E C O N O M I C

R E S E A R C H

Economic overview

Johan RossouwTel: +27 (0) 21 481 6205E-mail: johan@vunanisecurities.co.za

26 February 2016

Will we be able to avert the dreaded downgrade?…

Table of Contents

Table of Contents

Table of contents

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––Global trends 4–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––SA Trends 13–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––Budget 2016 22––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––Securities Markets 31 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

03

South African and global economic growth 2000 – 2016…

Source: National Treasury Global trends

04

Stock market a leading indicator for US output growth

Source: Reuters Global trends

-10

-8

-6

-4

-2

0

2

4

6

8

10

-50

-40

-30

-20

-10

0

10

20

30

40

50

1979Q3 1984Q3 1989Q3 1994Q3 1999Q3 2004Q3 2009Q3 2015Q3

Y-o-Y % changeY-o-Y % change

S&P 500 (lhs) US GDP growth (rhs)

05

Latest US data releases raise concern

Source: ISM / Reuters Global trends

30

35

40

45

50

55

60

65

Jul-97 Aug-00 Sep-03 Oct-06 Nov-09 Dec-12 Jan-16

Index

ISM non-manufacturing ISM manufacturing

06

G7 headline CPI forecasts revised down

Source: OECD Global trends

-2

-1

0

1

2

3

4

5

2000-Q1 2002-Q1 2004-Q1 2006-Q1 2008-Q1 2010-Q1 2012-Q1 2014-Q1 2016-Q1

Y-o-Y % change

2015Q3 forecast Latest 2% target

07

Changing expectations of Fed tightening

Source: US Fed Global trends

Policy rate 2016 2017 LT

0 - 0.25% Dec ‘14 2.5% 3.6% 3.8%

0 - 0.25% March ’15 1.9% 3.1% 3.8%

0 - 0.25% June ‘15 1.6% 2.9% 3.8%

0 - 0.25% Sept ‘15 1.4% 2.6% 3.5%

0.50% Dec ‘15 1.4% 2.4% 3.4%

Median FOMC member target for US policy rate at year end

• Fed more dovish so far in ‘16 – expectations for rate hikes pushed out • BoE rate hike now only expected later in ’16• ECB / BoJ may announce further stimulus measures

08

US dollar relatively stable since early 2015, softened of late

Source: Reuters Global trends

Nenegate

73

83

93

103

113

123

133

143

153

163

Dec-2013 May-2014 Oct-2014 Mar-2015 Aug-2015 Jan-2016

Index, Dec ‘13 = 100

SA rand Euro/dollar Aussie dollar

Dollar strength

09

China rebalancing taking shape

Source: Reuters Global trends

5

7

9

11

13

15

2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1

Y-o-Y % change

GDP Secondary sector Tertiary sector

010

Rand weakness shielding SA export prices

Source: Reuters Global trends

35

55

75

95

115

135

155

May-2014 Sep-2014 Jan-2015 May-2015 Sep-2015 Jan-2016

May ‘14 = 100

Gold

Platinum

Brent crude

Iron ore

Richards Bay thermal coal

011

Economic growth and inflation forecasts...

Source: National Treasury Global trends

012

The ratings effect: Most of the weakness before junkstatus

Source: Reuters / Vunani Securities SA trends

RussiaS&P action

BrazilS&P

BrazilFitch

90

110

130

150

170

190

210

230

250

270

Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013 Mar-2014 Aug-2014 Jan-2015 Jun-2015 Nov-2015

Index, Feb ‘12 = 100

SA rand Brazil Russia

013

Outlook for the rand exchange rate

Source: BER SA trends

Quarterly

ave’16Q1 ’16Q2 ‘16Q3 ‘16Q4 ’17Q1 ’17Q2 ‘17Q3 ‘17Q4

Dollar/rand 16.50 16.85 17.10 17.00 16.95 16.75 16.50 16.25

• Rand forecast assumes S&P cut to junk in 2nd half ’16. SA remains part of WGBI

• Russia / Brazil experience suggests most of currency weakness before downgrade

• Budget 2016 key for ratings outlook

• Crucial gov. reduced expenditure ceiling

• Not just about austerity, agencies looking for growth-supporting structural reforms

014

Rand still much weaker than estimated fair value…

Source: Vunani Securities SA trends

015

Limited potential for structural change

Source: Trusted Sources SA trends

016

CPI to significantly exceed target in 2016 and 2017

Source: Vunani Securities SA trends

Annual ave 2015 2016 2017

Headline 4.6 6.9 6.6

Core 5.5 6.0 6.2

Food & NAB 5.1 9.9 6.3

Major inflation drivers / risks:

• Increased rand pass-through

• Food prices

• Additional elec tariff hikes

Dec ‘16: 7.9%

3

4

5

6

7

8

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17

y-o-y % change

Headline CPI Core CPI

017

Comparison of real policy rates – SA monetary policyremains very accommodative

Source: SARB / Stats SA / Vunani Securities SA trends

-2

0

2

4

6

8

10

12

14

16

SA Brazil Russia Turkey Indonesia India

%

Policy rate Expected CPI '16Q4 Real rate

• Another two 25bps rate hikes pencilled in for

2016

• Repo ends 2016 at 7.25% vs. 6.75%

previously expected

018

Investment, business confidence and profits...

Source: National Treasury SA trends

019

SARB leading indicator points to further GDPgrowth moderation in ‘16

Source: SARB SA trends

-20

-15

-10

-5

0

5

10

15

20

25

-3

-2

-1

0

1

2

3

4

5

6

7

2000Q1 2002Q2 2004Q3 2006Q4 2009Q1 2011Q2 2013Q3 2015Q4

Y-o-Y % change

Real GDP growth SARB leading indicator

020

Production side GDP forecast – substantial downsiderisk

Source: BER SA trends

Seasonally adjusted y-o-y %

2015 2016

Agriculture (2.3%) -7.9 -13.0BFAP simulation, normal yields in

2017

Mining (7.9%) 2.9 -0.4

Manufacturing (12.5%) 0.3 1.3 Downside

Electricity (2.2%) -0.9 0.7

Construction (3.4%) 1.9 1.1

Trade (13.6%) 1.3 0.8 Downside

Transport (8.4%) 1.4 0.4

Financial (19.8%) 2.9 2.3

Government (15.3%) 0.8 0.6

Personal services (5.3%) 1.1 0.8

GDP (total) 1.3 0.8

021

More depressed economic growth outlook...

Source: National Treasury Budget 2016

022

Consolidated fiscal framework...

Source: National Treasury Budget 2016

023

Tax changes...

Source: National Treasury Budget 2016

024

Impact of tax proposals on 2016/17 revenue...

Budget 2016

025

2016/17 Budget Expenditure by function..

Source: National Treasury Budget 2016

026

2016/17 Budget Expenditure by function..

Source: National Treasury Budget 2016

027

Additional spending to be funded in the 2016 MTEF...

Source: National Treasury Budget 2016

028

Baseline reductions by sphere of government, 2016/17 – 2018/19...

Source: National Treasury Budget 2016

029

Public sector borrowing requirement...

Source: National Treasury Budget 2016

030

Forecast tracker

Source: INET BFA & Vunani calculations and forecasts Securities markets

031

Asset classes: potential 12-month total returnsFrom the 29th January 2016

Source: INET BFA & Vunani calculations and forecasts Securities markets

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