Integrated Report 2021

Our external operating environment

The impact of Covid-19 on global markets and industries has resulted in supply chain constraints, logistical issues and product shortages globally. The countries and some of the industries we operate in have been adversely affected by the aftermath of the pandemic. Locally, the year was also characterised by political uncertainty, industrial action and violent protests.

Our strategic ambition to double the group’s intrinsic value every four years regardless of the external factors influencing our operating environment requires a forward-looking approach, agility and a focus on business efficiency. Our strategy, and Barloworld management’s swift reaction to the potential impact of Covid-19 lockdowns paid off and is starting to yield results. Certain market forces have also provided profitable opportunities for some of Barloworld’s business units and has confirmed that our decision to focus on asset light, cash generative businesses has positioned the group well to achieve its strategic ambition.

The World Bank forecasts that global GDP growth should recover to 4% in 2021, moderating to 3.8% in 2022. However, the continued disruption from the ongoing pandemic means that uncertainty prevails.

Our external operating environment

The positive growth South Africa recorded in Q3 and Q4 2020 was not enough to offset the impact of Covid-19 in Q2 2020 when lockdown restrictions were most stringent. Economic activity for the entire year decreased by 7.0% in 2020. Consumer inflation continues its upward trend, mainly driven by the cost of transport, food, non-alcoholic beverages, housing and utilities. Annual fuel inflation has been consistently higher than headline inflation since April 2021, resulting in a slight increase in public transport costs during September 2021, with a 16.2% jump in the prices of car rental over the same period.

The South African economy recorded its fourth consecutive quarter of growth, expanding by 1.2% in Q2 of 2021, subsequent to a revised 1.0% rise in real GDP in the first quarter. Despite these gains, the economy is still 1.4% smaller than pre-Covid levels. The slow rollout of Covid-19 vaccinations has the potential to hamper any further GDP expansion, despite government efforts to increase uptake.

Increased economic activity related to agriculture, transport and communications resulted in these sectors recording the highest growth rate of 6.9% for Q2 2021. The value of mining exports increased strongly in the second quarter of 2021, boosted especially by platinum group metals, benefiting from the international supply chain pressures, which caused a strong surge in commodity prices. Our Industrial Equipment and Services business units are benefiting from the commodity demands. Manufacturing, vehicles and other transport, equipment and agricultural exports also increased over this period, but gains are expected to be impacted by the introduction of severe levels of loadshedding by the country’s state-owned power utility. Ingrain, our Consumer Industries business unit, has benefited from the international maize price, which encouraged increased production in South Africa.

The economic impact of severe economic disruption, protest action and violence in KwaZulu-Natal and Gauteng in July, followed by a cyber breach bringing the ports of South Africa to a standstill, is only expected to reflect in the Q3 GDP data due in December 2021. Expectations of a positive macroeconomic outlook appears to have been countered by the Reserve Bank’s November announcement of its first interest rate hike in three years, while the anticipated surge in tourism and hospitality over the festive period is dwindling due to renewed travel bans introduced, following the identification of the Omicron Covid-19 variant.

Our external operating environment

According to the African Development Bank, the Angolan economy’s main risk is associated with low oil prices; however, if the oil price recovery persists, the budget deficit could narrow to 2.2% of GDP activity, with further expansions in 2022 and 2023.

The Zambian economy is expected to gradually recover, underpinned by activity the mining, tourism and manufacturing sectors. The commissioning of a new hydropower station and a return to normal rainfall patterns are expected to support growth in agriculture and electricity production. The recovery in international demand and the copper price are positive developments, while a reduction in Covid-19 cases will boost activity both in manufacturing and tourism.

Similarly, the outlook for the DRC for 2021 and 2022 is favorable if the pandemic can be brought under control and global demand recovers. Real GDP is expected to grow by 3.3% in 2021 and 4.5% in 2022, driven by higher prices for major mining products, such as copper, associated with a recovery in both consumption and investment.

Botswana expects economic growth of 9.7% in 2021, assisted by higher diamond sales and a recent rebasing of GDP accounts, with most major rating agencies positively revising their outlook for the country.

Mongolia’s economic growth rebounded in the first half of 2021 on the back of robust exports and a surge in private investment, mainly in the mining sector, supported by stronger Chinese demand for commodities and higher commodity prices. Government’s relief and stimulus measures translated into higher credit growth, increased investment, and supported domestic demand, countered by lockdown restrictions introduced in May 2021 and the disruptions in the supply of imported inputs and commodity exports. Equipment Mongolia is benefiting from the increase in mining activity.

Employment in Russia is still below pre-pandemic levels, however, the labour market started showing signs of improvement towards the end of 2020. Global economic recovery, higher oil prices, an increase in mining activities, and soft domestic monetary conditions in 2021 are expected to support a recovery in the GDP growth of Russia.

Despite the uncertainty that prevails Barloworld believes it is well-positioned to achieve its strategic ambitions.