African Business Outlook Part of the Global Business Outlook

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African Business OutlookPart of the Global
Business Outlook

• A joint survey effort between
• Duke University,
• The South African Institute of
  Chartered Accountants,
• Africa Investment Advisors
• and
• CFO magazine

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CFO Global and African Business Outlook Overview

• Global Business Outlook
• Duke University has surveyed CFOs around the
  world every quarter since 1996, most of those
  years jointly with CFO magazine. The survey takes
  the pulse of the business community and has a
  strong record of predicting future economic
  activity. The results are relied upon by Central
  Bankers, Analysts, Investors, and are widely
  reported in the press.

SAICA, AIA, and the African Business
Outlook SAICA joined the survey in 2013, helping
to found the African Business Outlook, with an
initial focus on the South African economy.
Nigeria was added to the survey sample in late
2015. African Investment Advisors joined the
survey team in Spring 2016, with an objective of
solidifying participation by Nigerian CFOs and
also expanding into Kenya. The analysis in this
report will enable participating firms to make
important business decisions as they can
benchmark themselves against their global peers
and also aid investors interested in Africa.

• Key Survey Facts
• Survey Respondents 113
• Of which, 47 from Nigeria, 47 from South Africa,
  and 19 from other parts of Africa.
• Unless otherwise stated, the analysis represents
  responses from across Africa.
• Due to the increase in respondents from Nigeria
  in the last two quarters, care should be taken
  when comparing to previous results, which were
  comprised primarily of responses from South
  Africa.
• Sample includes CFOs from both public and private
  companies representing a broad range of
  industries, including
• Retail/Wholesale, Mining/Construction,
  Manufacturing, Transportation/Energy,
  Communications/Media, Technology, and
  Banking/Finance/Insurance.
• Certain questions are constant each quarter, to
  capture trends in corporate optimism, expected
  hiring and capital investment plans, inflation,
  wages, and many other categories.
• Other questions change each quarter to examine
  topical economic issues and newsworthy business
  or political events that may affect the corporate
  finance landscape.

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African Business Optimism Compared to the Rest of
the World

• African CFOs are the least optimistic in the
  world about their countries economic outlook over
  the next year. However, they are more optimistic
  about their own companies than Europe and Latin
  America.

Global Trends
Jun 2016 Response
Country Business Optimism Index
Country / Region
Own-Firm Business Optimism Index
Own Company
Notes Presented data are the mean value for
each region or country, Scale from 0-100
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Optimism Regarding Economy, African Details
Optimism about the domestic economy in South
Africa remains low, and is still significantly
lower than the rest of Africa. Nigerian CFOs are
more optimistic about the domestic Nigerian
economy.

• Trends in South Africa Optimism
• CFOs are less optimistic about the domestic
  economy
• CFOs from South Africa (83) grow less
  optimistic, more so than CFOs from the Rest of
  Africa (41)
• Last quarter, about the same number (85) of
  South African CFOs reported becoming less
  optimistic about the domestic economy

• Nigerian Optimism
• CFOs are optimistic about the domestic economy
• A large percentage of CFOs from Nigeria (59)
  have become more optimistic, more than CFOs from
  South Africa (11) and from West Africa (40)
• More CFOs from Nigeria became more optimistic in
  Q2 2016 (59) compared to Q1 2016 (42).

When ranked on a 100 point scale, the South
African Optimism Index (for the economic
prospects of the domestic economy over the next
year) decreased from 38.3 in Q1 2016 to 37.6 in
Q2 2016, and is significantly lower than Africa
as a whole at 47.5.
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Own Company Optimism, African Details

• CFOs are becoming more optimistic about their own
  companies in South Africa. CFOs in Nigeria and
  Africa in general also follow this trend and are
  more optimistic about their own companies than
  about the domestic economy.

• Trends in African Optimism
• CFOs are more optimistic about their own
  companies
• A majority of CFOs from Nigeria are increasingly
  optimistic about their own companies (64), about
  the same as last quarter.
• There was a decrease in the number of less
  optimistic Nigerian CFOs (14) compared to Q1
  2016 (34)
• CFOs from West Africa became more optimistic
  about their companies in Q2 2016 (70) compared
  to Q1 2016 (40).

• Trends in African Optimism
• CFOs are more optimistic about their own
  companies
• Across Africa, a majority of CFOs higher own-firm
  optimism (62) compared to last quarter (59)
• Significantly fewer CFOs from South Africa (36)
  are more optimistic about their own firms than
  are CFOs from the Rest of Africa (61)
• Compared to Q1 16 (54), fewer South African
  CFOs (34) report being less optimistic about
  their own companies this quarter.

