SOUTH AFRICA ECONOMIC PROSPECTS

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1 Johannesburg (gtai) South Africa stands at a watershed. Accusations of private interest groups undermining the state damage the investment climate and paralyse the already weak economy. In 2017 and 2018, too, growth is likely to miss the 2% mark. Important legislation has been stuck for years. As a result of political uncertainty, companies investments are declining. Private consumers too can no longer provide sufficient impulses. ECONOMIC PROSPECTS South Africa scarcely avoided stagnation in Although a growth rate of zero was still expected at mid-year, the South African Reserve Bank (SARB) now forecasts a slight increase in GDP of 0,4%. Over the next two years, GDP growth will not breach the 2% mark, according to the current forecast. Due to rapid population growth, unemployment is threatening to rise even higher from 26,7%. A simultaneous high inflation rate of about 6% provides conditions for stagflation. In recent years South Africa has been haunted by several successive economic shocks. These included massive strike waves, electricity shortages, falling commodity prices and the worst drought the country has seen in decades. The most recent negative development is the sharp fall in private sector investments due to political uncertainty. Heated political debate about state capture has also contributed to a lack of confidence among investors. A report by the Public Protector has raised serious allegations against Indian-born South African business family, the Guptas, who are friends of President Jacob Zuma and also reveals how state ministries and state-owned entities have been influenced to benefit private business interests. The focus is now on the state-owned energy utility Eskom and the Department of Minerals and Energy. The Guptas also tried to gain control of the Treasury using bribes (600 million rand). Observers see this as an attempt to hijack important government projects, in particular the controversial nuclear programme. Investors regard the Treasury as a final institutional bastion for solidity and good governance in South Africa. Economic representatives fear that an erosion of the integrity of the Treasury will lead to a further downward spiral. In October 2016, respected Finance Minister Pravin Gordhan found himself forced into a corner on charges of corruption. These proved to be legally untenable after a short time and are regarded as politically motivated. According to the decision of the Public Protector, a judicial commission of investigation is to clarify the accusations of state capture. The air around the scandal burdened President Zuma is thinning. The unpredictability of developments is likely to cause further uncertainty and impact the investment climate. INVESTMENT According to 2016 estimates by Treasury, gross fixed capital formation will fall by -2,9%. Private companies, which contribute around two-thirds of the investment rate, are cutting back on spending even though the private sector has reserves of more than 700 billion rand. In addition to weak demand and political uncertainty, companies are also discouraged by the lack of structural reforms. Many important legislative proposals have been in limbo for years. For example, a new mining charter has been in the spotlight since 2012 and when an update was recently issued, the mining industry rejected it outright as impractical. Mining companies lack legal certainty for investment decisions. There are similar problems in telecommunications and the labour market. The previously booming market for renewable energies is now also being affected by these uncertainties. The state-owned utility, Eskom, concerned about further electricity purchase agreements with private producers, is in favour of implementing the nuclear programme (9,6 GW). It is hoped that infrastructure expansion will generate new impetus. A sum of 987 billion rand is envisaged in the budget planning until CONSUMPTION With a GDP share of around 60%, private consumption is an important economic stimulus for the country but difficult economic times have not left consumers unaffected. There are vast deficits in the government budget, further tax increases of 28 billion rand were announced in 2017 and the severe drought brought on by the El Nino effect is causing 58 ANNUAL REPORT OF THE SOUTHERN AFRICAN GERMAN CHAMBER OF COMMERCE AND INDUSTRY

2 Lüderitz S O U T H A T L A N T I C N A M I B I A O C E A N Capital: Pretoria, administrative; Cape Town, legislative and Bloemfontein, judicial National capital District capital Major airport International boundary District boundary Main road Railroad Saldanha Bay O range Saint Helena Bay Table Bay Cape Town Cape of 300 km Good Hope 200 mi F alse Bay NORTHERN CAPE WESTERN CAPE Cape Agulhas BOTSW ANA Molopo Mossel Bay Moss el bay Aliwal North Middelburg Umtata Queenstown Algoa Bay Port Elizabeth Cape St. Francis Musina (Messina) NORTHERN PROVINCE Polokwane (Pietersburg) Nelspruit Pretoria Xai-Xai Mafikeng Johannesburg Delagoa Bay Maputo NORTH WEST MPUMALANGA GAUTENG Mbabane Klerksdorp SWAZILAND Kimberley Orange Gaborone Bloemfontein EASTERN CAPE Bisho Su n days Harts FREE STATE Caledon Great Fish Orange D r a Limpopo Maseru LESOTHO k e n Great Kei s b