VZCZCXRO7909
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0160/01 0261109
ZNR UUUUU ZZH
R 261109Z JAN 10
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1009
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPARTMENT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 06 PRETORIA 000160 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR DAN PETERS 
DEPT PASS USTR FOR WILLIAM JACKSON 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY 
ECONOMIC STATISTICS 
 
¶1. (U) Summary:  Following three consecutive quarters of 
contraction, South Africa's GDP resumed positive growth in the third 
quarter of 2009.  South African exports edged higher in the second 
half of 2009, following an improvement in the global economy. As a 
result, the deficit on the current account narrowed to 3.2 percent 
of GDP in the third quarter of 2009.  This deficit was financed 
through substantial capital inflows on the financial account, which 
added to the increase in foreign reserves and resulted in a strong 
rand appreciation.  The stronger rand together with an economy 
operating below capacity forced price inflation back to within the 3 
- 6 percent target range.  The response to the cumulative 500 basis 
points interest rate reduction between December 2008 and August 2009 
was still in the pipeline, outweighed by stricter lending standards 
of commercial banks, and deleveraging of balance sheets by 
households and companies.  The continued deceleration in the growth 
of the money supply (M3) and negative growth in domestic credit 
extension to the private sector, illustrated the continued financial 
pressure on households and companies.  Almost 1 million jobs were 
lost during the first three quarters of 2009. End Summary. 
 
The sources for the following tables are from the South African 
Reserve Bank (SARB), Statistics SA, and the Customs Department of 
the South African Revenue Service.  Some figures from previous 
months may have changed as the result of statistical revisions. 
 
------------------ 
¶I. MONTHLY FIGURES 
------------------ 
 
¶2.  EXCHANGE RATES 
Rand/US Dollar Exchange Rate (monthly average) 
--------------------------------------------- -------- 
2008           2009 
--------------------------------------------- -------- 
Sep  8.05      Jan  9.90      May 8.37      Sep 7.52 
Oct  9.67      Feb 10.01      Jun 8.05      Oct 7.48 
Nov 10.12      Mar 10.00      Jul 7.95      Nov 7.52 
Dec  9.95      Apr  9.02      Aug 7.94      Dec 7.50 
 
Trade-Weighted Rand (monthly average; 2000 = 100) 
--------------------------------------------- ------- 
2008          2009 
--------------------------------------------- ------- 
Sep 66.11     Jan 57.07     May 66.49     Sep 70.83 
Oct 57.32     Feb 57.66     Jun 67.84     Oct 70.45 
Nov 56.61     Mar 57.81     Jul 68.48     Nov 69.63 
Dec 56.38     Apr 63.36     Aug 68.52     Dec 69.68 
 
Comment:  In 2009, the rand regained most of its 2008 losses and 
appreciated by 27 percent against the dollar and 24 percent against 
the trade-weighted average exchange rate of the rand.  The sharp 
improvement in the exchange rate is largely attributable to the 
improvement in South Africa's current account deficit, an increase 
in the risk appetite of international investors and the subsequent 
acquisition of domestic securities, a surge in commodity prices, and 
the weakness of the U.S. dollar.  The strengthening of the rand will 
constrain the competitiveness of South African exporters in 
international markets.  Analysts believe the rand would remain 
strong in the early part of 2010, due to a combination of dollar 
weakness as well as an inflow of foreign currency in the run up to 
the 2010 FIFA World Cup.  End Comment. 
 
¶3.  INFLATION (year-on-year) 
---------------------------- 
         2009 
          Jul     Aug      Sep     Oct     Nov 
Q          Jul     Aug      Sep     Oct     Nov 
--------------------------------------------- -- 
CPI       6.7     6.4      6.1     5.9     5.8 
PPI      -3.8    -4.0     -3.7    -3.3    -1.2 
 
Comment:  Inflation slowed against the background of an economy 
operating below capacity and a significant appreciation of the rand. 
 In October 2009, consumer price inflation fell within the 3-6 
percent target range for the first time in 30 months.  Producer 
price deflation contributed to the containment of consumer price 
inflation.  Analysts expect inflation to rise above six percent in 
December 2009 due to base effects.  The Monetary Policy Committee's 
(MPC's) most recent central inflation forecast projects that 
inflation will return to the 3-6 percent inflation target range, on 
a sustained basis, by the second quarter of 2010.  Inflation is 
expected to average 5.7 percent and 5.8 percent in 2010 and 2011, 
respectively.  End Comment. 
 
