Manufacturing Circle Response to the Budget Presentation to the Standing and Select Committees of...

Manufacturing Circle Response to the Budget

Presentation to the Standing and Select Committees of Finance

Parliament of the Republic of South AfricaCape Town6 March 2013

Why is South African Manufacturing Important?

Why is South African manufacturing important?

Multiplier Effect of Manufacturing per R1 investment

Source: PAIRS

Value/Output Multiplier Employment Multiplier


Multiplier Effect of Manufacturing per R1 investment

Source: PAIRS

Export Multiplier Fiscal Revenue Multiplier


Ten-year cumulative effects of the economy-wide impact of an increase in manufacturing output

Source: PAIRS

Youth and adult employment ratios in SA and selected emerging market economies

Source: ILO (Key indicators of the labour market, 6th Ed. ), Statistics SA quarterly labour force survey, June 2010

Crisis in Manufacturing

Growth in mortgages to households

Source: sTANLIB

Housing Sector Effect%y/y

Domestic Economic Overview

Source: KPMG

Construction Sector Effect

Mining & manufacturing production and vehicle sales, annual growth, South Africa Jan 2010 – Dec. 2012

Source: Statistics South Africa

Manufacturing and Employment in SA

Source: Stats SACompiled by: PAIRS


Manufacturing growth (%) 1970 - 2010

Source: PAIRS & SARB


South Africa’s Deindustrialisation

16

17

18

19

20

21

22

1970 1977 1984 1991 1998 2005

Contribution to GDP Trend

Manufacturing Growth and Contribution to GDPManufacturing contribution to GDP (%)

50

100

150

200

250

300

350

400

450

0

100

200

300

400

500

600

700

8001

94

0

19

44

19

48

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

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Economic activity

Employment

LabourRelationsAct (1995)

Employment decoupled from economic growthHas deindustrialisation and the currency played a role?

Employment vs. Economic Activity

Imports and Exports decoupled since Jan 2012

Source: South African Revenue Services


Source: SARSCompiled by: PAIRS

Poor export performance:Ratio of imports to GDP exceeds that of exports


Source: SARB, PAIRS Calculations


Entrenched trade balance deficit throughout 2012

Source: SARSCompiled by: PAIRS

Challenges and Opportunities In the BRICS Context

Manufacturing Imports from Developed & BRICS Countries to South Africa, 1988 - 2011

Source: QuantecCompiled by: PAIRS

Challenges and Opportunities In the BRICS Context

Chinese exports to South Africa, 1999 - 2012


Source: Statistics South Africa


Downbeat Kagiso PMI in much of 2012

Source: BER, Stats SACompiled by: PAIRS

FISCAL POLICY: Tax, Spending and Monetary Policy

Overall Response

• Manufacturing Circle supports counter-cyclical stance• Lower growth leading to lower revenue reducing our ability to maintain this posture• Spending on the productive side crucial – why no mention this year?• Drags on Investor Sentiment:

- Low demand in traditional export markets, - Concerns about SA’s swindling manufacturing competitiveness, - Lack of consensus on the economy (pact between social partners and in constituencies)- Policy co-ordination and coherence (NDP?)- Savings, spending moderation, deficit reduction and debt stabilisation projections precarious

• Tax review cannot take place in isolation of broader macro-economic economic policy• Reports of spending review noted in media welcomed – further reports will be welcomed

- Address steep, bunched-up administered price increases- Target turnaround of financial position of local authorities

• Should trigger monetary policy review as well to better support productive sectors of the economy

FISCAL POLICY

Monetary Policy

IMPLIED EXCHANGE RATE VOLATILITY, SOUTH AFRICA AND PEER GROUP, 2005 - 2010

Source: Respective statistical bureausNotes: India (2000 & 2009), Fuel, Power, Light and Lubricants; Brazil, Electricity; China, Electricity; Russia, Public Utilities; South Africa, Electricity.

GROSS RESERVES VS. MEASURES OF ADEQUACY, SOUTH AFRICA, 2008 - 2016


Monetary Policy

Cost pushes and Rand strength

The Rand is currently at 2003 levels, and has strengthened by 23% in the last 10 years.Costs (PPI and Electricity) have increased by between 81% - 231% over the same period

PPI Electricity Rand:USD

% ( Strengthen) / weakening in

Rand2002 13.4% -1.1% 10.502003 2.2% -1.5% 7.54 -28.2%2004 2.4% 2.4% 6.40 -15.1%2005 3.6% 4.9% 6.34 -0.9%2006 7.7% 4.6% 6.75 6.5%2007 10.9% 6.7% 7.04 4.2%2008 14.3% 21.4% 8.25 17.3%2009 0.0% 26.2% 8.40 1.8%2010 6.0% 24.0% 7.31 -13.1%2011 8.4% 25.3% 7.26 -0.7%2012 YTD 6.6% 18.00% 8.11 11.7%Average increase 6.9% 11.9% 7.63Total increase since 2002 81.4% 231.7% -23%

