Global growth for the year was characterised by sluggish recovery and has remained at 3,1% – the same as the prior year. South Africa registered negligible growth due to the effects of weak global demand, low commodity prices, a severe drought and low levels of business and consumer confidence. With a GDP growth rate of 0,7%, which is marginally below the expected growth rate of 0,8%, and unemployment rising to the highest level in 13 years, South Africa also saw a contraction in private-sector capital investment. A challenging outlook for the country going forward was further affirmed by the downgrade of the Sovereign credit rating by two credit rating agencies to so-called junk status, from ‘BBB’ to ‘BB+’ -’ and the long-term local currency rating to ‘BBB-’ from ‘BBB.’
Globally, a high degree of uncertainty dominates geopolitical and economic relations. Tensions in many parts of the globe are rising, and populist movements have appeared in Europe and the United States. Political tensions have now made advanced economies a major locus of policy uncertainty, with rhetoric in many countries suggesting an orientation towards inward-looking policies and protectionism. On the upside, concerns from a year ago regarding China’s growth prospects and the consequent struggles of primary commodity exporters have largely abated, with commodity prices partially recovering.
The expectation is for moderate global economic recovery in 2017. World growth is expected to rise from 3,1% in 2016 to 3,5% in 2017, and 3,6% in 20181.
Despite the commodity price recovery, commodity prices are expected to remain below their peaks in 2011 to 2014 peaks, reflecting a weak global recovery2. Prospects for 2017 differ sharply across countries and regions, with emerging Asia in general, and India in particular, showing robust growth. Sub-Saharan Africa is forecast to experience overall growth of only 2,6%.
GDP growth %
The short-term global outlook is mixed and, with it, Transnet’s demand picture is also mixed. We continue to experience slow global recovery and uncertainty, paired with an increasingly challenging economic environment at home. Our strategic intent as an SOC, encapsulated in the Statement of Strategic Intent from our Shareholder (DPE), requires us not only to navigate these precarious economic times in a manner that improves our bottom line, and secures our future, but also to chart a course that leads the country towards sustainable and inclusive growth. As a large infrastructure company, we intend to contribute towards this growth by investing in strategic infrastructure ahead of demand, of which the positive outcomes extend to both our commercial and developmental objectives. However, it is crucial that we temper our aspirations for capacity creation in the context of current market conditions. We are, therefore, repositioning the MDS, now in its sixth year, to increase capacity ahead of pre-empted, ‘validated’ demand.
In the prior year’s scenario planning, we revised our seven-year capital portfolio planning down from initial projections of R277,8 billion to R254,9 billion if economic recovery remained stagnant. Transnet now expects to invest R229,2 billion over the next seven years to 2024, thereby reducing our capital investment planning by R48,6 billion.
As a result of the Sovereign rating downgrade by S&P Global, the ratings agency has reviewed Transnet’s long-term foreign currency Sovereign credit rating from ‘BBB-’ to ‘BB+’, and the long-term local currency rating from ‘BBB’ to ‘BBB-’. This outlook is in line with the rating agency’s assessment of the Sovereign rating given that Transnet’s rating is linked to that of the Sovereign. S&P has, however, maintained Transnet’s standalone credit profile at ‘BBB’, reflecting our strong financial metrics as we execute our multi-billion-Rand infrastructure investment programme.
Transnet is indeed well positioned to withstand the downgrade, as we continue to raise funds on the strength of our own balance sheet. Transnet does not receive funding or guarantees from the National Government. We will continue to undertake our investment and capitalisation strategies with the requisite degree of prudence and risk awareness to ensure we do not undermine our financial sustainability.
Transnet aims to achieve capital spend of R229,2 billion
over the Market Demand Strategy (MDS) period (between R340 billion and R380 billion to be invested over the next
10 years) to increase capacity across all commodities
1 International Monetary Fund, 2017. World Economic Outlook: Gaining Momentum? Washington, April
2 Africa Pulse, October 2016, Volume 14, https://openknowledge.worldbank.org/handle/10986/25097