Post Policy Engagement

Nelson Mandela Bay Metro and Sarah Baartman

MEC Mcebisi Jonas

April 18th, 2013

Setting new directions for the economy

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2013 promises to be another tough year for the global, South African and Eastern Cape economies

• The World Bank predicts that the global economy will grow by just 2,4% this year, a level very similar to last year

• Eurozone will most likely remain in recession• US economy expected to grow at under 2% • Only real good news

– China’s growth is expected to rise (from 7,9% to 8,4%)– Emerging economies will continue to grow at above 5%.– There will be continued demand for SA commodities (SA

will continue at approx 3% growth)

Global shift in economic power to emerging economies

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1080 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Advanced Economies Emerging Economies

Annual gdp growth: %

Trade within Africa remains low in spite of the massive trade potential

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The 10 fastest growing economies in the world, 2011-2015, per cent A population of one

billion

Regional GDP will double over the next 13 years.

Addressing regional trade and infrastructure bottlenecks will be critical

Leveraging South Africa’s expertise in mining.

Sub-Sahara Africa will have 7 of the 10 fastest growing economies in the world over the next five years.

So what does all of this mean for South Africa?• Continued Eurozone recession will continue to hit South African

manufacturers where it hurts - Eurozone – South Africa’s largest trading bloc - imports a relatively higher proportion of manufactured and semi-processed goods.

• Eurozone crisis will also impact on our auto manufacturers. Demand for new cars in the Eurozone fell by 11,3% last year.

• Means we have to urgently diversify our trade strategy (to trade

more with BRICS and Africa).

• Will undoubtedly continue to affect our economic performance and competitiveness.

• Weakened short-term growth prospects, high levels of structural unemployment, spate of industrial action and social protests: led to downgrade of South Africa’s credit rating by the three main credit rating agencies

Not all gloom and doom• The credit downgrade by the ratings agencies is

more of a warning to Government to get its house in order.

• SA still has a “stable” outlook as a result of credit strengths built around its strong banking sector and manageable debt-to-GDP ratio.

• Continued growth of the Chinese economy means continued demand for South African minerals, which will provide the minimum levels of growth and revenue to sustain Government’s social welfare programmes over the short-to-medium term.

Not all gloom and doom• SA’s economy remains resilient – our non-

financial corporates have cash balances of R550 billion (mid-2012), enough to finance two years of private real investment.

• Two recent reported surveys confirm SA’s ranking as the most attractive place to do business in Africa (Grant Thornton and Ernst & Young)

But our current growth trajectory is unsustainable

• Too locked into minerals-led growth path (historically built on cheap labour and cheap electricity) with EC on the margins.

• We are growing at far lower levels than other emerging economies (SA grew at an average 2,7% PA over the past 5 years compared to 4,7% for emerging economies).

• We seem unable to dent unemployment - EC gravitates between highest or second highest rate of unemployment.

• Need new growth path for province

Four Critical Contraints of the Provincial Economy

1. Our extremely small primary sector (2.4% GDP)

• Lowest primary GVA of all nine provinces • Explained partly by the absence of significant mining

in EC and partly by our extremely small farming sector (EC’s agriculture sector is not much larger in absolute terms than that of urbanised Gauteng)

• Our small primary sector is important because strong primary sectors boost economic activity in the rest of the economy

• Its small size is due to the history of our region as a labour reserve rather than a productive base, and the spatial geography of the so-called mineral-energy complex.

Primary % Secondary % Tertiary %

South Africa 12.0 21.2 66.7

Eastern Cape 2.4 20.0 78.2

Free State 17.3 17.3 65.5

KZN 6.3 25.9 67.8

NW 39.9 9.1 51.0

Gauteng 3.3 24.9 71.6

Mpumalanga 25.6 26.3 48.1

Limpopo 35.3 8.3 56.4

Western Cape 4.3 22.7 73.0

Northern Cape 41.5 6.8 51.7

Table: Sector structure of GVA by province (% GVA, 2010)

2. The large proportion of our population living in the former Bantustan areas (at least 2/3 of total population)

•Conditions there for private sector investments are not (and never have been) conducive and social infrastructure backlogs persist.

•Former Bantustan areas remain the most deprived in SA.

•Resolving land administration obstacles in former bantustans is key to enticing private investment

3. Our two coastal metros are both small and slow-growing• Are subject to partial de-industrialisation (due to

import competition).

• While our auto industry directly created 10,000 jobs over the period 1995 to 2010 (assisted by MIDP), many labour-intensive factories closed down.

• Our two IDZs have not yet become major employment zones (although now have significant investment pipeline).

4. EC has tended to get a low share of investment by public corporations

• In 2011 total SA Gross Fixed Capital Formation was R349 billion, of which 15% was contributed by general government, 23% by public corporations and 62% by private business enterprises.

• Only major investment by state-owned enterprises in the EC post-94 has been the new port of Ngqura (at a cost of R6 billion).

• This situation is now changing with EC having a large pipeline of major economic infrastructure projects (and PICCs SE node and corridors).

Our Share of State Owned Investments • We did an analysis that showed massive under

investment by SOE’s

– Concluded a collaboration agreement with Transnet. – Results are encouraging, Investments planned over a 7

year period is estimated at R 32 billion.

• Collaboration framework with DPE

– Eskom to invest over R 3.5 billion in the Eastern Cape up to 2015/16

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The Eastern Cape needs a much more diversified and

dynamic economy

Export analysis• We have started an analysis of our exports• Useful to identify competitive advantage• We have started analysis at H-2 digit level

(100 product categories)• H-4 digit level has about 1200 product

categories• H-6 digit level has about 7600 product

categories.