e r g East London R a n g e K WAZULU- NATAL E.C. ZIMBABWE Olifants Buffalo Durban MOZAMBIQUE Limpopo I N A N D I O C Save N E A Area Population km² 55 million Population growth 1,2% Official languages Capital isizulu, isixhosa, Afrikaans, Sepedi, Setswana, English, Sesotho, Xitsonga, Siswati, Tshivenda and isindebele Pretoria GDP growth 0,4% (2016) President Jacob Zuma Ease of doing business 74/189 (2015) Currency Sources: World Bank, gtai South African rand (ZAR) KEY ECONOMIC DATA Indicator (estimates) GDP (nominal, billions of 314,7 294, ,6 US dollars) , GDP per capita (nominal, US dollars) Population (millions) 54,5 55,0 81,6 Exchange rate (1USD = rand) Sources: IMF, German Federal Bureau of Statistics 12, FOREIGN TRADE (USD MILLIONS) Comparative data, Germany % change Imports 79,6 74,7-6,1 Exports 69,6 74,1 6,4 Balance of trade -10,0-0,6 Source: EIU SWOT ANALYSIS Strengths Large market of 55 million inhabitants with high purchasing power Relatively good infrastructure Broad industrial base, enables market entry into African continent Highly developed finance sector, independent justice system, free press Politically relatively stable Opportunities Major state infrastructure programmes High demand for imports Eager consumers in growing middle class Excellent conditions for opportunities in renewable energy Abundant raw materials Weaknesses Lack of skilled workers Rising energy prices Lack of competent administration High crime rate Economic policy conflicts within the ANC and its partners Threats Declining commodity prices Infiltration of government by private interest groups Wage increases disproportional to productivity growth Volatile national currency Social imbalances and increasing protests can undermine the stability of the country in the long term SELECTED MAJOR PROJECTS Project Description Investment (rand) Project Status PRASA Passenger rail transport 12,7 billion Completion until 2030, Part 1 of the order for rail fleet went to Alstom Comments Renewal of the rail fleet with the construction of a 74 million USD production facility, new construction and renewal of railway tracks and signal systems Transnet Railways und Ports 28,1 billion Completion by 2026 Construction or expansion of ports and railway lines, rail fleets Clean Fuels 2 Programme 3 billion Planning, Completion delayed until 2020 Investments from refineries for the production of fuels according to the euro V standard, including Sasol (0,9 billion USD) and BP / Shell (0,4 billion USD) Swazilink Railway 1,3 billion Feasibility planning Construction of a railway connection from the Mpumalanga province to the ports in Richards Bay and to Maputo via Swaziland Liquefied Natural Gas Independent Power Producer (IPP)-Programme Solar Park Project Up to 14,8 billion 3,7 billion Tender procedure is to be completed in 2017 Feasibility planning Procurement of MW at IPP Construction of 1,5 GW solar production in the province of Northern Cape, expanding to up to 5 GW Lesotho Highlands Water Project 1,7 billion Planning, to conclude in 2024 Phase 2: Construction of a new dam Zendai Modderfontein 6,2 billion First project under construction, Completion by 2024 Mixed city district between Johannesburg and OR Tambo airport with residential units Volkswagen 0,3 billion Planning, Completion by 2017 Expansion of the Port Elizabeth plant, including production of the new Polo Volkswagen 4.5 billion Planning Factory expansion in Port Elizabeth BMW 6 billion Planning Expanding Rosslyn plant in preparation to produce X3 ANNUAL REPORT OF THE SOUTHERN AFRICAN GERMAN CHAMBER OF COMMERCE AND INDUSTRY Sources: gtai research, press reports

3 double-digit food price inflation. Many households are considered over-indebted. The debt ratio is around 75%. Since mid-2015, SARB has raised the prime lending rate in several steps from 6 to 7%, which makes loan repayment more expensive. As a result, disposable incomes are rising at a slower pace: after 2,2% (2015), the figure for 2016 is expected to grow by only 0,7%. Consumption levels have dropped, particularly in the case of durable goods such as furniture, electronics and motor vehicles. Retail sales in the first eight months of 2016 were only 2,2% in real terms (2015: 3,3%). Despite this, construction of large shopping centres continues unabated. In November 2016, the expanded Menlyn Park in Pretoria opened, at square meters the largest mall in Africa. An equally large shopping centre is also being built in Fourways. FOREIGN TRADE The value of the rand has fallen in recent years against the US dollar and the euro, but South Africa s exports have not benefited sufficiently. In future, the country will also have a significant deficit in its trade balance. The imbalance is clearly illustrated in relation to its main trading partner, China. South African exports have fallen by 18,9% between 2013 and 2015 due to low demand for raw materials. At the same time, imports of finished products from the East are increasing. A number of local industries, especially the steel and metal industry, complain about losing market shares as a result of the flood of imports. Germany as the second-most important trading partner also attains a high export surplus with South Africa, supported by the supply of motor vehicle parts and machines. In 2015, the