma could step down from the

presidency; the ANC splinters; the new Agang party (led by

renowned anti-apartheid activist Mamphela Ramphele) joins

forces with the Democratic Alliance and manages to win vot-

ers from the ANC, enabling it to come to power; or there is an

economic crisis (balance of payments, most likely) that prompts

a wholesale rethink of policy.

Under this scenario, there would be better, more inclusive

national dialogue that would result in new impetus in the drive

towards alleviating poverty, creating jobs and reducing crime.

Somehow, the government would be able to foster a sense of

solidarity that would reduce the tendency toward public unrest.

Many people commented in our meetings that the power of the

unions is a huge impediment to business, and this best-case

scenario could also include lower levels of unionisation. Since

the education level of the workforce is another commonly cited

problem encountered by businesses, the best-case scenario

would also encompass a modernisation of the education system.

A reduction in government bureaucracy would also take place in

a best-case scenario, helping South African companies to focus

on opportunities in the wider Africa region and fully leverage

their position on the continent (favourable funding, deep ex-

pertise, superior infrastructure, etc). Furthermore, a reversal of

the 'brain drain' would likely occur, with skilled South Africans

returning to the country. Under this scenario, foreign investor

interest would quickly pick up, pushing up real GDP growth

and causing the rand to strengthen. The budget deficit would

likely widen, however, as the reform drive would necessitate

higher government spending.

Worst-Case Scenario: Severe Instability We assign a 10% probability to a worst-case scenario in which

there is severe political and economic instability. This could,

for example, be prompted by the formation of a very left-wing

political party, which SACP could choose to join up with.

Alternatively, COSATU could become more aggressive in its

demands, causing strikes to flare up significantly across multiple

sectors. Or the ongoing concerns regarding corruption and the

trustworthiness of the police could be exacerbated, destabilising

the ANC and provoking massive protests.

Problems With Doing Business In South AfricaMost Problematic Factors For Doing Business, % Of Responses

0.5

0.8

1.1

1.8

1.9

3.2

3.5

5.5

8.0

9.8

11.5

16.1

16.8

19.6

0 5 10 15 20 25

Tax rates

Tax regulations

Inflation

Poor public health

Foreign currency regulations

Policy instability

Access to financing

Poor work ethic in national labour

Inadequate supply of infrastructure

Crime and theft

Corruption

Restrictive labour regulations

Inadequately educated workforce

Inefficient government bureaucracy

Source: World Economic Forum Global Competitiveness Report 2011-2012. From a list of 1-15 factors, respondents were asked to select the five most problematic and rank them in order. The bars in the chart show the responses weighted according to their rankings.



Under this scenario, the economy could grind to a halt due to

industrial unrest, and the rand could go into free fall as foreign

investors rush to pull their money out of South Africa. We could

also see sudden, sharp interest rate hikes in a bid to rein in the

currency losses such a move would cripple businesses and

consumers, causing a plunge into recession. Meanwhile, the 'brain

drain' would get worse, with skilled workers forced to move

abroad for work. Last but not least, South Africa would lose its

standing in Africa, as other nations such as Kenya, Ghana and

Nigeria gain traction as alternative gateways to the continent.

Foreign Politics

BRICS Bank: Opportunities And Limitations

BMI VIEWProposals to create a new 'BRICS Bank' capable of rivalling the World

Bank and IMF has potential to be a game-changer in the global econ-

omy, at least over the long term. However, there are significant obsta-

cles to creating and managing such an entity in the near term.

The leaders of the BRICS (Brazil, Russia, India, China and

South Africa) nations met in Durban, South Africa, in March

for their annual summit, and proposals have emerged for the

creation of a new development bank to rival the World Bank,

and possibly even the IMF. If the new 'BRICS Bank' were to

come into existence, it could have far reaching consequences

for the global economy, as it would mean that there would be a

real alternative to the Western-dominated World Bank and IMF.

This alternative anchor would further reinforce the notion that

global wealth and power is shifting east and south.

The Rationale For A BRICS BankThere are three main factors driving the creation of a BRICS Bank:

Firstly, the world's leading financial institutions, the World

Bank and IMF, remain dominated by Western countries, ie, the

US and Europe. The so-called Bretton Woods institutions were

created in 1944, before the end of World War II, and many feel

that their leadership and decision-making powers clearly do not

reflect the contemporary global economy in which China, Brazil,

Russia, India and South Africa are now much bigger players.

Secondly, the BRICS nations are in a position to afford to be able

to create such a bank. They have a combined US$4.4trn worth

of foreign currency reserves, of which China has US$3.3trn.

During the global financial crisis of 2008-2009, Brazil actu-

ally contributed US$10bn to the IMF, rather than the other

way round. The BRICS countries are also arguably much more

financially experienced than ever before, with India, Brazil and

Russia having overcome severe financial crises in the 1990s and

under relatively prudent management. As emerging nations, the

BRICS may also feel that they are better placed than the US

and Europe to understand the challenges and needs of other

developing countries.

Thirdly, the BRICS states are becoming increasingly assertive

politically, with all five acting as major economic and geopoliti-

cal powers in their respective regions. Furthermore, the BRICS

countries reflect every continent in the world except North

America and perceive themselves collectively to represent the

'global south'.

What Would It Look Like?At the time of writing, it is unclear whether other developing

countries would be allowed to participate in a BRICS Bank, but

we assume that this would be the case, for otherwise the scope

of the new lender would be too limited. The proposals indicate

that the bank would mainly be focused on infrastructure develop-

ment, which is a key priority of Brazil and India in particular,

as well as other developing nations. China reportedly favours

initiating the bank with US$100bn in capital, whereas India is

said to favour US$50bn, which would dovetail with Russia's sug-

gestion that each founding member should contribute US$10bn.

