Economic and business drivers of turbocharged growth in SA

1. Economic and business drivers of turbocharged growth in SA Christopher Hart Senior Treasury Economist Absa Group Treasury

2. The international context

3. 1. Slowing growth due to higher interest rates, oil and consumer debt 2. Major structural problems with key currencies - $, EUR, JPY Key Global Trends 4. Higher precious metal prices 3. Rise in commodity prices: long term bull market in progress.

4. Drivers of USD: will the 2005 recovery last? Twin deficit burden USD 2005 recovery supporting pillars Economic growth Rising Interest rates Homeland Investment Bill

5. USD bear market – 2005 just a correction in a 10-year trend Reserves rebalancing, lower growth and a turn in the interest rate cycle to contribute to dollar weakness. Uncertainty over policy direction of the new Fed Governor and termination of the Homeland Investment inflows could result in significant dollar weakness over the next two months i.e. $1.28/EUR

6. Global growth not synchronised. Likely to slow in 2006 Eurozone growth to accelerate but not to strong levels. Convergence with the US expected. US growth weaker than expected, dipping towards 2,0% by mid 2006. Burden of higher interest rates, oil price and consumer indebtedness to weigh on the US economy.

7. Global currency Stress USD Further protracted weakness required EUR Substantial deep- seated problems Other currencies: Competitive devaluation

8. Currency stress – precious metal price divergence from other commodities and the euro. Growing investment demand, a drop in new mine supplies and increasing Central Bank interest to buy have been contributing factors. The divergence between gold and the euro will continue due to protracted problems in the eurozone. Gold to outperform platinum.

9. CRB commodities index – strong performance expected after the global slowdown Could come under some pressure over the next two to three quarters due to slowing global economy but primary upward trend could last for a further 15 years or more.

10. Moving to 6% growth (or higher!)

11. Rand: continued strength possible with strong investment inflows Investor inflows essential to sustain higher economic growth.

12. S.A.: lower inflation, higher growth The first time since the early 1970’s. Will continue as with virtuous circle intact. The implication for investor perceptions and investment performance is highly significant.

13. Resources Revenue Cost of Capital S. African Growth Productivity improvement Hurdle Rate

14. Global Investment Trends Emerging market economies Developed market economies Investment flows Commodity producers • Population trends • Economic growth differentials • Risk and return • Cost advantages • Globalization • Dollar divestment (Islam, China etc)

15. Economic growth shift Investment boom Consumption boom Momentum in consumer demand is slowing but growth is expected to be boosted by investment. This would bring greater balance to the economy and inflationary pressure could be further reduced.

16. The SA economy: on the verge of an investment flood • Structural growth now possible • Barclays – Absa takeover. Stature of investor and substance of the deal to encourage others • The financial sector to see more investment • Vodacom / Vodafone • Commodity boom: backward integration, fund investment, green and brownfield development • Commodity boom: regional growth boost • Utilities: SNO, Transnet, ESKOM, Local authority infrastructure, World Cup • Strong demand to attract other multinationals not yet represented in Southern Africa • Investor attraction through superior investment returns

17. Investment Returns: strong and consistent S.A. outperformance supported by a strengthening currency SA investment outperformance expected to resume over the next year.

18. Strategic management implication Mindset / past experience Embracing the challenge Wishful Thinking? Proactive? Management by wishful thinking – hoping for the rand to weaken and rescue the income statement. Bonuses paid on undeserved windfalls. Lobbying for protection against competition. Proactive management – planning the long-term survival of the business by benchmarking against best practice and achieving it. Being globally competitive despite currency strength.

19. Business strategy under current circumstances Price Pricing power weak under strong currency conditions Volumes Volume needs to grow to raise profitability Efficiency Global competition greater and survival depends on efficiency gains

20. Alternative Business strategy: • High value-added businesses • High degree of specialisation • Greater use of technology • Personalised services • Customisation production where economies of scale do not exist • Development and retention of scarce skills

21. Inflation and Interest rates

22. Consumer demand Current account Inflation: serious forecast failure Consumer debt Oil price Wage increases

23. Inflation: Q3-2005 peak. Downward trend in progress from 4th quarter 2005 Consensus forecast Where inflation is Actually heading

24. Consumption boom is slowing in the SA economy Growth is still strong but the base is high and growth has started to slow. This will continue without any further stimulus.

25. The slowing internal growth momentum is also reflected in credit and money supply Credit and money supply growth is expected to ease further over the next few quarters.

26. Interest rate outlook: • Markets and economic fundamentals have shifted rapidly since October when a hike was virtually promised • Further few months of data can be expected to shift more favourably towards cuts • A peak in global interest rates will be clearer • The rand is expected to be below the R6,00 level • CPIX is expected to be closer to the 3,0% than the 6% level • A lower to steadier oil price is also anticipated • A rate cut in April or June 2006 is considered a reasonable possibility

27. Questions and summaryContact Details:082 494 2258chrisha@absa.co.za