Manufacturing Circle Response to the Budget

1. Manufacturing Circle Response to the Budget Presentation to the Standing and Select Committees of Finance Parliament of the Republic of South Africa Cape Town 6 March 2013

2. Why is South African Manufacturing Important?

3. Why is South African manufacturing important? Multiplier Effect of Manufacturing per R1 investment Value/Output Multiplier Employment Multiplier Source: PAIRS

4. Why is South African manufacturing important? Multiplier Effect of Manufacturing per R1 investment Fiscal Revenue Multiplier Export Multiplier Source: PAIRS

5. Why is South African manufacturing important? Ten-year cumulative effects of the economy-wide impact of an increase in manufacturing output Source: PAIRS

6. 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

7. Crisis in Manufacturing

8. Growth in mortgages to households %y/y Housing Sector Effect Source: sTANLIB

9. Domestic Economic Overview Construction Sector Effect Source: KPMG

10. Manufacturing and Employment in SA Mining & manufacturing production and vehicle sales, annual growth, South Africa Jan 2010 – Dec. 2012 Source: Statistics South Africa Source: Stats SA Compiled by: PAIRS

11. Manufacturing and Employment in SA Manufacturing growth (%) 1970 - 2010 Source: PAIRS & SARB

12. Manufacturing and Employment in SA South Africa’s Deindustrialisation Manufacturing Growth and Contribution to GDP Manufacturing contribution to GDP (%)

13. Employment decoupled from economic growthHas deindustrialisation and the currency played a role? Employment vs. Economic Activity Labour Relations Act (1995)

14. Manufacturing and Employment in SA Imports and Exports decoupled since Jan 2012 Source: South African Revenue Services Source: SARS Compiled by: PAIRS

15. Manufacturing and Employment in SA Poor export performance:Ratio of imports to GDP exceeds that of exports Source: SARB, PAIRS Calculations

16. Manufacturing and Employment in SA Entrenched trade balance deficit throughout 2012 Source: SARS Compiled by: PAIRS

17. Challenges and Opportunities In the BRICS Context Manufacturing Imports from Developed & BRICS Countries to South Africa, 1988 - 2011 Source: Quantec Compiled by: PAIRS

18. Challenges and Opportunities In the BRICS Context Chinese exports to South Africa, 1999 - 2012

19. Manufacturing and Employment in SA Source: Statistics South Africa

20. Manufacturing and Employment in SA Downbeat Kagiso PMI in much of 2012 Source: BER, Stats SA Compiled by: PAIRS

21. FISCAL POLICY: Tax, Spending and Monetary Policy

22. FISCAL POLICY • 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 Overall Response

23. Monetary Policy Implied exchange rate Volatility, SOUTH AFRICA and Peer group, 2005 - 2010 Source: Respective statistical bureaus Notes: India (2000 & 2009), Fuel, Power, Light and Lubricants; Brazil, Electricity; China, Electricity; Russia, Public Utilities; South Africa, Electricity.

24. Monetary Policy Gross Reserves vs. Measures of Adequacy, SOUTH AFRICA, 2008 - 2016 Source: Respective statistical bureaus Notes: India (2000 & 2009), Fuel, Power, Light and Lubricants; Brazil, Electricity; China, Electricity; Russia, Public Utilities; South Africa, Electricity.

25. 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

26. FISCAL POLICY • 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. Manufacturing Circle Monetary Policy Position

27. Administered Prices, Electricity & Water

28. Electricity Growth Rates of Administered Prices between 2000 and 2010 Source: Respective statistical bureaus Notes: India (2000 & 2009), Fuel, Power, Light and Lubricants; Brazil, Electricity; China, Electricity; Russia, Public Utilities; South Africa, Electricity.

29. 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 inflationwith high municipal mark-ups remaining a challenge

30. Electricity Source: EIUG

31. Electricity Source: EIUG

32. On Electricity… • 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. Cost push effects of electricity – how it works Source: WEF & Frontier Advisory

33. On 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 Eskomwas sensitisedto 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. Specific proposals in relation to Electricity

34. On Administered Prices… • The 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, and • Greater attention to alternative approaches for administering prices are given. Broader Proposals re Administered Prices

35. Report-back on Incentives

36. Incentives Report-back MCEP VERY FAVOURABLY RECEIVED AMONGST MANUFACTURERS Many applications still in differing stages Clarifications on rules and guidelines required in certain instances, but mostly clear Does not pick winners60 day turnaround times promised – cause for confidenceCIP / MIDP / EIP / MIP Appropriately structured Turnaround times of 3 – 8 months – programmes deemed accessible Proposals for quicker disbursement in certain instances EIP / MIP excludes primary/capital intensive industries due to jobs/R1 consideration Reasons not always given forunsuccessful applicationsJOBS FUNDRecent presentation received by Genesis AnALYTICSOpaqueness around types of investments likely to succeed, required ZAR investment per job and exclusion of creation of indirect jobs from consideration clarified

37. THANK YOU