1. Manufacturing Circle Bulletin Quarterly Review Second Quarter 2012 Presentation for Manufacturing Circle 16 August 2012 by Dr Iraj Abedian P AN -A FRICAN I NVESTMENT & R ESEARCH S ERVICES (P TY ) L TD.

2. Slide # 2Outline 1. Introduction 2. Overall Manufacturing Business Confidence 3. SA Manufacturing Environment in Q2- 2012 4. Survey Results for Q2-2012 5. Rethinking Monetary Policy in the Wake of the Financial Crisis 6. Concluding Remarks

3. Introduction

4. Slide # 4 Profile of Respondents Profile of Respondents A Total of 67 (previously 49) Participating Firms in Q2 2012

5. Manufacturing Business Confidence

6. Slide # 6 Second Quarter 2012 Manufacturing Conditions Second Quarter 2012 Manufacturing Conditions Mostly Fragile / weak Environment in Q2 2012 Compared to Stable Conditions in Q1 2012

7. South African Manufacturing Environment in Q2 2012

8. Slide # 8 Kagiso Purchasing Managers Index Quarterly Average Kagiso Purchasing Managers Index Quarterly Average Overall weaker Conditions in Q2 2012 Source: Bureau for Economic Research Except for “inventories”, drop in all other component indices from Q1 2012 to Q2 2012 Manufacturing Jobs under strain in Q2 2012 D ATE PMI* B USINESS ACTIVITY N EW SALES B ACKLOG OF ORDER SALES I NVENTORIES P URCHASING COMMITMENTS S UPPLIERS ' PERFORMANCE P RICES E MPLOYMENT E XPECTED BUSINESS CONDITIONS Q1 2012 55.458.960.641.553.150.352.076.747.064.6 Q2 2012 51.853.651.040.857.849.349.269.949.557.5

9. Slide # 9 Manufacturing Production Q2 2012 Source: Statistics South Africa Manufacturing Division Weights 2005 Q/Q Seasonally Adjusted % Growth Food & beverages15.4 1.4 Textiles, clothing, leather & footwear4.9 -0.2 Wood, paper, publishing & printing products10.2 -4.8 Petroleum, chemical & rubber products22.1 1.7 Glass & non-metallic mineral products4.8 -1.2 Basic iron & steel, non-ferrous metal products & machinery22.9 -6.2 Electrical machinery2.5 4.5 Radio, tv communication apparatus & professional equipment1.1 -0.7 Motor vehicle parts & accessories and other transport equipment10.9 5.8 Furniture & other manufacturing division5.2 4.6 Total100.0 -0.2

10. Slide # 10 Quarterly Manufacturing Employment Quarterly Manufacturing Employment 44,000 Manufacturing Jobs Lost in Q2 2012 Source: Statistics South Africa

11. Summary of Q2 -2012 Survey Results

12. Slide # 12 Demand Conditions Demand Conditions Q2 2012Domestic Sales Outperformed Export Sales but losing momentum

13. Slide # 13 Supply Conditions Supply Conditions Input Costs Remained Elevated in Q2 2012

14. Slide # 14 Manufacturing Employment Conditions Manufacturing Employment Conditions Positive Growth (at least 1%) in Manufacturing Employment losing Momentum: 25% of Respondents in Q2 2012 (previously 31%)

15. Slide # 15 Manufacturing Employment Conditions Manufacturing Employment Conditions Factors Explaining the Decline in Manufacturing Employment during Q2 2012 1.Increasing volumes of cheap imports, especially from China. 2.Some manufacturers importing labour intensive intermediate components from China for local assembly to maintain competitiveness 3. Automation proving to be sustainable and very attractive as a way of reducing labour costs 4. Mergers leading to staff redundancies 5. Company restructuring leading to the closing of non-competitive product lines 6. The need to become more efficient in the face of dwindling profit margins 7.The immediate reduction in the number of contract staff as new orders from export markets plummet

16. Slide # 16 Labour Productivity & Regulatory Environment Labour productivity either improved or stayed the same in Q2 2012 compared to Q1 2012 Mostly unchanged regulatory environment between Q1 2012 and Q2 2012

17. Slide # 17 Financial Conditions 1.Sixty five per cent (previously 40 per cent) of surveyed firms reported positive changes in their operating profit during Q2 -2012 2.Q2- 2012 had a more deleveraged environment compared to Q1- 2012 (58 per cent of respondents (previously 62 per cent) registered a debt to equity ratio of up to 50 per cent in Q2- 2012 3.Sixty three per cent (previously 80 per cent) of survey participants accessed credit at lower cost (less than JIBAR +3 per cent) in Q2 -2012

18. Manufacturing Outlook

19. Slide # 19 Short to Long-Term Manufacturing Outlook According to survey respondents, factors that will affect manufacturing performance in the short to long term include: 1)Elevated input costs (electricity, fuel and labour) and a relatively strong rand ; 2)The relocation of the manufacturing of retailers’ house brands abroad (China and India); 3)The slowdown in domestic and international demand conditions as uncertainty and volatility in the global economic environment prevail; 4)The shift in the patterns of consumer spending in South Africa due to high costs ; 5)The poor performance of the mining sector.