In addition, there are discussions about creating a pool of for-

eign currency reserves for the purposes of rescuing countries in

financial crisis. This could potentially be modelled on the Chiang

Mai Initiative, which consists of China, Japan, South Korea and

10 Southeast Asian countries and has access to US$240bn of

emergency funds.

There are major question marks surrounding the conditions

under which a BRICS Bank would lend to other countries.

The World Bank and IMF typically lends through a range of

conditions, such as a commitment from the borrower to public

spending cuts, greater transparency, reduced corruption and free

market reforms. It is unclear if the BRICS Bank would impose

such stringent conditions. If the bank were to be more casual in

its terms of lending, then it could emerge as a more attractive

option than the World Bank and IMF, raising questions about

their raison d'tre. The decline of Western financial influence

would mean reduced political influence.


POLITICAL OUTLOOK

Potential Obstacles To Management Although the BRICS nations clearly want to see global financial

institutions that reflect their rising power, there are significant

obstacles to the creation and smooth running of a BRICS Bank.

Chief among these is the issue of which country gets the biggest

say in its decision-making.

Geopolitics: China, Russia and India are all geopolitical competitors. China and Russia are competing for influence in

Central Asia and the Far East, while India and China are rivals

in Southeast Asia, the Himalayan region, the Indian Ocean and

Africa. All three regard themselves as emerging or re-emerging

world powers and would thus want to exert a big a sway as pos-

sible in the bank. As the richest and most powerful member,

China would be its natural leader, but any attempt by Beijing

to dominate the lender would cause resentment in Moscow and

New Delhi. This could paralyse the new bank in a time of crisis.

Divergent Economic Interests: The BRICS group is economi-cally incoherent to say the least, and this will affect their priorities.

Brazil and Russia are already middle-income, highly urbanised

economies, whereas China and India are still low-income coun-

tries that have massive rural populations. This means they have

differing development challenges. Meanwhile, Brazil, Russia and

South Africa are big commodity exporters, whereas China and

India are major importers. In addition, the original four BRIC

countries are all competing against one another economically. For

example, China's demand for Brazilian commodities is leading

to fears in Brazil of a dependency relationship and concerns that

Brazilian manufactured goods will be replaced by competition

from China. In demographic terms, China and India stand out

with more than a billion people each, whereas Brazil and Russia

have less than 200mn people. Brazil, India and South Africa

are all 'young' countries, whereas China and Russia are ageing

rapidly. Finally, South Africa, due to its smaller population and

economy, doesn't rank as highly as the other BRIC states, which

are all in the top 10 world's biggest economies.

Lack Of Ideological Coherence: China and Russia are both quite state-directed economies, whereas India has moved away

from this model and Brazil has been more laissez-faire than

the other four BRICS for many years. Politically, Brazil and

India are both vibrant democracies, whereas Russia, China and

South Africa are de facto or de jure one-party states. This lack

of ideological coherence will also affect the BRICS Bank's

world view. Furthermore, even if the BRICS Bank were to

become fully operational, China and Russia could still pursue

unilateral assistance to other countries outside the framework

of the new lender.

US Can Undermine BRICS Bank: After the 1997-1998 Asian financial crisis, Japan attempted to establish an Asian Monetary

Fund but was thwarted from doing so by the US, which wanted

the IMF to remain the dominant global crisis-beating institution.

Now, as momentum for the BRICS Bank builds, Washington

can still exert influence on the BRICS states, because all or

most of them very likely still value their relationship with the

US above their ties with fellow BRICS states although this

may eventually change.

Global Problems Require Global SolutionsWith the world increasingly interconnected, as evidenced by

the severity of the 2008-2009 crisis, the smooth functioning

of the global economy will require coordination by the major

economies. This is evident from the way that the G-20 has come

to supersede the G-7 or G-8. Thus, if the BRICS Bank does

come into existence, we believe it would not work unassisted.

The World Bank and IMF have decades of experience behind

them and would still serve a purpose.

Long-Term Political Outlook

Political Trials And Tribulations Over The Coming Decade

BMI VIEWMany issues threaten South Africa's political stability over the long

term, not least the inequalities still stemming from the apartheid era

and the foreign policy challenge of Zimbabwe. Although our core sce-

nario envisages no major change to the political backdrop, we present

a number of alternative scenarios.

South Africa's political environment has several weak spots that

could disrupt the relative stability that has prevailed in recent

times. Although the country has one of the most advanced and

entrenched democracies in Sub-Saharan Africa, many issues will

need to be resolved over the coming years. The risks are clearly

illustrated by our long-term political risk ratings, where a low

score for the 'characteristics of society' component drags South

Africa's overall rating down to 68.8 out of 100.0. In particular,

threats stem from the high levels of poverty and inequality that

prevail in spite of the relative affluence of the nation as a whole.



Threats And Challenges To StabilitySouth Africa faces several challenges, some of which are long-

standing, and some of which have become more pressing in

recent times:

Legacy Of Apartheid: The policy of racial segregation enforced by the National Party between 1948 and 1994 has left a lasting

legacy in South Africa, with the minority ethnic whites (9.6% of

the population) retaining disproportionate influence over finan-

cial and business affairs, compared with ethnic black Africans

(79.0% of the population). Although the degree of 'skewing'

is difficult to estimate, the data certainly suggest that income

distribution is very uneven across the country. For example, the

United Nations Development Programme (UNDP) calculates

that South Africa has a Gini index of 57.8. This is reflected in

BMI's long-term political risk ratings, where we assign South Africa a score of just 2/10 for 'income distribution'.