bilateral trading volume reached a record value of 15,5 billion euro. German exports amounted to 9,6 billion euro. On the back of this high value, there is likely to be a significant cooling off in By the end of August 2016, German shipments had declined by 10,3% compared to previous year s figures. SECTOR SURVEY South Africa is currently ranked third largest economy in Africa, behind Nigeria and Egypt due in part to the decline in the exchange rate, which has had a negative impact on the valuation made in US dollars. Nevertheless, South Africa still has the most developed and diversified economic infrastructure on the continent with a broad industrial base that provides a high demand for goods and services. German companies should not be deterred by the current weak economic situation. There are good business opportunities in individual segments such as water infrastructure and energy efficiency. MACHINERY AND EQUIPMENT Equipment investment fell by 0,6% in real terms in 2015 with similarly negative development in This has put a damper on the sale of machinery. Producers are harmed by over-capacity as a result of weak demand and only achieve a utilisation rate of 81%. The market environment for expansion investments is therefore fairly weak. However, at the same time costs are rising, for example electricity prices which increased by 9,4% (2015: 12,7%). Companies are looking to invest primarily in refurbishing and replacing cost-reducing equipment. This creates sales opportunities for resource-efficient technologies and automation. There is high import demand for machinery, which accounts for a quarter of total imports. AUTOMOTIVE INDUSTRY The automotive sector is in crisis and is expected to shrink for the third year in a row, according to the National Association of Automobile Manufacturers of South Africa (NAAMSA). Sales are expected to drop by -8,6% to (2015: -4,1%). On the other hand, production of motor vehicles is growing steadily. In 2015, vehicles rolled off the assembly line (+ 8,7%), and in 2016 the number will increase to German car makers also announced investments for the production of new models, such as BMW (6 billion rand) and VW (4,5 billion rand). Companies like Hyundai, Mahindra and BAIC are also showing interest in South Africa. The course of the 2017 wage negotiations will be decisive. During the last pay round in 2013, a seven-week strike severely damaged the reputation of South Africa as a reliable production site. CHEMICALS The chemical industry is also suffering in the weak economy and its production index stagnated in Without considering the oil industry, nominal turnover is also just treading water. 60 ANNUAL REPORT OF THE SOUTHERN AFRICAN GERMAN CHAMBER OF COMMERCE AND INDUSTRY

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5 Demand among local key customer sectors is weak. In addition, because of rising costs, domestic producers are finding it difficult to compete against imports. Many investment projects are unable to get off the ground. South Africa s six oil refineries are still producing according to the outdated euro II standard. The planned introduction of euro V in 2017 may be delayed several years, which will also hamper investment in modernisation of up to 40 billion rand. Chevron is one of the operators that may opt to withdraw from South Africa. CONSTRUCTION The South African construction sector is still growing at an above-average rate; in 2015 it grew by 2%. The driving force behind this is increased investment in residential construction (+ 8,3%) and civil engineering (+ 5,9%). In 2016 the industry is expected to grow by about 1,6%. High population growth and urbanisation have created a demand for 2,1 million residential units. Government is planning to respond with private public partnerships in social housing and has 101 large projects with an investment volume of 340 billion rand on the agenda. Private developers are planning many mixed-use projects, intended to improve connections between home and work in the sprawling cities. Companies complain that there is a lack of major national infrastructure projects; contracts are mainly found in the municipal sector. ELECTRO-TECHNOLOGY AND ELECTRONICS The market for security technology, which is important in South Africa, is subject to political uncertainty. A draft law, according to which providers of security services must surrender at least 51% of their shareholding to South Africans, has yet to be signed by President Zuma. Due to concerns about their legality, it is unclear whether regulations will be effected. Demand is likely to remain high in the long term. Rising criminality, like hijacking of trucks, requires high-tech security measures such as telematics. Sales of consumer electronics have suffered due to a decline in consumer spending on durable goods and price increases for imported goods as a result of the weak exchange rate. We are a world-class company, based in Sandton, the business hub of Africa. We offer integrated talent solutions to clients nationally and in sub-saharan Africa. Staffed by people with many years of experience in the search and human resources field, Signium is a proud B-BBEE level 2 contributor as a QSE, evaluated against the new codes. OUR SERVICE OFFERINGS INCLUDE: Executive Search, Selection of Specialised Skills, Assessment of Human Capital, Leadership Development and Coaching, and Board Strategy Facilitation. TALENT IS NOTHING WITHOUT CHARACTER AUGUSTE (GUSTI) COETZER MOSIMA SELEKISHO It's our most abundant resource ANNELIZE VAN RENSBURG MICHELLE MOSS 62 ANNUAL REPORT OF THE SOUTHERN AFRICAN GERMAN CHAMBER OF COMMERCE AND INDUSTRY SUSAN MOHALE Non Executive For more information, call or visit our website: signium.co.za