20. Rethinking Monetary Policy in the Wake of the Financial Crisis

21. Slide # 21 Global Competitiveness Index Global Competitiveness Index BRIC Competitiveness Outperforms South Africa’s Post 2008 Source: World Economic Forum 1.Declining SA competitiveness due to: a)The Rand exchange rate b)High input costs 2.Strong currencies eroding competitiveness in many other countries. For example: a)Closure of steel mills in Australia due to a strong Australian dollar b)Honda and Nissan relocating their production plants outside Japan due to an appreciating Yen

22. Slide # 22 Structural Change in the Global Economy 1.More frequent recessions in the future than has been the case in the 25 years leading up to the financial crisis (World Economic Forum); 2.The global economy to remain on a trajectory of major structural adjustment for a protracted period; 3.New structural regime characterised by episodes of erratic patterns of capital flows to Emerging Market Economies (EMEs); 4.EMEs currencies to sustain high volatility for as long as free floating exchange rate regimes are followed; 5.Highly volatile currencies to impact on the ability of firms to design proper medium term strategies and budgets

23. Slide # 23 Volatility of the Rand and Peer Group Currencies Peer Group Countries: o Argentina o Turkey o Hungary o Chile o Poland o Malaysia o Philippines o Mexico o Israel o Ukraine o Korea o Indonesia o Russia o Brazil o Peru o Colombia o Thailand Implied Foreign Exchange Volatility (in per cent), South Africa vs. Peer Countries, 2005 - 2010 Source: Datastream

24. Slide # 24 Extra Tool For Monetary Policy 1.The financial crisis has stimulated a new debate on the role of monetary policy: a)In advanced economies: Monetary policy should target asset prices in addition to consumer prices. b)In emerging and developing economies: Monetary policy should target the exchange rate in addition to ensuring low inflation.

25. Slide # 25 Extra Tool For Monetary Policy 2.Emerging market economies have become more vulnerable to currency volatility because: a)They are generally not well hedged against a currency risk; b)A strengthening of the exchange rate may result in the loss of competitiveness of the traded goods sector and the ensuing effect could become permanent, even if the exchange rate subsequently returns to its previous level. 3.Foreign exchange market intervention becomes a more relevant monetary policy tool for inflation-targeting emerging market economies relative to inflation-targeting advanced economies.

26. Slide # 26 Inflation and Exchange Rate Targeting Inflation and Exchange Rate Targeting Not Mutually Exclusive 1.Policymakers should use different tools e.g. as macro-prudential regulation, capital controls, exchange rate bands, etc. to create macro- financial stability. 2.Following the financial crisis, delivering stable prices is not the only credible and appropriate target for monetary policy in emerging markets. 3.Given the effects of considerable fluctuations in the exchange rate, there is a need for two targets: a)inflation targeting b)exchange rate targeting 4. The SARB should specifically adopt an explicit “currency band” between 8.20 and 8.60 per US$ as a “working guide” for the conduct of monetary and exchange rate policies.

27. Slide # 27 Inflation and Exchange Rate Targeting Inflation and Exchange Rate Targeting South Africa will be required to maintain an adequate stock of safe and liquid assets Source: IMF GROSS RESERVES VS. MEASURES OF ADEQUACY, SOUTH AFRICA, 2008 - 2016

28. Concluding Remarks

29. Slide # 29 Concluding Remarks 1. Despite a better overall performance in Q1 2012, manufacturing production and business confidence remained weak during Q2 2012. 2. Following the financial crisis, the global economy is set to remain on a trajectory of considerable structural adjustment partly characterised by elevated EMEs currencies’ volatility. 3. Empirical global and national lessons since the financial crisis show that refraining from using the broader array of available policy tools (including exchange rate bands) would prove to be detrimental for economic activity, job creation and growth sustainability.

30. Slide # 30 Thank you for your attention abedian@pan-african.co.za Tel: 011 883 8036/7 Fax: 011 883 8038 Q & A