The disparity in wealth risks stirring up racial tensions, especially

in areas where rich 'white' suburbs are juxtaposed with 'black'

slums. These risks are particularly acute given the legacy of

'townships' (areas on the outskirts of towns and cities that were

reserved for non-whites under apartheid). These townships still

tend to be inhabited by impoverished black people. Furthermore,

many townships remain underdeveloped, lacking basic amenities

such as clean water and electricity.

In a bid to redress the inequalities brought about by apartheid,

the South African government has introduced a Black Economic

Empowerment policy, aimed at giving previously disadvantaged

groups ('black people', as defined under the Black Economic

Empowerment Act of 2003) economic opportunities. However,

it has arguably exacerbated racial tensions through advantaging

the previously disadvantaged and disadvantaging the previously

advantaged. Furthermore, it has created a 'brain drain' effect,

whereby white professionals go abroad to seek opportunities in

countries where they may be hired more easily.

Poverty And Joblessness: Poverty is widespread in South Africa, despite the nation being by far the most developed in

Sub-Saharan Africa. The UNDP estimates that 42.9% of the

population lives on less than US$2 per day, and this is reflected

in the 5/10 score we accord to South Africa in the 'poverty'

element of our long-term political risk ratings. A significant

proportion of this poverty stems from the high degree of un-

employment: joblessness is high, at around 25% of the labour

force. This poverty and high unemployment presents heightened

risk of social unrest. In turn, this risk is exacerbated by the high

degree of unionisation prevalent in South Africa, since unions

can provide a forum for galvanising discontent. It is estimated

that the Federation of Unions of South Africa currently repre-

sents more than 500,000 members. High levels of poverty and

unemployment also tend to generate crime, and South Africa's

notoriously high crime levels attest to this relationship. Around

50 people are killed each day, and violent robberies are com-

monplace in some areas including Johannesburg.

Differing Levels Of Government: The post-apartheid (post-1994) years have seen significant changes in administrative

structures, and there is some contention surrounding the nature

of the relationship between central and provincial governments.

There are nine provinces (which in 1997 replaced the previous

system of four provinces) plus 10 black 'homelands', four of

which were considered independent by the South African gov-

ernment. Although the current system is a federal one, there is

considerable debate surrounding the various power structures,

especially among groups advocating a greater degree of autonomy

from the central government.

Zimbabwe: Political unrest in neighbouring Zimbabwe has presented a considerable foreign policy challenge for South

Africa. Former South African president Thabo Mbeki was re-

peatedly accused of turning a blind eye to the alleged misdeeds

of Robert Mugabe and his cronies prior to the formation of the

government of national unity, causing discontent among the

South African populace.

On a separate note, prolonged instability has generated an

influx of refugees from Zimbabwe. This is putting pressure

on already strained resources such as housing, posing a risk of

social tensions. The explosion of xenophobic violence against

Mozambican immigrants in the Guateng province in May 2008

certainly illustrates this risk.

HIV/AIDS: South Africa suffers a high prevalence of HIV/AIDS; a nationwide study conducted by the South African

Department of Health in 2010 found that 30.2% of pregnant

women (aged 15-49) were living with HIV in 2010. This presents

social risks, since a high HIV/AIDS rate results in a high level

of orphaned children. Furthermore, many South Africans feel

that the government has not done enough to counter the rising

threat of the disease. Mbeki famously refused to accept medi-

cal evidence of the virus during his tenure, hampering efforts

to introduce treatments.


POLITICAL OUTLOOK

Scenarios For Political ChangeSo far, President Jacob Zuma has sustained the difficult balanc-

ing act of keeping left-wing allies on board while maintaining

market-friendly policies. However, we see two major develop-

ments that could unfold over the coming years:

Fragmentation Of Left-Wing Alliance: The ruling African National Congress (ANC) enjoys support from the powerful,

left-wing Congress of South African Trade Unions and the South

African Communist Party. However, this support may wane over

time given the economic hardship that many South Africans

continue to suffer in the aftermath of the 2009 recession. Im-

portantly, some people feel that the government is insufficiently

sympathetic with its policies. For example, the South African

Reserve Bank hikes interest rates when inflation looms in spite

of the difficulties this poses for borrowers, especially those with

mortgages. Furthermore, the South African rand is allowed to

strengthen in line with market forces, even though this pushes

exporters to the brink of uncompetitiveness. The loss of support

from any of the ANC's major allies would be a serious blow

for the party, and would be likely to lead to a diminution of its

power in parliament; at present, the ANC holds 264 out of 400

parliamentary seats.

Opposition Rises: Related to the above point, the opposition could emerge as a more powerful force over the coming years.

At the April 2009 elections, the Democratic Alliance (DA)

won 16.7% of all votes. This may seem fairly marginal, but

anecdotally, the party has gained more support since then, as

voters have become increasingly disenchanted with the status

quo. As the party has more time to strengthen its support base,

the potential for the DA to pose a more serious challenge to the

ANC in the next elections is not negligible.


SWOT Analysis

Strengths The government has pursued a prudent fiscal policy since 1994, al-

lowing it to increase public expenditure during economic downturns.

The state has rich mineral resources and is the continent's financial

hub.

Despite a decrease in profitability, South Africa's banking sector has

remained broadly stable amid the global recession and subsequent

recovery.

Weaknesses Currency volatility over the years has hampered industry planning.

Lack of investment in education under apartheid has left a legacy of

high structural unemployment and poverty, which will take a genera-

tion to meaningfully reduce.

Opportunities Increasing the trend rate of growth is essential to long-term plans to

alleviate poverty. The government is planning a raft of microeconomic

reforms, including improved skills training, to address this.

Threats The government's Black Economic Empowerment initiative is likely

to increase equality in the participation and ownership of financial

resources, although over the medium term the costs of compliance

will be high.

