Our operating context

We operate in diverse countries, and as such we are exposed to global market forces; fluctuations in national economies; societal unrest and geopolitical uncertainty; a range of consumer trends; evolving legislation and changes made by competitors. Failure to recognise and appropriately respond to any of these factors could directly impact the profitability of our operations but also allows us to consider the opportunities presented.

The context in which we operate our businesses, both now and in the future, is informed by global macroeconomic as well as industry and geographic trends. Our strategy is a direct response to our operating context in our quest to achieve our stated ambition. More specific operating context details, relevant to each division are outlined here.

SOUTH AFRICA
The loss in momentum behind growth to 1.2% in the past decade from 3.5% in the previous decade reflects chronic policy uncertainty, stretched government finances, infrastructure constraints and dwindling confidence.
The South African government established the Solidarity Fund as a vehicle to enable the international community, citizens of South Africa and the business community to contribute to the national disaster response. As at 18 September 2020 R3.8 billion had been raised.
The South African Sovereign credit rating was downgraded from BB to BB- by Fitch, while Standard and Poor's local currency rating of BB and foreign currency at BB- was maintained. On 26 November 2020 Moody's downgraded Barloworld's Global Scale Rating from Ba1 to Ba2 while maintaining a negative outlook. The National Scale Rating for Barloworld has been maintained at Aa2.za. The Reserve Bank reduced the repurchasing rate from 6.25% to 3.50% between March and July.
The Medium-Term Policy Statement outlines the economic recovery plan that will focus on infrastructure, electricity generation, digital spectrum allocation, employment and rapid industrialisation, despite an expected contraction of the SA economy by 7.8% in 2020.
The appointment of an 18-member Economic Advisory Council by President Ramaphosa in September 2019 offers medium term opportunity, as does National Treasury's recently released growth plan. The plan presents the prospects of creating a more stable and predictable policy environment expected to stimulate investor confidence and job-rich growth.
Policy uncertainty around the fate of state-owned enterprises bolstered with the appointment of 10 people to the Presidential State-Owned Enterprises Council to support government in repositioning SOEs as "effective instruments of economic transformation and development". Evidence of some decisive actions taken at Eskom, despite several loadshedding schedules during 2020, and SAA in business rescue.

GLOBAL

The IMF reports that the global economy is slowly climbing out of the depths to which it had plummeted during the hard lockdown in April 2020. However, with the COVID-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations. While there are early signs of recovery in some regions, the global economy's long ascent back to pre-pandemic levels of activity remains prone to setbacks.

Global growth is projected at -4.4 percent in 2020 and at 5.2 percent in 2021. Following contraction in 2020 and recovery in 2021, the level of global GDP in 2021 is expected to be a modest 0.6 percent above that of 2019. Growth projections imply wide negative output gaps and elevated unemployment rates in 2020 and 2021 across both advanced and emerging market economies.


REST OF AFRICA
In sub-Saharan Africa, the World Bank predicts economic growth to fall from 2.4% to -3.3%. Real GDP is expected to pick up to 2.1% in 2021. Massive investments are required across countries and support from the international community and a bold reform agenda including policies that create fiscal space and policies to speed up job creation.
In Angola the economy is expected to fall deeper into recession due to the double shock of low oil prices and the pandemic. Next year, GDP is seen to be rebounding in line with gradually recovering activity, although growth will remain marginal. An increased external debt burden amid a depreciating Kwanza and risk of default, which threatens macro stability, cloud the outlook. Development challenges include reducing its dependency on oil and diversifying the economy by rebuilding its infrastructure as well as improving institutional capacity.
Botswana's economy deteriorated sharply as COVID-19 related restrictions hammered activity. Diamond exports, (90% of all exports), fell by 99.4% y-o-y, due to lockdowns and disrupted supply chains. Developments in the global diamond industry will have a telling impact on the short term recovery given Botswana's dependence on the commodity. While a mild recovery is expected for 2021, the economic impact of COVID-19 is likely to be deep and long-lasting. Government's ability to advance key reforms in the 2020 - 2023 Economic Recovery and Transformation Plan are key for broad-based growth.
The DRC economy was impacted by COVID-19 to a lesser extent than expected - particularly due to the resilience of the mining sector - as the confinement of workers at mine sites contributed to an increase in production. Prices for the country's export commodities trended higher after the coronavirus-induced slump, with prices for copper in particular, its main export, rallying thanks to firming demand from China. Economic sentiment improved in August - highlighting slowly recovering confidence among businesses.
The Mozambique economy is poised to contract for the first time in nearly three decades. Exports, especially coal and aluminium, are set to decline amid subdued foreign demand. Output is expected to rebound next year as activity gradually recovers. The country's sizeable external debt burden continues to cloud the outlook.
Zambian GDP data revealed output contracted as a result of a shrinking wholesale and retail trade sector. Containment measures reduced demand and exports fell. Merchandise exports rebounded in July after nearly two full years of decline. Some concern exists around the abrupt dismissal of the Central Bank governor by the President, raising some concerns over central bank independence and uncertainty regarding talks with the IMF for a much-needed loan programme. High exposure to copper (single commodity) creates uncertainty. The IMF says a combination of lockdown measures, currency volatility, high inflation, wage erosion, lack of foreign currency and reduced capacity of businesses, has accelerated company closures.
Zimbabwe's economy contracted by 10.4%, but expects a rebound next year. With all the challenges, the long term growth fundamentals remain, supported by favourable high population growth trends, including urbanisation and consumer spend growth. If confidence comes back in to the market, growth will return.


