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

Manufacturing Circle Response to the MTBPS

Presentation to the Standing and Select Committees of Finance

Parliament of the Republic of South AfricaCape Town30 October 2012

Crisis in Manufacturing

Mining and Manufacturing Production and Vehicle Sales, Annual Growth, South Africa Jan 2010 – June 2012

Percent

Source: Statistics South Africa

Imports and Exports, South Africa Jan 2011 – Jun 2012

Source: South African Revenue Services

R billion

Current crisis for Manufacturing in South Africa

Trade Deficit Entrenches on LEOWER EXPORTS AND INCREASED IMPORTS

Source: SARSCompiled by: PAIRS


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

Source: Quantec


PMI contracts to a 3-year low in 2012 Sept

Source: BER


Source: Statistics South Africa

Manufacturing Employment, South Africa2008Q1 – 2012Q1


440 000 business closed in 5 years

Source: Adcorp Analytics

Monetary Policy

Cost pushes and Rand strength

The Rand is currently at 2003 levels, and has strengthened by 24% in the last 10 years.Costs (PPI, Electricity and wages) have increased by between 74% - 181% over the same period

PPI Electricity Wage Costs Rand: USD% (strengthen) /

Weakening in Rand2002 13.4% -1.1% 7.3% 10.502003 2.2% -1.5% 7.0% 7.54 -28.2%2004 2.4% 2.4% 0.0% 6.40 -15.1%2005 3.6% 4.9% 6.5% 6.34 -0.9%2006 7.7% 4.6% 6.5% 6.75 6.5%2007 10.9% 6.7% 6.4% 7.04 4.2%2008 14.3% 21.4% 8.0% 8.25 17.3%2009 0.0% 26.2% 0.0% 8.40 1.8%2010 6.0% 24.0% 7.5% 7.31 -13.1%2011 8.4% 25.3% 8.0% 7.26 -0.7%2012 6.6% 7.0% 7.97 9.8%Average increase 6.9% 11.3% 5.8% 7.61Total increase since 2002 81.4% 181.1% 74.0% -24%

Monetary Policy

RAND VOLATILITY AND SA COMPETIVENESS – MANUFACTURING NARRATIVE

• Following a bout of weakness in 2001 and 2002, the Rand has generally strengthened, and with extreme fluctuations The Rand has proved to be the most volatile global currency.

• Economic policy is strongly influenced by the robust and strong banking, services and retail sectors, who are also supported by the financial media.

• However, unemployment has grown significantly under this policy with the economy underperforming.

• Jobs have not been created in the three most important sectors, manufacturing, mining and agri industries.

• While the policy has kept inflation in check, it has dampened economic growth and resulted in a number of sectors underperforming with subdued growth following the 2008/2009 recession. Manufacturing is in its 3rd year of poor growth.

• Interest rates have remained relatively high and the SA Reserve Bank has over an extended period applied a very conservative interest rate policy. Interest rates have been stable for the past 2 years. Did the Reserve Bank move too slowly too late?

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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

RAND VOLATILITY AND SA COMPETIVENESS – MANUFACTURING NARRATIVE

• In recent times the Rand has again experienced strong volatility moving from R6.60 - R8.80 - R7.56 – R9.00 ? over the last 8 months of 2011 / 2012, reflecting a range of a 36% fluctuation.

• Factors influencing the Rand:- US / Europe economic policies (i.e. QE and low interest rate regimes)- Market risk (high)- Political risk (low), but changing - Carry trade (high)- Capital flows (high)• The Rand situation has stimulated significant debate in the country on how the problem can

be addressed. The Reserve Bank has purchased foreign currency at selected intervals, but more recently has stood on the sidelines, and the debate is ongoing.

• The solution is to not make ad hoc interventions but over the long term to build adequate reserves, target a periodically reviewed currency band, macro-prudential regulation and appropriate capital controls

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Administered Prices, Electricity & Water

Electricity

Growth Rates of Administered Prices between 2000 and 2010


Electricity


South Africa vs Brazil

As Eskom readies itself to motivate for further increases at nearly three times the inflation rate (16%) over the next five years, which could lead to increases to consumers as much as 19%, Brazil is cutting industrial electricity rates by 28% with effect from 2013.

Electricity

Growth Rates of Administered Prices between 2000 and 2010

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•The Manufacturing Circle would prefer a longer term and more gradual cost increase trajectory. •We would propose that this would be easier to achieve if NERSA:was better capacitated to interrogate Eskom price increases, and and Eskom were better sensitised to economic growth and job creation imperatives and their important role in helping to exercise them in South Africa. •It is proposed that electricity discounts 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.

Progress to Date

Progress to Date…

The Manufacturing Circle has a Technical Working Group with Treasury

Issues Covered:Macro-economic policy (targeting exchange rate band in addition to inflation band)Bulk infrastructure provision (long-term strategy promoting investment sightlines)Administered prices (Broadly and Electricity)Local Procurement & extending it to the private sector Regulatory Issues (Carbon Tax, EIA etc)Customs (Dumping and Illegal Imports)

Progress to Date…

The Manufacturing Circle has identified the need for a strong buy local campaign

Joint Statement on Buying LocalText of statement agreed by all stakeholders (EDD, DTI, Treasury, BLSA, Manufacturing Circle, ProudlySA, Cosatu, Fedusa, Nactu)Dates targeted for signing ceremony: 26 November (ProudlySA Buy Local Conference)Statement intended to kick off broader buy local advertising campaign

Broader Advertising CampaignStrong creative concept developed 40% funding securedFurther funding required: R6.3mIntention: success of initial campaign will stimulate extension and further action

Report-back on Incentives

Incentives

Report-backMCEP VERY FAVOURABLY RECEIVED AMONGST MANUFACTURERSMany applications still in early 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 FUNDNo succesful applications reportsOpaqueness around types of investments likely to succeed, required ZAR investment per job and exclusion of creation of indirect jobs from consideration

THANK YOU

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

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