High levels of HIV/AIDS will reduce long-term growth.

Following the 2009 elections, the government is taking a more

populist stance, significantly increasing fiscal spending and poten-

tially nationalising key industries (although the latter is not our core

scenario).

BMI Economic Risk RatingsGiven South Africa's close links with the global economy, the country

remains heavily exposed to the external environment. South Africa's

current account deficit constitutes an ongoing liability, as a renewed

decline in capital flows could make the financing of the shortfall a chal-

lenge over the medium term. That said, the threat of a major economic

crisis will remain limited.

Chapter 2: Economic Outlook

S-T Economy Rank TrendBotswana 71.9 1 =Gabon 63.3 2 =Nigeria 63.1 3 =Mauritius 60.0 4 +Angola 58.3 5 =South Africa 57.9 6 =Congo-Brazzaville 53.3 7 =Zambia 50.8 8 =Cte d`Ivoire 48.8 9 =Rwanda 48.3 10 =Uganda 47.5 11 +Cameroon 47.3 12 =Niger 47.3 12 =Tanzania 46.0 14 =Kenya 44.8 15 +Senegal 44.4 15 =Togo 44.2 17 =Burkina Faso 43.1 18 =Benin 42.3 19 =Equatorial Guinea 41.5 20 =Sierra Leone 40.2 21 =Ethiopia 38.8 23 =Mali 38.8 23 =Ghana 37.9 25 =Mozambique 36.9 22 -Namibia 36.7 26 =Chad 36.5 27 =Guinea 34.6 28 =Guinea-Bissau 32.9 29 =Zimbabwe 30.6 30 =Congo, Dem. Rep. 29.8 31 =Sudan 20.2 32 =Regional ave 45.7/Global ave 55.0/Emerging markets ave 53.3

L-T Economy Rank TrendSouth Africa 62.9 1 =Mauritius 60.5 2 =Botswana 57.5 3 =Gabon 57.1 4 =Nigeria 56.7 5 =Angola 52.6 6 =Tanzania 50.3 7 =Uganda 47.2 8 =Rwanda 46.0 9 =Zambia 46.5 10 =Ghana 44.6 11 =Kenya 44.0 12 =Namibia 43.6 13 =Cte d`Ivoire 41.9 14 =Burkina Faso 41.7 15 =Cameroon 41.7 15 =Ethiopia 40.5 17 =Senegal 40.3 18 =Chad 39.4 19 =Equatorial Guinea 39.4 19 =Niger 39.3 21 =Sierra Leone 39.0 22 =Togo 38.4 23 =Benin 38.1 24 =Mozambique 37.8 25 =Mali 37.3 26 =Congo-Brazzaville 36.3 27 =Congo, Dem. Rep. 28.5 28 =Guinea 28.4 29 =Guinea-Bissau 23.5 30 =Zimbabwe 22.3 31 =Sudan 18.9 32 =Regional ave 43.5/Global ave 53.7/Emerging markets ave 51.3



ing continued to play an important role in propping up growth,

albeit increasing by a lacklustre 2.4% q-o-q SAAR in Q412.

Gross fixed capital formation (GFCF) was also a key pillar of

support in the quarter, growing by 4.3% but, as outlined below,

this trend is unlikely to continue.

Given BMI's prediction of stagnation in the eurozone and a slowdown in China in the second half of 2013, South Africa looks

set to continue to suffer from a weak global growth environ-

ment and potentially high investor risk aversion amid frequent

industrial unrest. Taking into account BMI's view for real GDP growth in the US of just 2.1% in 2013, a slight contraction of

0.1% in the eurozone and a marked cooling of gross fixed capital

formation in China, we forecast that the South African economy

will post real GDP growth of just 2.8%.

We maintain our core view that economic growth will be driven

by the demand side (ie, wholesale and retail trade, financial and

personal services) while the supply side (especially mining) will

continue to remain weak. Breaking GDP down by expenditure,

we see private consumption adding 2.1 percentage points (pp) to

headline growth in 2013; government consumption contributing

0.7pp; exports adding 0.7pp; GFCF adding 0.4pp; and imports

subtracting 1.2pp.

Expenditure BreakdownPrivate Consumption Outlook: We remain fairly positive on private consumption, forecasting real growth of 3.2% in 2013,

following growth of 3.5% in 2012. In our view, two factors

bode well for consumer spending: high nominal wage growth

and the low interest rate environment, which is likely to keep a

lid on debt servicing costs. Regarding the latter point, we expect

SARB to keep the repo rate steady at 5.00% over the coming 12

months. Although the weak growth environment may prompt

calls for a rate cut, inflation is heading higher, and risks are firmly

to the upside given firm maize prices and the relative weakness

Economic Activity

Tepid Growth Ahead

BMI VIEWWe forecast tepid economic growth for South Africa over the medium

term, forecasting that real GDP will expand by 2.8% in 2013 and 3.3%

in 2014. Although private consumption is expected to remain relatively

robust, private investment is likely to suffer due to elevated political

risk.