¶4. MONEY AGGREGATES (percentage change year-on-year) 
 
PRETORIA 00000160  002 OF 006 
 
 
--------------------------------------------- ------ 
         2009 
         Jul      Aug      Sep      Oct      Nov 
--------------------------------------------- ---- 
M1       3.82     4.86     1.15     1.53     2.52 
M2       3.75     4.82     2.48     0.87    -1.04 
M3       5.70     5.49     4.00     2.67     0.58 
 
Comment: The slowdown in broadly defined money supply (M3) growth 
continued to reflect the subdued level of aggregate income, the 
relative low return on M3 deposits, lower inflation, and the 
deterioration in corporate and household balance sheets.  End 
Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage 
change year-on-year) 
--------------------------------------------- ------ 
     2009 
     Jul       Aug       Sep       Oct        Nov 
--------------------------------------------- ------ 
    3.31      2.34      1.49     -0.42      -1.59 
 
Comment: During the third quarter of 2009, growth in banks' total 
loans and advances extended to the private sector turned negative, 
an occurrence last seen in the 1960s.  Because of monetary lag, 
lower interest rates have yet to have their full impact on credit 
extension.  Meanwhile, commercial banks are imposing stricter 
lending standards, and households and companies continue to 
deleverage.  End Comment. 
 
¶6.  KEY INTEREST RATES (at end of month) 
--------------------------------------- 
                  2009 
                  Aug    Sep     Oct     Nov    Dec 
--------------------------------------------- --------- 
SARB Repo Rate    7.00    7.00    7.00   7.00    7.00 
Prime Overdraft  10.50   10.50   10.50  10.50   10.50 
Rate 
 
Comment:  The South African Reserve Bank's Monetary Policy Committee 
(MPC) started reducing the repo rate in December 2008.  By mid-2009, 
it had reduced the policy rate by a cumulative total of 450 basis 
points.  In August 2009, the MPC, mindful of the large output gap, 
reduced the repurchase rate by a further 50 basis points to 7 
percent, the same level seen at the trough of the previous interest 
rate cycle.  The MPC left  interest rates unchanged at its 
September, October, and November meetings, based on its view that 
the domestic economic growth should improve in the coming quarters, 
while inflation continue its downward trend.  Analysts expect 
interest rates to remain unchanged until early 2011. End Comment. 
 
¶7.  MERCHANDISE TRADE ACCOUNT (R millions) 
----------------------------------------- 
2009        EXPORTS       IMPORTS      TRADE BALANCE 
Jan         36,251.7      53,631.5      -17,379.7 
Feb         44,061.8      44,632.4         -570.7 
Mar         51,966.3      52,478.2         -511.9 
Apr         40,656.3      42,112.4       -1,456.1 
May         41,456.8      39,437.2        2,019.6 
Jun         43,039.2      39,817.5        3,221.7 
Jul         44,461.9      44,015.1          446.8 
Aug         40,380.6      42,361.9       -1,981.2 
Sep         45,535.4      41,664.3        3,871.1 
Oct         44,088.9      50,797.6       -6,708.7 
Nov         45,855.9      48,330.4       -2,474.6 
TOTAL (1)  470,366.6     499,546.1      -29,179.4 
 
 
JAN - NOV 2008 
TOTAL (1)  614,558.7     677,455.4      -62,896.7 
 
(1) Total After Adjustments (year-to-date) 
 
