Macro -economic outlook 2018 –2023: Global growth is ...

1 Macro -economic outlook 2018 2023: Global growth is expected to strengthen somewhat further; for SA's growth free market policies are key First quarter 2018 5th January 2018 . Figure 1: Summary, % real growth rates 2017 2018 2019 2020 2021 2022 2023. GDP (real, %) HCE (real, %) GCE (real, %) GFCF (real, %) GDE (real, %) Export (goods & non-factor services) - (real, %) Imports (goods & non-factor services) - (real, %) Balance: Current Account - (% of GDP) Source: SARB, Investec South Africa has seen a substantial improvement in the exchange rate, bond yields and JSE on the outcome of 2017's ANC elective conference in late December, with the rand strengthening from , and to , and , the yield on the R186 improving from to , and the JSE gaining almost 3000 points. Financial markets favour Cyril Ramaphosa as president of the ANC (and SA), as it is perceived that he will deliver good governance, eradicate corruption, and follow economic policies that support economic growth and lean towards the free market approach.

2 The rand, and SA's financial market indicators generally, have strengthened into the up case trajectory (see Rand note: the domestic currency has strengthened on relief SA was not downgraded by Moody's, growing market expectations of a Cyril Ramaphosa ANC election win and the fiscal consolidation newly mooted by National Treasury, 5th December 2017, see website address below). Jacob Zuma remains President of the country, and as such determines who enacts policies and policy proposals, which in turn have an impact both on economic growth and sentiment levels. The economy (as opposed to the financial market indicators) is not expected to run in the up case this year or the first half of next year as little is anticipated to change in that period to meaningfully spur economic growth and sentiment. Business confidence has been depressed for a lengthy period (since Figure 2: PPP value of the rand vs USD, GBP & JSE vs SA bond yield 25 Purchasing Power Parity of the rand vs 80000 JSE All Share Index vs Govt Bond Yields 25.)

3 R/GBP GBP and USD Index %. 20 20. 60000. 15 15. 40000. 10 10. 5 20000. 5. 0 0 0. 1995 2001 2007 2013 2019 1995 2002 2010 2017. GBPZAR PPP for GBPZAR. USDZAR PPP for USDZAR JSE All Share Index Govt Bond Yield Source: IRESS, Investec 1. Annabel Bishop Investec Bank Limited Tel (2711) 286 7188 email: .. Macro -economic outlook 2018 2023: Global growth is expected to strengthen somewhat further; for SA's growth free market policies are key First quarter 2018 5th January 2018 . Figure 3: Gross Fixed Capital Formation 2017 2018 2019 2020 2021 2022 2023. GFCF, total (real, %) GFCF as % of GDP Private sector (real, %) Government (real, %) Non-residential GFCF (real, %) Residential buildings (real, %) Source: Investec, SARB. 2009 it has averaged 41%, well below the neutral 50 level) as per the BER, and in the last quarter of 2017. it recorded 34%, meaning that 66% of businesses were dissatisfied with prevailing conditions at the time. The BER business confidence reading was taken before the outcome of the recent ANC elective conference, and could improve in the first quarter of 2018 on Cyril Ramaphosa's appointment as President of the ANC.

4 However, he is not the President of the country, and as such the expected improvement in the confidence indicator for 2018 may be moderate. A more substantial improvement in business confidence is likely to occur with Ramaphosa as President of SA, as opposed to only of the ANC. A recovery in economic growth towards y/y is expected on Ramaphosa attaining presidency of SA (as indicated by the President of the ANC himself), but this will not immediately mitigate the burden placed on government finances. economic growth needs to rapidly rise to y/y. Ramaphosa proposes a New Deal' for SA in order to reach y/y, or a New Deal for Jobs, growth and Transformation that will turn the economy around and build a more equal society. This New Deal will and must bring together government, business, labour and civil society in a meaningful and effective social compact to construct a prosperous, just society founded on opportunities for all. Mr Ramaphosa explains this as an unwavering commitment to strengthening the structures of the state and re-asserting the independence of institutions supporting democracy,- basing everything we do on innovation and excellence, - massification of Figure 4: Fixed investment, economic growth and business confidence % y/y SA's GDP and Fixed Investment growth 100 Political constraints, uncertainty and sentiment vs Employment and BCI Index 100 0.

5 Index Index BCI. 50. 50 50. 0. 1994 1999 2004 2009 2014 0 100. Fixed investment GDP growth Employment BCI (RHS) Political Constraint Business Confidence Source: SARB, Stats SA, BER. 2. Annabel Bishop Investec Bank Limited Tel (2711) 286 7188 email: .. Macro -economic outlook 2018 2023: Global growth is expected to strengthen somewhat further; for SA's growth free market policies are key First quarter 2018 5th January 2018 . Figure 5: Exchange Rates: averages 2017 2018 2019 2020 2021 2022 2023. USD/ZAR GBP/ZAR EUR/ZAR ZAR/JPY GBP/USD EUR/USD USD/JPY 112 108 108 107 107 107 107. Source: Investec, IRESS. initiatives to promote inclusive growth ,- a focus on the empowerment of youth and women, and- an uncompromising rejection of corruption, patronage, cronyism and wastage.. Transformation is another core component of Ramaphosa's proposed economic policies, along with job creation, economic recovery and investment, reindustrialisation, inclusive growth , infrastructure, fiscal consolidation, education, good governance of SOE'S and eradication of corruption and state capture.