The latest data from the South African Reserve Bank (SARB)

and Statistics South Africa reinforce our view of sluggish growth

stemming from the adverse external environment and elevated

domestic political risk. In Q412, the economy as a whole grew by

2.1% quarter-on-quarter on a seasonally adjusted and annualised

basis (q-o-q SAAR), bringing full-year 2012 growth to 2.5% (for

comparison, growth stood at 3.5% in 2011). The breakdown of

GDP by expenditure for Q412 revealed that household spend-

TABLE: QUARTERLY REAL GDPHousehold

Expenditure Government Expenditure

Gross Fixed Capital Formation

Exports Imports Total GDP

Q111 6.3 9.3 5.8 7.3 7.0 4.8

Q211 3.1 -0.5 5.2 6.1 6.7 1.9

Q311 3.2 4.8 6.8 8.0 18.5 1.9

Q411 4.4 7.8 7.3 4.4 11.0 3.3

Q112 4.0 1.9 4.6 -3.0 4.8 2.5

Q212 3.2 3.7 5.4 -6.1 -0.5 3.4

Q312 2.7 8.3 5.6 1.6 12.0 1.2

Q412 2.4 -0.7 4.3 -4.3 -12.4 2.1

Note: % chg q-o-q, SAAR. Source: South African Reserve Bank, BMI

Edging Along, SlowlyReal GDP Growth, % & Components' Contribution, pp

-3

-2

-1

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013f 2014f 2015f

Net exports InvestmentGovernment consumption Private consumptionTotal GDP

f = BMI forecast. Source: BMI, South African Reserve Bank


ECONOMIC OUTLOOK

of the rand. The latest consumer price inflation prints are 5.9%

year-on-year (y-o-y) in February and 5.4% in January. Amid this

stagflationary scenario, the SARB Monetary Policy Committee

will likely choose to maintain the status quo.

Certainly, the latest data on retail sales and credit extended to

private households suggest that the consumer remains in decent

shape in spite of indebtedness. Retail sales grew by 1.9% y-o-y

in January, which is not stellar but nevertheless still positive.

Meanwhile, credit extended to private households grew by a

robust 9.9% y-o-y. That said, we expect a generally weaker

consumer sector in 2013 compared with 2012 given that rising

inflation will likely eat into people's purchasing power.

Government Spending Outlook: As regards government spending, we hold a relatively upbeat view, forecasting real

growth of 3.5% in 2013. The treasury is proactively nurturing

the economic recovery, withdrawing fiscal stimulus gradually

and tolerating a fiscal deficit over the medium term. The budget

presented by the treasury in February illustrates this: the finance

ministry intends to run fiscal deficits equaling 4.6% of GDP

in fiscal year 2013/14 and 3.9% of GDP in 2014/15, in line

with its 'gradual fiscal consolidation' policy. The public sector

is proving a key driver of job creation in the current climate,

helping to boost consumer spending and keep unemployment

under control although joblessness remains high, recorded at

24.9% in Q412.

Investment Outlook: The outlook for investment is less posi-tive: we are forecasting real GFCF growth of just 2.0% in 2013

following 5.7% in 2012. Our view is predicated on the likelihood

of global risk appetite remaining weak amid a 'muddle-through'

in the eurozone and a slowdown in China in the second half

of the year. South Africa's manufacturing sector is particularly

vulnerable in this regard given its reliance on external demand;

although the ongoing weakness of the rand will likely provide

a timely boost to competitiveness. We have also factored in

tainted foreign investor perceptions following the Marikana

massacre and subsequent bouts of industrial unrest. Certainly,

the credit default swap market suggests that general investor

sentiment towards South Africa has deteriorated in recent months.

Lacking Confidence Business Confidence Index, 2010 = 100

90

95

100

105

110

115

120

125

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13

Source: South African Chamber of Commerce and Industry; BMI

Consumer Sector Holding UpRetail Sales & Credit To Private Households, % y-o-y 3mma

-10

-5

0

5

10

15

20

25

30

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2

Retail Sales, % y-o-y, 3mmaCredit Extended To Private Households, % y-o-y, 3mma

Source: BMI, Statistics South Africa, South African Reserve Bank

TABLE: ECONOMIC ACTIVITY2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Nominal GDP, ZARbn [1] 2,256.5 2,406.4 2,659.4 2,917.5 3,155.2 3,409.1 3,727.0 4,074.0 4,457.5 4,877.4

Nominal GDP, US$bn [1] 272.8 285.8 363.3 401.7 384.4 379.3 390.4 422.5 457.7 495.8

Real GDP growth, % change y-o-y [1] 3.6 -1.5 3.1 3.5 2.5 2.8 3.3 3.5 3.6 3.6

GDP per capita, US$ [1] 5,530 5,745 7,246 7,961 7,577 7,441 7,623 8,215 8,860 9,557

Population, mn [2] 49.3 49.8 50.1 50.5 50.7 51.0 51.2 51.4 51.7 51.9

Unemployment, % of labour force, eop [3] 21.9 24.3 24.0 23.9 24.9 24.0 23.3 22.6 21.9 21.2

Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Reserve Bank/BMI calculations; 2 World Bank/UN/BMI; 3 Statistics South Africa.



largest iron ore producer.

Turning to imports of goods and services, we are forecasting real

growth of 4.0% in 2013, which would be a notable slowdown

from the 6.3% growth seen in 2012. In our view, the weakness

of the rand will keep import costs elevated, weighing on demand

somewhat. Furthermore, the aforementioned slowdown in the

growth of investment spending will also very likely keep a lid

on import growth.

Monetary Policy

Policy Stuck In A Stagflationary Rut

BMI VIEWWe hold to our view that the South African Reserve Bank will keep the

repo rate on hold at 5.00% over the whole of 2013. Although South Afri-

ca faces a weak growth outlook and risks are to the downside, inflation

has been ticking upward and is likely to go higher still. This stagflation-

ary scenario will likely force South African Reserve Bank's Monetary

Policy Committee to maintain the status quo.

In line with the expectations of both BMI and the market, the South African Reserve Bank's (SARB) Monetary Policy Com-

mittee (MPC) opted to keep the benchmark repo rate on hold at

5.00% on March 20. The MPC continues to face a stagflationary

Furthermore, the latest data on business confidence from the

South African Chamber of Commerce and Industry indicate that

domestic investment will likely cool. The business confidence

index stood at 93.0 in February (based to 2010 = 100) and has

remained depressed relative to pre-global financial crisis levels.