When ranked on a 100 point scale, the South
African Own-Company Optimism Index (for the
financial prospects over the next year of each
CFOs own company) fell slightly from 58.6 in Q1
2016 to 58.3 in Q2 2016. This is lower than
Africa as a whole, which increased from 59 to 62.
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Top 10 Most Pressing Concerns

• CFOs in South Africa and Nigeria feel that
  economic uncertainty, currency risk, and
  government policies are the most pressing
  concerns.

South Africa Nigeria
Economic uncertainty Economic uncertainty
Currency risk Government policies
Government policies Currency risk
Volatility of political situation Inflation
Regulatory requirements Cost of borrowing
Difficulty attracting /retaining qualified employees Access to capital
Rising wages and salaries Weak demand for products/services
Weak demand for products/services Rising input or commodity costs
Employee morale Difficulty attracting /retaining qualified employees
Employee productivity Reliability and cost of electricity
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Most Pressing Concerns, Details and Comparisons

• Most CFOs in South Africa and Nigeria agree that
  economic uncertainty is their most pressing
  concern. Most CFOs in South Africa believe that
  the depreciation of the currency is the next
  major cause for concern. However, their Nigerian
  counterparts are more worried about the impact of
  the new governments polices on their operations.
  Other CFOs in West Africa are concerned about
  difficulty accessing cheap sources of capital.

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Business Plans

• Capital expenditures will increase by 10 in
  Nigeria and other parts of West Africa buy only
  by 2 in South Africa. Of the surveyed areas,
  only Nigeria expects to increase fulltime
  employment. Wages and salaries will increase by
  about 7 across Africa.

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Political Risk and Uncertainty
How would you rate the degree of political
uncertainty or political risk in your country?

• Africa has the highest degree of political risk,
  followed by Latin America
• 93 of African CFOs think their countrys
  political risk is moderate-to-high, compared to
  90 for Latin America
• Within Africa, South Africa has the highest
  political uncertainty, with more than 80 saying
  it is severe
• Due to the upcoming election and Washington
  gridlock, the US also faces high political risk

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Primary Sources of Political Risk

• CFOs from South Africa and Nigeria rank the
  following sources of political risk and
  uncertainty that is causing their firms to be
  more cautious in their business plans

South Africa Nigeria
Government gridlock or dysfunction Government gridlock or dysfunction
Proposed regulations Threat of terrorism
Social policies socioeconomic or racial activism, etc. Proposed regulations
Upcoming elections Protests against current administration
Protests against current administration The potential for tax reform
The potential for tax reform Minimum wage
Minimum wage Environmental / climate policies
Environmental / climate policies Social policies socioeconomic or racial activism, etc.
Other Upcoming elections
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Primary Sources of Political Risk, Details

• African CFOs identify Government gridlock or
  dysfunction (68) as the primary source causing
  business caution, followed by proposed
  regulations (50) and Protests against the
  current administration (38).

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Effects on Business of Political Risk and
Uncertainty

• About three-fourths of South African and Nigerian
  CFOs say that political risk is causing their
  firms to be more cautious in spending or making
  acquisitions.

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Are African Firms Hesitant to Do Business in the
US Due to US Political Risk?

• Political Uncertainty in the United States has
  very little effect on the willingness of African
  companies to do business in the United States or
  with United States companies.

14
Do Trade Alliances Help African Companies and
Their Countries?

• African CFOs say that trade alliances have a
  predominantly positive effect on their countys
  economy (71). The positive effect is more
  moderate on their own companies (58)

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Do Trade Alliances Affect African Employment?

• African CFOs say that trade alliances have a
  moderate positive effect on the number of
  employees they hire, though many firms say there
  is no effect.

16
Cash on the Balance Sheet

• CFOs from Nigeria and South Africa have their
  holdings of cash and marketable securities
  compared to previous years. CFOs indicate that
  their companies have loose cash targets and
  attempt to increase cash holdings if it they fall
  too low

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Will African Companies Deploy Their Cash Reserves?

• Most African CFOs are willing to deploy their
  cash reserves (60), which they plan to use for
  capital expenditures and investment. The other
  40 of CFOs are holding back because they lack
  excess cash and need a liquidity buffer.

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Return on Assets and Capacity Utilization

• Despite the risks and uncertainties, South
  African and Nigerian companies expect an increase
  in ROA over last year. However, South African
  companies expect a decrease in capacity
  utilization in the first half of 2016.

South Africa Nigeria Europe Asia Latin America
Return-on-Assets          
Approximate ROA in 2015 13.2 15.2 9.0 13.0 7.2
Expected ROA In 2016 14.5 19.0 10.9 14.9 8.5
Capacity Utilization  
capacity in H2 2015 72.5 70.0 77.2 78.0 71.5
capacity planned for H1 of 2016 71.7 70.0 78.5 79.4 73.9