Manufacturing Circle Monetary Policy Position• Currency currently trading at more competitive levels, which supports competitiveness and

maintenance of export levels, but volatility remains high and advantage undermined by domestic policy challenges

• Monetary policy options not a panacea to Manufacturing Growth, but a more stable and competitive currency is an important conducive factor for manufacturing growth

• Current weaker currency = despite policy, not because of it• Manufacturing Circle supports view of the OECD and others that current monetary policy regime

is unsupportive of the productive sectors of the economy, while supporting high interest rates and large budget deficits.

• Current consensus amongst manufacturers = R8.50/$1 – R9.50/$1• How? By employing range of tools in addition to inflation target and interest rates:

- Boost reserves = putting resources down on productive side of the economy- Appropriate capital controls- Macroprudential controls- Employing a periodically reviewed currency band.

FISCAL POLICY

Administered Prices, Electricity & Water

Electricity

Growth Rates of Administered Prices between 2000 and 2010


Electricity

South Africa vs Brazil

As Eskom readied itself to motivate for further increases at nearly three times the inflation rate (19% for industrial customers) over the next five years, which could lead to increases to consumers as much as 19%, Brazil cut industrial electricity rates by 28% with effect from 2013. NERSA determination a relief, but in effect increases to manufacturing of 10%/11% still above inflation with high municipal mark-ups remaining a challenge

Electricity

Source: EIUG

On Electricity…

Cost push effects of electricity – how it works

Source: WEF & Frontier Advisory

• South African manufacturers have found it a great challenge to bear the steep, bunched-up increases in the electricity prices against a background of numerous other domestic inefficiencies, the resultant cost-push thereof and our unequal trade position.

• The resultant margin squeeze as well as concerns re future developments in this regard is retarding investment and causing business failure.

• Direct Effects: It raises the baseline cost structure for the local manufacturers, hence reducing their global competitiveness.

• Indirect Effects: Negative effects the shortage of energy has on the mining sector, which is a key source of demand for the local manufacturing activities.

On Electricity…

Specific proposals in relation to Electricity•Recent NERSA determination although still above inflation better accords with the necessity of a longer term and more gradual cost increase trajectory. •The latest price determination exercise as well as Manufacturing Circle discussions have shown that:NERSA was better capacitated to interrogate Eskom price increases, and that Eskom was sensitised to economic growth and job creation imperatives but that it was constrained in terms of the policy framework in which it operates to respond better to industry growth needs for cheaper electricity. •It is proposed that an industrial policy measure to off-set steep, bunched-up electricity price increases be considered as an interim measures to assist manufacturers to adjust.

OnAdministered Prices…

Broader Proposals re Administered PricesThe Manufacturing Circle supports:•idea of a fiscal review in the spirit of how it was mentioned in the 2011 MTBPS, to ensure that the way in which public infrastructure provision is funded and financed and the way in which the associated costs incurred are recouped is done most efficiently and competitively•recommendations of A Study to Collate all Research Done on Administered Prices concluded under the Fund for Research into Industrial Development and Equity in 2011, that:New, up-to-date studies on the regulatory frameworks and processes underpinning the determination of administered prices be commissioned,Greater attention is focused on the economic impacts of administered pricing decisions, The effectiveness of administered pricing in terms of its contribution to national objectives is assessed, The capacity and resources of independent regulators is improved,Benchmarking analyses are undertaken, andGreater attention to alternative approaches for administering prices are given.

Report-back on Incentives

Incentives

Report-backMCEP VERY FAVOURABLY RECEIVED AMONGST MANUFACTURERSMany applications still in differing stagesClarifications on rules and guidelines required in certain instances, but mostly clearDoes not pick winners 60 day turnaround times promised – cause for confidence

CIP / MIDP / EIP / MIPAppropriately structuredTurnaround times of 3 – 8 months – programmes deemed accessibleProposals for quicker disbursement in certain instancesEIP / MIP excludes primary/capital intensive industries due to jobs/R1 considerationReasons not always given for unsuccessful applications

JOBS FUNDRecent presentation received by Genesis AnALYTICSOpaqueness around types of investments likely to succeed, required ZAR investment per job and exclusion of creation of indirect jobs from consideration clarified

THANK YOU

Manufacturing Circle Response to the Budget Presentation to the Standing and Select Committees of...

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