Net Exports Outlook: We see the overall impact of net exports being negative. Exports will likely see weak growth at best, but

we also expect imports to rise, having a deleterious impact on

headline real GDP growth.

Looking first at exports of goods and services, we are forecasting

growth of 3.0% in 2013. Focusing on one of South Africa's key

exports, BMI's Mining analysts are forecasting annual growth in gold output to average 1.4% over the five-year forecast period

in spite of the potential for industrial unrest, rising to 6.0mn

ounces by 2017 from 5.7mn ounces in 2013. For coal which

accounts for the majority of the mining sector's value our

analysts forecast a swifter increase in output, with production

reaching 284mn tonnes by 2017, marking average annual growth

of 2.4%. This is particularly important as it comes at a time of

tight global coal supplies. Iron ore is also notable; the sector is

set for significant expansion over the long term, driven primarily

by Kumba Iron Ore (majority-owned by Anglo American). For this metal, we expect output to reach 68mn tonnes in 2017,

from current levels of around 59mn tonnes. However, given

aggressive expansion plans in the west of the continent, it is pos-

sible that South Africa could be usurped by Guinea as Africa's

TABLE: MONETARY POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Consumer price index, % y-o-y, eop [4] 6.3 3.5 6.1 5.7 6.2 5.8 5.7 5.7 5.7

Consumer price index, % y-o-y, ave [4] 7.2 4.3 5.0 5.7 6.1 6.0 5.8 5.7 5.7

Producer prices, % y-o-y, eop [4] 0.7 5.8 9.8 6.1 6.0 6.2 6.1 6.1 6.1

Producer prices, % y-o-y, ave [4] 0.2 6.0 8.3 7.0 6.1 6.1 6.2 6.1 6.1

M1, ZARbn [5] 806.3 862.8 946.9 1,035.0 1,123.0 1,218.5 1,322.0 1,434.4 1,556.3

M1, % change y-o-y [5] 7.0 7.0 9.7 9.3 8.5 8.5 8.5 8.5 8.5

M2, ZARbn [5] 1,588.3 1,677.3 1,797.5 1,867.8 2,026.6 2,198.8 2,385.7 2,588.5 2,808.5

M2, % change y-o-y [5] 1.7 5.6 7.2 3.9 8.5 8.5 8.5 8.5 8.5

Central Bank policy rate, % eop [1,5] 7.00 5.50 5.50 5.00 5.00 5.00 5.50 5.50 5.50

Lending rate, %, eop [2,5] 10.5 9.0 9.0 8.5 8.5 8.5 9.0 9.0 9.0

Lending rate, %, ave [2,5] 11.7 9.8 9.0 8.8 8.5 8.5 8.8 9.0 9.0

Real lending rate, %, eop [3,6] 4.2 5.5 2.9 2.8 2.3 2.7 3.3 3.3 3.3

Real lending rate, %, ave [3,6] 4.6 5.5 4.0 3.1 2.4 2.5 3.0 3.3 3.3

3-month money market rate, % eop [7] 7.3 5.6 5.8 5.8 5.8 5.8 5.8 5.8 5.8

Real 3-month money market rate, %, eop [3,7] 1.0 2.1 -0.3 0.1 -0.4 0.0 0.1 0.1 0.1

3-month money market rate, %, ave [7] 8.3 6.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6

Real 3-month money market rate, %, ave [3,7] 1.1 2.3 0.6 -0.1 -0.5 -0.4 -0.2 -0.1 -0.1

Notes: e BMI estimates. f BMI forecasts. 1 Repo rate; 2 Prime rate; 3 Real rate strips out the effects of inflation. Sources: 4 Statistics South Africa; 5 South African Reserve Bank; 6 South African Reserve Bank/BMI; 7 BMI.


ECONOMIC OUTLOOK

scenario in which domestic economic activity is flagging but infla-

tion is rising, meaning that the central bank's only viable option

is to keep rates static. SARB Governor Gill Marcus commented

that 'the MPC continues to assess the monetary policy stance to

be appropriately accommodative given the persistence of the

negative output gap. At the same time, further accommodation

remains constrained by the upside risks to the inflation outlook'.

As regards the outlook for economic growth, the SARB's view

chimes with our own tepid outlook. The central bank is forecast-

ing real GDP growth of just 2.7%, slightly below BMI's (and Bloomberg consensus) projection of 2.8%. The factors underpin-

ning this are both external and internal, with the eurozone still

'muddling through' its crisis, and the domestic economy beset

by industrial unrest and difficulties in the mining sector. Marcus

emphasised that the risks to South Africa's growth trajectory

are to the downside, commenting that 'the unresolved labour

disputes in the mining sector pose a significant risk to eco-

nomic growth through their negative impact on export revenues,

employment growth and investor perceptions of South Africa'.

Although the growth outlook is concerning, the MPC is being

forced to hold off from cutting rates given that inflation is ticking

upward. Headline consumer price inflation (CPI) was recorded

at 5.9% y-o-y in February 2013, up from 5.4% in January, while

core inflation (which excludes food, non-alcoholic beverages,

petrol and energy) rose to 5.5% from 5.0%. Price growth looks

set to continue its upward trajectory owing to the weakness of

the rand and high wage settlements in certain industries. The

rand is particularly concerning given that it will very likely

weaken further due to the wide current account deficit and

adverse foreign investor sentiment. Indeed, we expect infla-

tion to pierce the upper band of the SARB's targeted 3.0-6.0%

range over the coming months. For 2013 as a whole, the SARB

forecasts that inflation will average 5.9%, slightly below our

own projection of 6.1%.