Comment:  With the global economy showing signs of recovery, South 
African export volumes edged higher while the upward trend in the 
QAfrican export volumes edged higher while the upward trend in the 
international prices of gold, platinum and other export commodities 
gave further support to export revenues in the second half of 2009. 
At the same time, the volume of merchandise imports declined 
slightly as real GDP inched lower.  While a substantially lower 
volume of crude oil was imported in the third quarter, this was 
partially offset by increases in other imports, including the 
acquisition of military aircraft by the government. Analysts expect 
export growth to exceed import growth in the first quarter of 2010, 
as the global economy and commodity prices continue to recover, 
 
PRETORIA 00000160  003 OF 006 
 
 
while weak household spending and falling fixed investment activity 
will cut into import demand.  End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
------------------------------- 
                      2009 
                      Jul    Aug    Sep    Oct    Nov 
--------------------------------------------- --------- 
SARB Gross Gold and 
Foreign Reserves      35.7   38.0   39.1   39.8   40.5 
SARB Net Open Forward 
Position              34.7   36.9   37.9   38.8   39.6 
 
Comment:  South Africa's gross gold and foreign reserves continued 
to rise, boosted mainly by the general allocation of Special Drawing 
Rights (SDRs) by the International Monetary Fund (IMF) to its member 
countries.  The one-off SDR allocations made in August 2009 amounted 
to $2.4 billion.  [Note: The SDR is an international reserve asset 
first created by the IMF in 1969 to supplement existing reserve 
assets of IMF member countries.  SDRs are mainly held by the 
monetary authorities of the IMF member countries, and represent an 
unconditional right of a member country to obtain foreign exchange 
or other reserve assets from other IMF members in order to deal with 
situations involving inadequate international liquidity. End Note]. 
The narrowing of the current account deficit alongside increasing 
capital inflows also added to the increase in foreign reserves.  End 
Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- --- 
                     2008     2009 
                      Q4      Q1      Q2      Q3 
--------------------------------------------- ---- 
PRIMARY SECTOR       1.7    -23.4     6.0    -7.0 
Agriculture          5.6     -3.7   -13.1    -9.8 
Mining               0.1    -30.7    15.8    -5.8 
 
SECONDARY SECTOR    -12.9   -19.4    -6.9     7.0 
Manufacturing       -17.4   -25.5   -11.1     7.6 
Electricity          -0.1    -8.1     1.9     4.2 
Construction          6.3    10.7     8.7     6.1 
 
TERTIARY SECTOR       4.2    -0.9    -1.7     0.8 
Trade & catering     -0.3    -2.4    -5.9    -1.1 
Transport & Comm.     1.6    -2.1    -1.0     1.2 
Finance               7.5    -2.3    -3.8    -1.5 
Government            6.2     2.1     3.1     4.9 
--------------------------------------------- ---- 
TOTAL                -0.7    -7.4    -2.8     0.9 
--------------------------------------------- ---- 
 
Comment: Following three consecutive quarters of contraction, South 
Africa's GDP resumed positive growth in the third quarter of 2009. 
This improvement was attributable to a decisive recovery in the 
secondary sector and a less prominent turnaround in the tertiary 
sector.  Output in the primary sector declined over the period, but 
it was more than offset by the expansion in the other two main 
sectors. Analysts expect economic conditions to improve further in 
the final quarter of 2009 and throughout 2010. 
 
Primary sector:  Agricultural production declined further in the 
third quarter, reflecting somewhat smaller field crops, while mining 
output also receded as the production of platinum and gold 
contracted.  Platinum production was strongly affected by strikes 
and mine accidents.  Apart from the strengthening of the rand, which 
Qand mine accidents.  Apart from the strengthening of the rand, which 
adversely affected the mining sector in general, the gold-mining 
sector was also affected by an increase in intermediate expenditure 
which more than neutralized the potential benefits of the higher 
dollar-dominated gold price.  Mining output, however, benefited from 
increased output of coal and iron ore in the third quarter.  Growing 
demand from Eskom contributed to the increase in the production of 
coal, while the production of iron ore was largely underpinned by 
strong demand from China. 
 