6 In particular he said it is therefore necessary to take immediate steps to remove from positions of responsibility those individuals who have facilitated state capture, strengthen law enforcement agencies and rebuild critical state institutions. The rand has strengthened in anticipation of promised future good governance, particularly fiscal, along with the JSE and bond yields. However, further strength in SA's financial market indicators is now likely to be dependent on Global events as Ramaphosa is only expected to become President of SA in 2019. Ramaphosa provides some detail on his ten priorities, but without more detail forthcoming this year they risk losing market impact. He does highlight the need to massively increase levels of investment from around 20 percent of GDP currently to the NDP target of 30 percent. An immediate priority is to restore confidence among investors. Among other things, this requires urgent measures to achieve policy certainty, improve institutional stability, restore the credibility of the criminal justice system and demonstrate the political will to turn around the economy.

7 Figure 6: Commodity prices and economic growth expectations 40 % y/y Commodity currencies vs Economist's metals Global growth forecasts over time %. commodity price index 20 0. -20. -40. 2011 2012 2013 2014 2015 2016 2017 2018 Rand/USD USD/CAD 2013 2014 2015 2016 2017 2018 2019. USD/AUD USD/NZD June 2015 January 2016. Economist Metals Index January 2017 June 2017. Source: IRESS, Investec & World Bank*. 3. Annabel Bishop Investec Bank Limited Tel (2711) 286 7188 email: .. Macro -economic outlook 2018 2023: Global growth is expected to strengthen somewhat further; for SA's growth free market policies are key First quarter 2018 5th January 2018 . Figure 7: Inflation 2017 2018 2019 2020 2021 2022 2023. Consumer Inflation (Av: %) (year-end: %) Producer Inflation (Av: %) (year-end: %) Salary & wage increases (%) Source: Investec, SARB, Statistics SA. He added that (l)and redistribution is also critical for economic inclusion , with the ANC supporting expropriation of land without compensation at the conference.

8 Despite this threat to property rights via proposed changes to the constitution, and the likely resultant severe collapse in sentiment and economic growth , should it be unchecked, little market reaction was forthcoming. The protection of property rights is fundamental to economic growth and so employment creation, and amendments to the constitution to provide expropriation of property without compensation could result in the extreme down case. The credit rating agency, Moody's has said the (n)ew ANC leadership gives prospect of a credit positive policy shift , but that the narrow victory complicates consensus on reforms . Credit positive typically means the possibility of a credit rating upgrade, but in SA's case, its Moody's rating is teetering on the brink of a downgrade to sub-investment grade with both a negative outlook and a credit review in place, dependent on the 2018 Budget outcome. Moody's is the last of the three key rating agencies to have SA's local-currency (and foreign-currency) long-term sovereign debt credit rating on investment grade following the deterioration in South Africa's government finances since 2009, and the poor fiscal health of many major state owned entities.

9 Should SA lose its Moody's investment grade long-term sovereign rating on the local currency front it could see debt portfolio outflows estimated between R40bn to R200bn (as SA's bonds will need to exit Citi Bank's WGBI), and so there would likely be a significant negative impact on its Figure 8: Inflation, oil and food prices 140 Oil price vs Petrol price % ch y/y 40 15 % y/y SA food price inflation ZAR/bbl 1400. 30 1200. 120. 20 1000. 100 10. 10 800. 80. 0 600. 60 5. -10 400. 40 -20 200. 20 -30 0 0. 2010 2011 2012 2013 2014 2015 2016 2017 2013 2013 2014 2015 2016 2016 2017. US$/bbl (LHS) Petrol Price Food CPI PPI Oil price Source: Stats SA, IMF, SARB. 4. Annabel Bishop Investec Bank Limited Tel (2711) 286 7188 email: .. Macro -economic outlook 2018 2023: Global growth is expected to strengthen somewhat further; for SA's growth free market policies are key First quarter 2018 5th January 2018 . Figure 9: Monetary Sector 2017 2018 2019 2020 2021 2022 2023.

10 Repo Rate (year-end: %) Prime Overdraft Rate(%) SA rand bond (%) US Fed funds rate UK Bank rate Source: Investec, SARB, IRESS. financial markets. Net foreign purchases of SA's bonds and equities of occurred over the week following Ramaphosa's election to President of the ANC. However, these purchases (net of sales) have subsequently dwindled to , with SA's financial market indicators also seeing little further strength in the New Year. Should the rand strengthen notably further this year the SARB may consider an interest rate cut on expected lower inflation, but a cut in January is highly unlikely as the rand's strength has yet to be maintained. Instead, we expect that the rand will remain largely around current levels, with interest rates flat as a consequence. The rand's December 2017 strength is likely to feed through into CPI inflation fairly immediately in via the petrol price, but have less impact on CPI inflation longer-term as many retailers will likely use the domestic currency's strength to claw back the impact of their absorption of price pressures following previous marked currency depreciation.