Taking all the above into account, we expect that the 'stagfla-

tion scenario' will continue for several months at least, and we

maintain our expectation for the repo rate to be kept static at

5.00% over the whole of 2013.

Risks To OutlookGiven the ongoing weakness of the rand, there is a risk that the

SARB may hike the repo rate in a bid to stabilise the currency.

However, in our view this would only happen in an 'emergency'

scenario in which the rand goes into free fall. The SARB is

generally very disciplined at sticking to its dual mandate to

foster sustainable growth and keep inflation under control, and

intervenes only to smooth out large fluctuations in the volatil-

ity of the rand. Furthermore, the MPC is currently stressing

that the weak exchange rate can have positive effects as well.

Marcus commented on March 20 that the current level of the

rand 'provides an opportunity for the manufacturing sector in

particular to become more competitive despite the challenging

export environment'.

Inflation Ticking UpInflation, % y-o-y

0

2

4

6

8

10

12

Dec

-09

Feb-

10Ap

r-10

Jun-

10Au

g-10

Oct

-10

Dec

-10

Feb-

11Ap

r-11

Jun-

11Au

g-11

Oct

-11

Dec

-11

Feb-

12Ap

r-12

Jun-

12Au

g-12

Oct

-12

Dec

-12

Feb-

13

Headline inflation Food inflationTransport inflation

Source: BMI, Statistics South Africa

Rates Still On HoldInflation & Repo Rate, %

2

4

6

8

10

12

14

16

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

CPI, % y-o-yRepo Rate, %

Source: BMI, Statistics South Africa, South African Reserve Bank



6.2% in 2014, following the 6.3% recorded in 2012. Moreover,

we highlight the risk that inflows to the capital and financial ac-

count will wane due to subdued investor appetite during potential

flare-ups in political risk, and therefore be insufficient to cover

the current account deficit. However, although this may result

in foreign reserves being drawn down, we do not believe the

balance of payments will become a critical weakness in South

Africa's macroeconomic profile.

Focusing on the outlook for exports, we are forecasting a rebound

in nominal growth to 7.7% in 2013 (in rand terms), following

an increase of just 2.8% in 2012, when gold, platinum and

coal production were severely hampered by industrial unrest.

Although we expect strikes and protests to continue taking

place sporadically, our core view is that industrial unrest will

not occur on the same scale as that seen in the aftermath of the

August 2012 deadly shooting of miners in Marikana. Further-

more, the external environment is likely to be fairly supportive:

we forecast that the US and China (two of South Africa's key

export markets) will see real GDP growth of 2.1% and 7.5%

respectively in 2013, helping to bolster demand. BMI's Mining analysts are forecasting that gold output will rise by 1.1% in

2013 to 5.7mn ounces (moz) and coal production will rise by

2.2% to 259mn tonnes (mnt), while platinum output continues

Balance Of Payments

Current Account To Remain Structural Weakness

BMI VIEWWe forecast that South Africa's current account deficit will remain wide

over the medium term, predicting that it will be 6.5% of GDP in 2013

and 6.2% in 2014. Inflows to the capital and financial account have

traditionally propped up the balance of payments, but with investor risk

appetite on shaky ground, this trend can no longer be assured.

The latest data reinforce our view that South Africa's current

account deficit will remain wide, posing a notable but not criti-

cal risk to macroeconomic stability. In Q412, the deficit stood

at 6.5% of GDP, marginally down from the 6.8% recorded in

Q312 but substantially above the 2.30-4.0% range recorded over

2009-2011. The widening of the shortfall during 2012 was due

to weak export growth, robust import demand and a widening

of the deficits on the income and current transfers accounts.

Over the medium term, we see a continuation of these trends,

forecasting a current account deficit of 6.5% of GDP in 2013 and

TABLE: CURRENT ACCOUNT2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Goods imports, US$bn [2] 65.8 81.7 100.5 102.7 102.2 104.4 110.6 118.3 128.8

Goods imports, % of GDP [2] 23.0 22.5 25.0 26.7 26.9 26.7 26.2 25.8 26.0

Goods exports, US$bn [2] 66.1 85.4 102.8 93.5 92.0 94.7 102.1 110.2 119.1

Goods exports, % of GDP [2] 23.1 23.5 25.6 24.3 24.2 24.3 24.2 24.1 24.0

Goods exports, % of imports [2] 100.4 104.5 102.2 91.0 90.0 90.7 92.3 93.2 92.4

Balance of trade in goods, US$bn [2] 0.3 3.7 2.3 -9.2 -10.3 -9.7 -8.5 -8.0 -9.7

Balance of trade in goods, % of GDP [2] 0.1 1.0 0.6 -2.4 -2.7 -2.5 -2.0 -1.8 -2.0

Services imports, US$bn [2] 14.7 18.4 19.6 17.7 16.9 16.7 17.4 18.1 18.8

Services imports, % of GDP [2] 5.2 5.1 4.9 4.6 4.5 4.3 4.1 4.0 3.8

Services exports, US$bn [2] 12.0 14.0 14.8 15.1 14.5 14.5 15.2 16.0 16.8

Services exports, % of GDP [2] 4.2 3.8 3.7 3.9 3.8 3.7 3.6 3.5 3.4

Goods and services exports, US$bn [2] 78.1 99.4 117.6 108.6 106.5 109.2 117.3 126.2 135.8

Goods and services exports, % of GDP [2] 27.3 27.4 29.3 28.3 28.1 28.0 27.8 27.6 27.4

Balance of trade in goods and services, US$bn [2] -2.5 -0.7 -2.5 -11.7 -12.7 -11.9 -10.7 -10.2 -11.8