Secondary sector:  The turnaround in the secondary sector was led by 
improved performance of the manufacturing sector.  This was mainly 
driven by higher production of basic iron and steel products, motor 
vehicles, food, chemicals, and plastic products.  Despite the growth 
in manufacturing production in the third quarter, output levels 
 
PRETORIA 00000160  004 OF 006 
 
 
remained repressed and production capacity utilization registered an 
average of 77.8 percent in the first three quarters of 2009, having 
averaged 83.8 percent in 2008.  The increase in electricity, gas and 
water production reflected the recovery in the production activities 
of electricity intensive mining and manufacturing industries.  The 
construction sector remained buoyant in the third quarter, 
benefiting from the upgrading of existing infrastructure and large 
projects such as the Gautrain, power stations, roads, sport stadiums 
and related infrastructure developments in preparation for the 2010 
FIFA World Cup. 
 
Tertiary sector:  The turnaround in the tertiary sector can mainly 
be attributed to increased value added in the transport and 
communication and general government subsectors.  Output in the 
transport sector edged higher, consistent with the higher volume of 
exports during the third quarter, while output in the communication 
sector increased moderately.  The increase in general government 
output was due to rising employment levels as part of 
countercyclical efforts alongside structural efforts to improve 
service delivery.  Consistent with the lower disposable income of 
households, output of the trade sector remained subdued.  The 
continued weak levels of credit extension to the private sector and 
the residential property market were symptomatic of the weak output 
performance in the financial service sector.  End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2008      2009 
                     Q4       Q1       Q2       Q3 
--------------------------------------------- ------- 
Merchandise Exp.  166,501  130,149  120,311  122,426 
 
Net Gold Exports   12,790   12,744   11,871   13,355 
 
Merchandise Imp.  185,341  153,485  124,539  132,126 
 
Income Payments    26,775   24,425   22,209   23,571 
 
Service payment    34,820   31,121   31,443   30,840 
--------------------------------------------- ------- 
Current Account   -30,827  -33,068  -20,824  -24,238 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -5.4     -6.7     -3.4      -3.2 
(percentage) 
 
Comment: The moderate pick-up in international trade following 
strong contractions since the final quarter of 2008 led to an 
increase in the value of merchandise exports and had a positive 
impact on South Africa's trade account.  However, the larger trade 
surplus was partly neutralized by an increase in service, income and 
current transfer payments to the rest of the world, causing the 
deficit on the current account as a percentage of GDP to narrow only 
slightly from 3.4 percent in the second quarter to 3.2 percent in 
the third quarter.  The current account deficit is now at   its 
lowest level since the second quarter of 2005.   The smaller 
shortfall on the current account makes South Africa less dependent 
on capital inflows and reduces the rand's vulnerability to swings in 
global risk appetite.  Analysts foresee the current account to stay 
at its current levels in the near future. Although the current 
account deficit might deteriorate lightly from the second quarter of 
2010 as imports start to pick up on the back of a domestic spending 
recovery, increased service receipts from the influx of tourists 
Qrecovery, increased service receipts from the influx of tourists 
related to 2010 FIFA World Cup should help to limit the damage.  End 
Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- --------- 
                      2008      2009 
                       Q4       Q1       Q2       Q3 
--------------------------------------------- --------- 
Direct Investment     45,941  13,642   21,222    4,785 
 
Portfolio Investment-111,675   9,054   29,259   22,644 
 
Other Investment      60,881  -9,044  -22,930   13,280 
--------------------------------------------- --------- 
Financial Account    -4,853  13,652   27,551    40,709 
 
 
--------------------------------------------- --------- 
 
Comment:  The deficit on the current account was financed through 
increased capital inflows on the financial account of the balance of 
 