COMMODITIES
SOCIAL AND ENVIRONMENTAL
OPEC cuts 2020 oil demand forecast and trims
2021 outlook on pandemic fallout. Energy market
participants are becoming increasingly more concerned
about a faltering economic recovery and stumbling fuel
demand in the wake of the pandemic. OPEC suggests
the negative impact on oil demand in Asia was expected to
persist through the first six months of 2021.
Demand for thermal coal in South Africa will remain high due
To Eskom’s reliance on coal, but will decline in export markets.
However, there is strong demand for coking coal on the back of
Copper demand is expected to stay strong in the medium to
long term, while the outlook for iron ore and manganese is
positive but not as much for diamonds. Our exposure to various
commodities protects performance from cyclicality.
Global population growth to nine billion by 2050 should
have a significant impact on commodities – this population
will require cars, white goods, laptops, and smartphones,
while expecting to live in increasingly technological
urbanised areas with adequate infrastructure.
growth in India and China.
In light of past corporate
global failures, stakeholders are
demanding greater levels of
transparency.
Corruption commissions and
investigations in South Africa
continue with several arrests
made in 2020.
Increasing demand for greater social equity.
Millennials’ focus on work/life balance.
become redundant.
COVID-19 responses to social needs (CSI and Solidarity fund).
Climate change and pressure for greater levels of
environmental responsibility in terms of greenhouse gas
emissions, the circular economy, reducing waste and
water usage, continue to gather momentum and
are high on the agenda of the United Nations,
governments and boardrooms across the world.
Escalating demand for renewable energy.
TECHNOLOGICAL
INNOVATION
AND DIGITISATION
The Fourth Industrial Revolution
encompasses technologies such as artificial
intelligence (AI), nanotechnology, quantum
computing, synthetic biology and robotics.
These technologies are blurring the lines
between the physical, digital and biological
spheres across all sectors, ushering in
profound changes to the world of business.
Fast tracking of digital strategies has been
a pervasive response by companies
to the pandemic.
Technology threatens job security as certain skills
continues to be important.
Localisation - emphasis on employing and procuring locally
CHALLENGES
TRANSPARENCY
MONGOLIA
The economic impact of the pandemic is projected to be severe, but temporary. The economy contracted sharply in 1H2020 due to fall in external demand and domestic containment measures. Economic activity will begin to recover 2H2020 with loosening in the policy mix, a resumption in mining exports to China, a pickup in credit growth, and lifting of containment measures. The agricultural sector (20% of GDP), has been somewhat insulated from the crisis. On an annual basis, real GDP is likely to contract by 1% in 2020 - 6% points lower than the pre-COVID-19 projection - but authorities see upside risks to this forecast. Inflation should remain low due to low international oil prices and weak domestic demand.
RUSSIA
2020 GDP is set to contract at the sharpest pace in over a decade. The pandemic has reduced domestic activity as investment and consumer demand decreases, while a devastated oil industry and weak foreign demand bode badly for the external sector. Fiscal and monetary stimulus should soften the downturn and bolster next year's recovery. The unemployment rate rose to an almost nine-year high in August, which, coupled with a depreciating ruble in September, likely capped the recovery in consumer spending. After diving in July, merchandise exports continued to plummet in August - September amid depressed oil output and prices. Government approved the 2021 - 2023 budget that includes cutting military spending in favour of social spending, increasing borrowing and raising taxes on mining companies and high earners.
2020 - THE WORLD CHARACTERISED BY THE DEVASTATING EFFECTS OF THE COVID-19
The COVID-19 pandemic has, with alarming speed, dealt a heavy blow to an already-weak global economy, which is expected to slide into its deepest recession since the Second World War, despite unprecedented policy support. The global recession will be deeper if countries take longer to bring the pandemic under control, if financial stress triggers defaults, or if there are protracted effects on households and firms. Economic disruptions are likely to be more severe and protracted in emerging markets and developing economies with larger domestic outbreaks and weaker medical care systems; greater exposure to international spill overs through trade, tourism, and commodity and financial markets; weaker macroeconomic frameworks; and more pervasive informality and poverty. Beyond the current steep economic contraction, the pandemic is likely to leave lasting scars on the global economy by undermining consumer and investor confidence, human capital, and global value chains. Being mostly a reflection of the recent plunge in global energy demand, low oil prices are unlikely to provide much of a boost to global growth in the near term. While policymakers' immediate priorities are to address the health crisis and moderate the short term economic losses, the likely long term consequences of the pandemic highlight the need to forcefully undertake comprehensive reform programmes to improve the fundamental drivers of economic growth, once the crisis abates.
Citation
"World Bank. 2020. Global Economic Prospects, June 2020. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/33748 License: CC BY 3.0 IGO."

Economic Advisory Council report


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