Balance of trade in goods and services, % of GDP [2] -0.9 -0.2 -0.6 -3.0 -3.3 -3.1 -2.5 -2.2 -2.4

Income account balance, US$bn [2] -6.4 -7.2 -9.2 -8.5 -8.5 -8.6 -9.3 -10.0 -10.7

Income account balance, % of GDP [2] -2.2 -2.0 -2.3 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2

Net transfers, US$bn [2] -22.4 -16.8 -14.2 -31.4 -32.9 -34.6 -36.3 -38.1 -40.0

Net transfers, % of GDP [2] -7.8 -4.6 -3.5 -8.2 -8.7 -8.9 -8.6 -8.3 -8.1

Current account balance, US$bn [2] -11.5 -10.2 -13.6 -24.1 -24.8 -24.2 -23.8 -24.0 -26.6

Current account balance, % of GDP [2] -4.0 -2.8 -3.4 -6.3 -6.5 -6.2 -5.6 -5.3 -5.4

Openness to international trade, % [1,2] 46.2 46.0 50.6 51.0 51.2 51.0 50.3 49.9 50.0

Notes: f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 South African Reserve Bank/BMI calculations.


ECONOMIC OUTLOOK

to decline, falling by 1.2% to 4.5moz.

Turning to imports, these have been growing strongly since

2010, and demand remains high in spite of the relative weakness

of the rand. This ties in with the data on GDP by expenditure,

which show that consumer demand remains relatively buoyant.

Notwithstanding an expected slowdown in investment growth

following the Marikana massacre, we are forecasting nominal

growth of 9.0% (in rand terms) for imports in 2013 and 8.5%

in 2014, following a 15.4% expansion in 2012.

We see total import growth coming in lower in 2013 than 2012

because the anticipated continued depreciation of the South

African rand will keep the price of imported goods relatively

high in local currency terms, putting the brakes on growth.

Given the size of the current account deficits we are forecasting,

inflows to the capital and financial account will be crucial for

propping up South Africa's balance of payments. The latest data

are somewhat concerning in this regard: in Q412, net foreign

direct investment inflows were negative and net portfolio in-

flows were only just positive. Furthermore, the latest data from

the Johannesburg Stock Exchange regarding foreign purchases

of equities and bonds indicate that investor demand for South

African equities is waning.

Given the uncertainties in the political and economic environ-

ment, our core scenario is that inflows to the capital and financial

Somewhat Precarious FinancingCapital & Financial Account By Component, ZARbn

-150

-100

-50

0

50

100

150

Q10

8Q

208

Q30

8Q

408

Q10

9Q

209

Q30

9Q

409

Q11

0Q

210

Q31

0Q

410

Q11

1Q

211

Q31

1Q

411

Q11

2Q

212

Q31

2Q

412

Net FDINet portfolio flowsNet other investmentBalance on capital & financial accountCurrent account deficit

Source: BMI, South African Reserve Bank

Elevated Import Demand Imports, ZARbn

0

50

100

150

200

250

Q10

4

Q30

4

Q10

5

Q30

5

Q10

6

Q30

6

Q10

7

Q30

7

Q10

8

Q30

8

Q10

9

Q30

9

Q11

0

Q31

0

Q11

1

Q31

1

Q11

2

Q31

2

Source: BMI, South African Reserve Bank

Broadly Supportive External EnvironmentExports By Destination, ZARbn

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012

China United States JapanGermany India

Source: BMI, South African Department for Trade and Industry

Deep In DeficitCurrent Account By Component, ZARbn

-60

-50

-40

-30

-20

-10

0

10

20

30

Q30

7Q

407

Q10

8Q

208

Q30

8Q

408

Q10

9Q

209

Q30

9Q

409

Q11

0Q

210

Q31

0Q

410

Q11

1Q

211

Q31

1Q

411

Q11

2Q

212

Q31

2Q

412

Trade balanceServices balanceIncome balanceTransfers balanceOverall current account balance

Source: South African Reserve Bank



account will be subdued over the coming quarters, resulting in

a weakening of South Africa's balance of payments position.

Fiscal Policy

Budget Deficit To Narrow Gradually

BMI VIEWSouth Africa's new budget signals that the treasury is likely to keep the

deficit under control despite various economic and political challenges.

We forecast a budget shortfall of 5.0% of GDP in fiscal year 2013/14,

falling to 3.9% of GDP by FY15/16.

The budget presented by Finance Minister Pravin Gordhan on

February 27 signalled that the South African treasury intends to

keep the budget deficit in check over the coming years in spite

of pressure to increase social spending. The budget shortfall for

the fiscal year running from April 2012-March 2013 (FY12/13)

came in at 5.3% of GDP owing to weak mining sector revenues

and slow economic growth, among other things. Although these

pressures will remain in place, the treasury intends to reduce the

budget deficit over the medium term, and is targeting a short-

fall of 4.6% of GDP in FY13/14, 3.9% in FY14/15 and 3.1%

in FY15/16. Furthermore, there are still plans to stabilise the

net public debt-to-GDP ratio by FY15/16. Our own forecasts

for the consolidated budget deficit are close to the treasury's,

although more cautious, at 5.0% of GDP in FY13/14, 4.5% in

FY15/16 and 3.9% in FY15/16. We believe that the government

will find it difficult to meet its targets on social spending, given

political pressure.

The continued commitment to fiscal prudence is encouraging,

and it shows that fears of a more lax policy stance amid rising

political pressure are overblown. Notably, the treasury has raised

its spending targets only marginally, and contrary to speculation

prior to the budget, there have been no increases in taxation on

the mining sector. This be

Documents

South Africa Business Forecast Report Q3 2013