PRETORIA 00000160  005 OF 006 
 
 
payments.  The surplus on the financial account was mainly due to a 
significant raise in portfolio investor's holdings of South African 
equities due to improved international appetite for investment in 
emerging-market economies.  The cumulative inflow of portfolio 
investment during the first three quarters of 2009 was R66.0 
billion, compared with an outflow of R71.5 billion recorded in 2008 
as a whole.  End Comment. 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
--------------------------------------------- -------- 
                     2008     2009 
                     Q4       Q1       Q2       Q3 
--------------------------------------------- -------- 
Employed           13,844   13,636   13,369   12,885 
Unemployed          3,873    4,184    4,125    4,192 
Total Labor Force  17,718   17,820   17,495   17,077 
Not Econ. Active   13,176   13,166   13,585   14,095 
Population 15-64   30,894   30,987   31,080   31,172 
--------------------------------------------- -------- 
Unemployment rate   21.9     23.5     23.6     24.5 
(percentage) 
 
Absorption rate     44.8     44.0     43.0     41.3 
(Employed/population ratio) 
 
Comment: The unemployment rate in South Africa increased from 23.6 
percent in the second quarter of 2009 to 24.5 percent in the third 
quarter of 2009.  The number of jobs lost in the first three 
quarters of 2009 totals 959,000.  Job losses were broad-based and 
occurred in both the formal and the informal sectors of the economy. 
 Analysts expect more job shedding until the first quarter of 2010. 
 End Comment. 
 
------------------- 
III. ANNUAL FIGURES 
------------------- 
 
¶13.  NATIONAL BUDGET (R billions) 
--------------------------------- 
Fiscal Year Ending 31 March: 
                        2006     2007   2008    2009 
--------------------------------------------- ------- 
Total Revenue          411.2   482.7   559.8   608.8 
Total Expenditure      416.8   470.2   541.4   635.8 
Budget Balance          -5.6    12.5    18.3   -27.0 
--------------------------------------------- ------- 
 
Budget Balance/GDP     -0.3     0.7     0.9    -1.2 
 
Comment:  The impact of weak domestic demand and the global economic 
crisis on tax revenues is primarily to blame for the change in 
fiscal stance in FY2009.  Analysts expect corporate tax payments to 
deteriorate further in FY2010, especially since sectors such as 
manufacturing and mining, which have been savaged by the global 
downturn, loom large in the corporate tax take.  Analysts expect the 
fiscal deficit to increase to about 8.0 percent of GDP in FY2010. 
End Comment. 
 
¶14.  GOVERNMENT DEBT (R billions) 
--------------------------------- 
Fiscal Year Ending 31 March: 
                     2006     2007      2008     2009 
--------------------------------------------- -------- 
Total Debt           528.5    551.9    571.7    616.4 
  of Which: 
   -- Domestic       461.2    469.0    475.2    518.9 
   -- Foreign         66.8     82.6     96.2     97.3 
   -- Other debt       0.4      0.3      0.2      0.2 
 
Debt Service Cost     50.9     52.2     52.8     54.3 
--------------------------------------------- -------- 
Government Debt/GDP   32.6     28.6     24.0     22.4 
(percentage) 
 
Debt Service Cost/GDP  3.2      2.8      2.5      2.3 
(percentage) 
 
Comment: The SAG continued to finance its borrowing needs mostly 
QComment: The SAG continued to finance its borrowing needs mostly 
from domestic sources.  The decline in government debt as a 
percentage of GDP can be attributed to the rapid growth of the 
economy and the creation of fiscal surpluses in FY2007 and FY2008. 
However, total debt is set to increase to 41.0 percent of GDP in 
FY2013 to finance the projected budget deficits over the next three 
years.  Debt service costs have shown a steadily declining trend 
 
PRETORIA 00000160  006 OF 006 
 
 
since peaking at 5.6 percent of GDP in the 1999 fiscal year.  The 
decline in debt service costs has created the necessary "fiscal 
space" to run a large deficit in FY2010 and maintain infrastructure 
spending to counteract the effects of the economic crisis.  National 
Treasury expects debt service cost to increase from R54 billion (2.3 
percent of GDP) in FY2009 to almost R100 billion (3.2 percent of 
GDP) in FY2013.  End Comment. 
 
--------------------------------------------- -------- 
 
For additional information please consult the following websites: 
 
South African Reserve Bank  
South African Revenue Service  
Statistics South Africa  
National Treasury  
 
GIPS