Annual report 2016 |

Economic and operating environment

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In South Africa, pressure on disposable income and an uncertain environment in the context of global political instability, pedestrian economic growth, investment market volatility and the risk of a downgrade in South Africa’s foreign denominated debt, did not bode well for investor confidence.

Economic and operating environment

Global economy

The potential impact of political referendums and elections on the global economy featured prominently in the news in 2016, including the UK referendum on European Union (EU) membership and the US Presidential election.


In the UK, the referendum vote in favour of leaving the EU prompted a sharp depreciation of pound sterling, while the Bank of England announced additional monetary policy easing in the form of a 0,25% cut in the Bank rate and expansion of its asset purchase programme, given concerns over the outlook for UK economic growth at the time.

In the US, Republican candidate and now President Trump’s victory in the November 2016 Presidential election was followed by a significant sell-off in the US Treasury market as investors contemplated the potential for looser fiscal policy.

The theme of divergence between the monetary policy stances of the US Federal Reserve and other major developed market (DM) central banks continued throughout 2016. The more stringent approach adopted by the Federal Reserve was, in part, motivated by the potential for upward pressure on wages and inflation due to the firmness of the labour market. The Federal Reserve Open Market Committee (FOMC) hiked the federal funds target rate from 0,25-0,50% to 0,50-0,75% in December 2016, its first hike since December 2015.

In contrast, the European Central Bank (ECB) maintained a loose monetary policy position, partly reflecting the risk of deflation. At the conclusion of its monetary policy meeting in December 2016, the ECB left its policy rates unchanged, but indicated that it would continue with its asset purchase programme. Although its monthly net asset purchases will be reduced from April 2017, purchases are set to continue until the end of December 2017 or, if necessary, beyond that point. It should, however, be noted that inflation lifted in the Euro area towards the end of 2016 - as is the case for the global economy in general - partly due to higher energy prices. This eased the deflation concerns of the ECB.

Among emerging market (EM) economies, expectations that China’s economy would continue to slow, given excess capacity in some sectors and the constraints posed by a debt overhang, did not materialise as looser monetary and fiscal policy stabilised the economy. However, risk lingers and China’s policymakers tightened foreign capital controls against the backdrop of a falling level of foreign exchange reserves.

Overall, global income growth remained modest in 2016, although business sentiment surveys suggest real economic activity lifted late in the year. The improving trend in the global manufacturing PMI index, in the second half of 2016, in particular, suggests firmer momentum in global industrial production off a low base.

South Africa

South Africa’s real GDP growth estimate for 2016 is less than 0,5%. Real personal disposable income growth remained soft, reflected in modest consumer spending data. In addition, heightened economic policy uncertainty and weak earnings impacted negatively on private sector fixed investment.


Throughout the year, attention was focused on the possibility of a downgrade of South Africa’s foreign currency denominated debt to sub-investment grade. This primarily reflected the risk to fiscal consolidation from stalling real GDP growth, concern over the sustainability of the country’s large current account deficit and the exposure of the central Government to the financial fragility of some state owned companies.

The South African National Treasury’s Budget for fiscal year 2016/17 and its October 2016 Medium Term Budget Policy Statement, nonetheless, continued to show a path to debt stabilisation over the medium term, by introducing revenue raising measures and cutting expenditure relative to previous projections.

Ultimately, a downgrade of South Africa’s long-term foreign currency debt to sub-investment grade was avoided as ratings agency Standard & Poor’s confirmed the sovereign’s long-term foreign currency debt rating at BBB- (negative outlook) in December 2016. The agency did, however, lower South Africa’s long-term local currency debt rating from BBB+ to BBB (negative outlook).

The negative outlook on South Africa’s debt rating implies a downgrade to sub-investment grade is still a risk. Nonetheless, an increase in the country’s terms of trade, interest rate hikes and the reprieve on the sovereign debt rating supported the rand exchange rate, which appreciated 12% against the US dollar during 2016.

Headline consumer price inflation increased from 5.2% at the end of 2015 to 6.6% in November 2016. Currency weakness in late 2015 and the concomitant upward pressure on inflation in 2016, prompted the Reserve Bank to hike its repo rate from 6,25% at end 2015 to 6,75% in January 2016 and further to 7,00% in March 2016, before remaining on hold during the rest of the year.

The appreciation of the rand in 2016 has improved the medium term inflation outlook. The annual advance in headline consumer price inflation is expected to peak in December 2016 and if the relatively benign inflation forecast for 2017 is realised, the Reserve Bank may have reached the top of its interest rate hiking cycle. Given this relatively more constructive backdrop, South African Government bonds rallied in 2016 as the 10-year bond yield declined to 8,921% at year-end from 9,687% at the end of 2015. The All Bond Index produced a return of +15.45% in the year to December 2016.

Encouragingly, South Africa’s national accounts data shows a recovery in growth in the total gross operating surplus to 6,3% in the third quarter of 2016, from a trough of 1,0% in the same period for 2015. Despite this, the earnings of all listed companies on the FTSE/JSE All Share Index decreased by 15,7% in the year to December 2016.

Considering the better earnings momentum recorded in the national accounts, though, the expected peak in the interest rate cycle, a forecast increase in agriculture production and the improvement in the terms of trade over the past 12 months, firmer real GDP growth of 1,3% is forecast for 2017.

Rest of Africa

Although real GDP growth for the sub-Saharan African (SSA) region is estimated at just 1,5% in 2016, the marked divergence in performance between countries should be noted.


Generally, commodity producers performed poorly relative to non-commodity producers. The former, which includes the three largest SSA economies, namely Nigeria, Angola and South Africa, has been exposed to the slowdown in growth in China and the accompanying fall in metals and minerals prices since late 2010.

Oil producers have been especially hard hit, notably Angola and Nigeria, where falling terms of trade weighed heavily on domestic demand. Balance of payments pressures, reflected in marked declines in foreign exchange reserve levels, prompted a devaluation of Nigeria’s naira and Angola’s kwanza.

Numerous SSA countries also ran sustained loose fiscal policies for an extensive period following the global financial crisis and have large macroeconomic imbalances. This has left them vulnerable to the shift towards a more restrictive monetary policy in the US and tighter global financial conditions. Among commodity producers, where GDP growth has slowed, this has enforced a period of macroeconomic adjustment in countries such as Ghana, Zambia, Nigeria and Angola.

This challenging economic environment and the accompanying currency weakness, was reflected in declines on total returns on equities in US dollar terms in, for example, Nigeria (37.6%) and Ghana (23.4%) in 2016.

In Botswana, real GDP growth has been constrained by a decrease in mining output, while the country’s fiscal balance turned into a significant deficit in 2015 and 2016, following robust surpluses in 2013 and 2014. Apart from weak real economic activity, the deterioration in the Government’s budget balance reflects lower SA Customs Union receipts. Although a recovery in diamond production is expected into 2017, there is clearly a need to diversify the economy, which is too reliant on diamond production. Botswana’s equity market yielded a negative total return in US dollar of (2.8%) in 2016.

In Namibia, too, lower SA Customs Union receipts have impacted negatively on Government finances. The country’s debt ratio is relatively low, but it has climbed significantly over the past two years and Namibia’s large twin deficits are unsustainable. Still, given Namibia’s membership of the Common Monetary Area of the rand, its currency appreciated along with the South African rand against the US$ during 2016. Partly reflecting the appreciation of the currency, the Namibia NSX overall index yielded a total return of 43.5% in US$ in 2016.

Non-commodity economies in SSA have fared noticeably better than the commodity producers in 2016 with oil importers, in particular, benefiting from lower oil prices. In East Africa growth has been especially strong in Tanzania, Uganda, Rwanda and Kenya. Growth in these countries is expected to remain elevated in 2017, supported by infrastructure spending.

Still, the equity markets of Kenya and Tanzania delivered negative total returns in US dollar terms in 2016, falling (3.0%) and (4.4%) respectively. Also, large twin deficits among the fast-growing non-commodity producers must be addressed to reduce vulnerability.

In North Africa, Morocco has adopted constitutional reforms and implemented measures to improve its fiscal position since the 2011 election, while also focusing on infrastructure development. Its economy experienced a marked contraction in agricultural production in 2016, due to unfavourable weather conditions. Accordingly its estimated total real GDP growth slowed to below 2,0% in 2016 from 4,5% in 2015. But, the industrial sector has fared relatively better and indications are the overall level of growth is likely to lift in 2017, should agricultural production rebound as expected. That said, a considerable delay in forming a new Government following the October 2016 parliamentary election was not yet resolved by year-end, which dampened business confidence.

Elsewhere, although political conflict has persisted, real GDP growth remained robust in West Africa in 2016. Boosted by infrastructure spending and supported by net foreign direct investment inflows, economic activity has been especially robust in non-resource rich economies such as Côte d’Ivoire and Senegal. Oil importers in the region have also enjoyed significant gains in their terms of trade, given the decline in oil prices from late 2014 through to early 2016.

Real GDP growth in a number of West African economies is expected to remain strong over the next year. Indeed, Côte d’Ivoire and Senegal are expected to be amongst the fastest growing countries on the continent. In these two economies, as well as the other members of the West African Economic and Monetary Union (WAEMU), inflation remains low, given the CFA franc’s peg to the euro.

The members of WAEMU and other countries in West Africa typically run twin deficits, some of which are large. This is to be expected where infrastructure spending is strong and economies are growing fast. Also, Government debt levels are generally low relative to GDP. Maintaining investor confidence and capital inflows is important, though, considering the relatively low gross national savings ratios in the region and the decline in foreign exchange reserves relative to imports in numerous countries in recent years. Also, as is the case in East Africa, the region is a beneficiary of significant amounts of official development assistance, which underlines the importance of implementing good governance standards.

India and Malaysia

India’s equity market delivered a positive 1,8% total return in US dollar terms in 2016, while its exchange rate remained relatively stable against the US dollar. The country’s current account deficit has shrunk markedly since 2013 and Government’s high debt ratio is expected to decline in the years ahead, albeit gradually. In addition, expectations of delivery on economic reform have supported foreign capital inflows and a significant build-up in the country’s foreign exchange reserves.


India remains one of the world’s fastest growing economies. Real GDP growth in 2016 is estimated at around 7%. Although demonetisation is expected to impact growth negatively in the near term, growth is expected to continue trending at a high level in 2017.

In contrast, growth in Malaysia moderated in 2016 and credit extension is weak against a backdrop of high debt levels, especially amongst households. Further, Malaysia’s current account surplus and foreign exchange reserves level have declined significantly since the global financial crisis. Malaysia’s equity market delivered another outright decline in total return of (4.0%) in US dollar in 2016, following a double digit decrease of (19.4%) in US dollar terms in 2015.

Overall, the growth environment of the SSA group of countries remains challenging as adjustment to macroeconomic imbalances continues. These countries, including South Africa, remain vulnerable to tighter US fiscal policy, possible trade protectionism and any unexpected downward adjustment to growth in China. In the absence of these risks, the downturn in growth may bottom in a number of countries in 2017, while the long-term growth potential of the SSA and EM Asia countries is viewed as more favourable than for the global economy overall.

Impact on the Group

New business

In South Africa, pressure on disposable income and an uncertain environment in the context of global political instability, pedestrian economic growth, investment market volatility and the risk of a downgrade in South Africa’s foreign denominated debt, did not bode well for investor confidence.


This manifested in muted demand for discretionary single premiums savings solutions in the retail market and low appetite at institutional investors to change investment mandates. Single premium new business sales at SPF and investment management inflows at SI slowed down markedly as a result. New recurring premium savings sales also recorded below-trend growth.

The pressure on real GDP growth and the currencies of the commodity-based economies where the Group operates, posed particular challenges in 2016 to grow new business volumes and operational earnings. In line with 2015, the Zambian operations continued to struggle, with Malawi also delivering an operational performance below expectations. The Nigerian business, however, delivered a sterling performance despite severe economic and currency pressures, and achieved some of the strongest growth in the Rest of Africa region.

Supportive economic growth, positive sentiment and the roll-out of infrastructure projects in India enabled the Shriram Capital businesses to achieve a much improved performance, with all businesses recording double digit growth in key performance indicators. Demonetisation created some uncertainty towards year-end.

In Malaysia, the general insurance business experienced a disappointing decline in net earned premiums, with the more muted economic growth impacting on motor cycle sales. Motor cycle insurance remained the key business line in 2016.

Investment return

Investment return earned on the Group’s capital portfolio was negatively impacted by the weak investment market performance in South Africa and most of the Rest of Africa markets.

Currency translation differences

The rand strengthened against all of the major currencies where the Group operates, but were still weaker on an average basis in 2016 compared to 2015. This had a twofold effect on the Group’s translated rand results:

  • A weaker average rand exchange rate had a positive impact on the translated value of all key performance indicators of the non-South African operations.
  • The strengthening of the rand since end-2015 to the end of December 2016 had a marked negative impact on the investment return earned on the foreign exposure in the South African capital portfolio, as well as on GEV at year-end and hence RoGEV for 2016.

Interest rates

The decline in the South African long-term interest rates during 2016 resulted in a commensurate decline in the risk discount rate used for the valuation of Group operations for GEV purposes, value of new covered business and the present value of new business premiums. This supported growth in these performance metrics.

Read more about the impact of the economic environment on the Group’s performance in the Financial review.