Product Code Exports in 2000(R million)

Exports in 2011(R million)

% change 2000 to 2011

EC as % of SA exports in 2011

Vehicles H87 4832 12253 154 23Machinery H84 2232 10786 383 25Wool H51 1008 2896 187 100Hides and leather H41 752 831 10 57

Tyres H40 595 1028 73 28Furniture H94 407 36 -91 1Clothing H61 343 4 -99 1Fish and molluscs H03 176 340 93 10

Fruit (processed) H20 143 233 63 6

Fruit (fresh) H08 22 855 3786 5Total Top 10 10510 29262 178Total EC 12145 34234 182 5Top 10 as % of total

86 85

SA Total 208364 691504 232

Table: EC “Top 10” Exports: nominal values 2000 and 2011

What we can observe from the table above:• “Machinery” in table above is almost all catalytic converters

• The above average export growth of catalytic converters (H84) [NB: CPI increased by 87%, 2000-2011 – so here we are looking at strong real growth].

• The exponential export growth of fresh fruit (mainly citrus).

• The large value of wool exported (most completely unprocessed, not even washed) [why no value-add?].

• The complete collapse of exports of non-automotive manufactured products (furniture and clothing).

• That EC accounts for only 5% of SA exports

There are encouraging signs that a more dynamic economy is now emerging:

• A strong automotive sector that is starting to diversify into non-automotive manufactured products. For example, Lumotech in Uitenhage (manufacturer of car lights) has diversified into eco-friendly street lights.

• A rapidly growing green economy (notably catalytic converters and wind energy).

• An expanding fruit industry with excellent development potential (in terms of natural resources and global markets).

• A growing capital goods sector (wind turbines in Coega).

• New agro-processing investments in IDZs (biofuel, food etc) which provide ready markets for primary feedstock).

• • A growing tourism economy since 1994

Linkage with the National Development Plan

• In the light of NDP, we need to build on these positive growth impulses and achieve much higher rates of investment and employment, particularly in export industries.

We must also work harder to keep what we have (dti starting with incentives for non-auto sectors eg textiles and white goods)

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How to build on these positive Trends:Industry-government partnerships and sensible instruments to:

– Reduce costs-of-doing- business in the EC (cost disdavantages).

– Accelerate diversification of manufacturing– Create new catalytic converter-type industrial successes:

were major success of post-94 industrial policy (combining beneficiation of SA and imported materials, making coastal location imperative)

– Capitalize on component supplier opportunities in Government’s build programme (and Africa’s build programme)

– Need big focus on agro-processing (with government-supported primary production of feedstock)

Key Strategic Project (Gateway Concept)• Cost and efficiency of logistics serious bottleneck to

investment and growth • Recently launched a massive economic infrastructure

program (under the auspices of the Presidential Infrastructure Co-ordinating Commission)

• Must find balance between need to invest in new infrastructure and end-user costs (eg energy)

• National infrastructure plan has recognized historic patterns of spatial underdevelopment, and has packaged a South Eastern Node and Corridor to connect the Eastern Cape to the national and global economy.

• Development and Implement a more robust and targeted Skills Development

Key Strategic Projects (Gateway Concept)Key projects include:• Coega trans-shipment hub• Manganese corridor to N Cape• EL port expansion• Mthatha airport upgrade• N2 Wild Coast Highway (linked to Wild Coast

Corridor)• Umzimvubu Basin Catchment Development

(need to move beyond dam)• Renewable Energy • Agro-processing, Better Govt Support for

Large Scale Agriculture

Build will and capacity of the state• Will impact on the scale and impact of these new

measures to change our growth path.

• We must be creative to ensure we assemble ring-fenced capacity and resources to drive our economic programmes unimpeded by the broader politics of institutional restructuring and conflict.

• Needed most in our two metros, which must rise to the occasion to become engines of growth and development.

Growing the economy: some big ideas...• Think big

– The Province can benefit from thousands of innovating brains. It’s a moment to broaden horizons, expect much more, and expand every kind of ambition.

• Transcend the post-apartheid legacy – Get over our hang-ups about apartheid: we badly

need a wave of new industries, new industrial capability

• Government support for technical innovation– Innovation is based on new knowledge, or it is

nothing. Government must and will support technical innovation

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Growing the economy• Hard work

– Thomas Edison famously said of genius – that it is one per cent inspiration and 99 per cent perspiration – remains largely true of innovation and entrepreneurship. Let’s recreate an ethos of hard work!

• Take risks – Risk aversion has become all-pervasive at all levels in

society. On the contrary we need to take real risks to achieve real change

– Government has shown too little interest in innovation. We tend to want a future that is more predictable and more stable. We try to avoid risks. By contrast serious innovators, whether they like it or not, tend to make things less predictable and less stable. They tend to take risks and let events take their course. We should not try to dampen things down.

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Growing the economy• Leadership

– Distinct and distinctive leaders are required not only to get innovation moving, but also to set aspirations, create goals that people can believe in, and take responsibility for failures. Innovation is a human process; because it includes failure and chance, it must be led by men and women who can take people from their ‘comfort zones’ into a different place altogether.

– Innovation demands not further empathy, trust or Key Performance Indicators, but vision, commitment, brains and, yes, a little personal heroism too. Join us in this project!

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Concluding issues for business • Need to participate in charting new growth path

for province;• Need to work with Government to address costs

of doing business (what is reasonably possible?)• Need to participate actively in clusters (auto

established and setting up non-auto manufacturing and agro-industry)

• Need to work closely with government to explore new trade and investment strategies (Africa and BRICS)

• Participation in supplier opportunities in build program

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THANK YOU