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DE RUEHSA #1397/01 0970438
ZNR UUUUU ZZH
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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2646
INFO RUEHBU/AMEMBASSY BUENOS AIRES 0229
RUEHTN/AMCONSUL CAPE TOWN 2648
RUEHDU/AMCONSUL DURBAN 7658
RUEHJO/AMCONSUL JOHANNESBURG 4236

UNCLAS SECTION 01 OF 04 PRETORIA 001397 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR H/BFLECK; AF/S; AF/EPS; EB/IFD 
 
E.O. 12958:  N/A 
TAGS: OREP PREL EFIN EINV ETRD ECON KHIV SF
SUBJECT:  SOUTH AFRICA: SCENESETTER FOR VISIT OF CODEL 
SHELBY, APRIL 20-22 
 
REF:  STATE 54245 
 
¶1.  (U) Sensitive but Unclassified; Not for Internet 
Distribution. 
 
¶2.  (SBU) Welcome to South Africa.  In the twelve years since 
the end of apartheid, the South African government (SAG) has 
taken major steps toward establishing a democracy and 
market-based economy.  Despite problems of income inequality 
and poverty, a severe HIV/AIDS pandemic, and political 
tensions within the ANC, South Africa remains the continent's 
best prospect for an economically prosperous democratic 
country.  President Mbeki's visit to the White House in June 
2005 reinforced our good bilateral relations.  We share 
important goals on the African continent, particularly in the 
area of conflict resolution.  While South Africa's 
involvement in global issues, such as Haiti, North Korea and 
Iran, are not always in sync with U.S. interests, bilateral 
cooperation in other areas has helped to advance the U.S. 
global agenda. 
 
¶3.  (SBU) Since 1994, the United States Government has 
contributed approximately $1.2 billion toward South Africa's 
development, excluding $201 million in credit guarantees. 
Over two dozen U.S. agencies, including the Office of 
Technical Assistance at Treasury, U.S. Secret Service, 
Customs, Peace Corps, Foreign Agriculture Service, Health and 
Human Services, and USAID are represented within our Mission, 
which includes the embassy in Pretoria and consulates in 
Johannesburg, Cape Town, and Durban. 
 
¶4.  (SBU) In this message, we provide a brief overview of the 
major issues facing South Africa and key concerns in 
U.S.-South Africa relations. 
 
-- Political Overview:  Democracy Won 
-- Promoting Africa 
-- The Economy 
-- Bilateral Trade and Investment 
-- OPIC Focus on Housing and Capital Markets 
-- