Absa Investments THE CHALLENGING ECONOMIC ENVIRONMENT Craig Pheiffer General Manager: Investments Absa Asset Management Private Clients

Global growth has slowed but country outlooks differ:  Least disruption from the crisis (slower growth but positive):  China  India  Peripheral to crisis, commodity-assisted rebound, some policy normalisation:  Russia  Brazil  Canada  At the centre of the crisis, meagre recovery:  Germany  United States  United Kingdom  Italy  Spain  Japan Source: Barclays Capital Global Economics Weekly (20 July 2012) The strongest economies have the most scope to provide policy stimulus while the weakest have the least.

The weakest economies have limited options: JP US EU UK Key Central Bank interest rates The market seeks more quantitative easing (“QE”) with interest rates near zero but the impact of more QE in a weak demand environment is questionable. Source: Barclays Capital Global Economics Weekly (20 July 2012)

United States Bernanke’s Senate testimony: “Risks to the growth outlook lie to the downside” - leaves the bar to further policy easing low. “Frustratingly slow” progress on reducing unemployment rate. High probability of inflation < 2%. Fiscal concerns! Recent consumption data has been soft but there have been encouraging signs on manufacturing for Q3. BarCap expectations: A better H2 as lower energy prices boost disposable incomes and household consumption. QE3 still not the base case. Stickier core inflation once lower energy prices have worked out of the system (plus higher rent payments). Advance reading of Q2 GDP on Friday expected at 1.5%. Source: Barclays Capital Global Economics Weekly (20 July 2012)

Euro area European Financial Stability Facility has committed up to €100bn to the Spanish government for recapitalising banks - Expectation is that €70bn- €80bn will be required. Should be at a favourable rate (±3.0%) with a favourable maturity. Spain commits to new fiscal targets set by the EC and other macroeconomic conditions set by the IMF. Government appears willing to accept these (VAT rate hike, dropping housing subsidies). Spain likely to need financial assistance in the bond market to finance budget deficits. Expect a primary surplus in 2.5 years with debt to GDP ratio peaking at 95% in Greece under the spotlight again with the troika visit - “Grexit” - has the “horror” really faded? Euro area concerns to linger: stronger dollar, risk “off”. Source: Barclays Capital Global Economics Weekly (20 July 2012)

United Kingdom MPC split on use and effectiveness of additional quantitative easing (QE upped by £50bn to £375bn). Alternatives policies being introduced such as the “Funding for Lending Scheme” (FLS) - likely to have limited effect in subdued demand environment. Inflation has fallen but MPC looking through the inflation dip as a temporary phenomenon. [BarCap sees near-term inflation pressures well below target but inflation is expected to rise above target by mid-2013] Expect Q2 GDP to have fallen by 0,2% q/q, a third consecutive quarterly contraction in economic output. Source: Barclays Capital Global Economics Weekly (20 July 2012)

Japan Real GDP expected to slow in FY2013 as government-led post- earthquake reconstruction measures run their course. Bank of Japan sees inflation nearing price stability goal (of around 1%) in 2014 even without further fiscal stimulus. Any response to calls for additional fiscal expansion could push prices higher. Bill to raise consumption tax (VAT) from 5% to 8% in April 2014 and 10% in October 2015 could push prices higher. BarCap expects 60% of any VAT rate increase to filter through to CPI. Source: Barclays Capital Global Economics Weekly (20 July 2012)

China Latest GDP growth data was broadly in line with most officials’ expectations. Most officials agree that some further policy measures may be required to stabilise economic growth at %. “Prudent” to “expansionary”? Rapidly falling inflation from the 6.5% July 2012 high has opened the way for more central bank action. More reserve ratio cuts expected in H2 to stabilise liquidity + base interest rate cuts. Officials argue that Chinese economic growth cannot rely purely on: Public-led investment. Credit expansion. Liquidity injections. The government is trying to strike a balance between falling property investment and surging housing prices. BarCap believes that some relaxation of housing purchase restrictions at the local level is likely to continue. Source: Barclays Capital Global Economics Weekly (20 July 2012)

Growth (GDP) Outlook Source: Barclays Capital Global Economics Weekly (20 July 2012) DEVELOPED US Euro area UK Japan DEVELOPING Brazil Russia India China S Africa Y/Y WORLD Q/Q (saar %) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 US Euro area UK Japan Y/Y % Changes in GDP: DEVELOPEDY/Y % Changes in GDP: DEVELOPING Q/Q % Changes in GDP: DEVELOPED

2012: 2.7% (2.9%) 2013: 3.8% (3.9%) 2014: 4.1% (4.1%) The SARB’s South African outlook (July vs May 2012) Inflation 2012: 5.6% (6.0%) 2013: 5.1% (5.5%) 2014: 5.1% (5.0%) Source: SARB MPC Policy Statement (19 July 2012) and SARB Monetary Policy Review (29 May 2012) GDP

Household consumption slowing? Manufacturing on the up? Real Retail Sales (%): Retail sales has been erratic due to base effects but some evidence of a slowing trend in consumption. Recent manufacturing data has been better than expected. Manufacturing (%): Mining production (%): May: 4.2% y/y May: 0.8% y/y May: 6.4% y/y

South African outlook Source: Barclays Capital Global Economics Weekly (20 July 2012) % Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 GDP (q/q) CPI (y/y) CA Deficit : GDP Repo rate Forecast: GDP (Y/Y) Y/Y % Changes in GDP: Quarterly data:

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