6 INFORMATION AND COMMUNICATION TECHNOLOGIES South Africa s mobile operators need to expand their mobile broadband networks massively. According to company reports, mobile data traffic has grown by about 50%. The share of the data business is increasing in total sales and already reaches values of approximately 30% among market leaders Vodacom and MTN. In order to meet demand in 2016, MTN invested around 12 billion USD in grid expansion. Vodacom reported a sum of 8,7 billion rand for the fiscal year The big problem is the limited spectrum. Urgently required frequencies are blocked by delays in the introduction of digital broadcasting. The government and the private television station e.tv are involved in a long-standing dispute over the encryption of set-top boxes, which has now been brought before the Constitutional Court. ENVIRONMENT Securing sufficient water supply will be a central challenge for the future of the country. At the moment, the country is mainly dependent on surface water. As a result of El Nino, 2015 was the driest year on record. The levels in the dams fell, and a state of emergency was declared in eight provinces. According to experts, South Africa is heading for a long-term crisis. Therefore, urgent investment is needed. Around 60% of sewage treatment plants are in a critical state. The pipe networks are ailing and have an average loss of 37%. In order to avoid shortages, the use of unexploited, often brackish ground water resources is to be improved. Seawater desalination and the collection of rainwater have also become important topics. MEDICINE According to industry experts, the South African medical technology market can still hold its own on a growth path of around 7% in 2016 and Accordingly, sales in 2016 were expected to rise to 15 billion rand, thus surpassing the previous year s result by a good 1 billion rand. High-quality medical technology is particularly popular with the private sector. Although the number of private insurers remained stagnant at about 8,8 million, the frequency of chronic and lifestyle-related diseases is increasing. The private operators such as Netcare or Mediclinic therefore increase their number of beds. The most important project in the healthcare sector is the planned introduction of a national health insurance (NHI), which will also contribute to the modernising of public facilities. ENERGY The power supply situation has recently stabilised. Since August 2015, there have been no loadshedding power outages, which previously paralysed the economy on an almost daily basis. The state utility Eskom has introduces improved maintenance of its power plants; critics however point mainly to the weaker demand, since the poor economy is slowing down production of largescale consumers such as smelting furnaces. At the current growth shortages may still be experienced until For the future, South Africa relies heavily on private producers: MW were planned for renewable energies, of which only MW have been granted thus far. A further invitation to tender is to be launched into The process for MW from gas power was also to be launched in The first successful bidders from the programme for coal power (2 500 MW) are also to be named. MINING The South African mining sector is resistant to investment. Weak prices and low demand have slowed production, particularly in the important sectors of coal, iron ore and platinum. Loss-making shafts are closed and investment projects deferred. The exception is gold mining, which benefits from higher world market prices and the weak value of the rand. Gold mines are investing primarily in cost reduction, since electricity prices have risen by 300% since In addition to energy efficiency measures (e.g. cooling systems for the shafts), the generation of electricity is also on the agenda. Sibanye Gold is planning solar plants (150 MW) and a coal-fired power station (300 MW). Goldfields wants to build a solar plant (80 MW). TRANSPORT Over the next three years, 145 billion rand is earmarked for maintenance and development of the road network. Nevertheless, the road construction authority, Sanral, has estimated that there is an investment backlog of 197 billion rand. Around 76% of roads maintained by Sanral are now older than their intended life span of 20 years. Transnet, which is responsible for freight transport, has planned investment expenditures for the next ten years at 380 billion rand. However, the volumes of raw material transport are developing slower than expected. The expansion of the railway lines for coal and iron ore may be delayed. The construction of a new deep-sea port in Durban is not yet being pursued, but instead the existing container terminals are to be extended from currently 3,6 million to 5,3 million tonnes. ANNUAL REPORT OF THE SOUTHERN AFRICAN GERMAN CHAMBER OF COMMERCE AND INDUSTRY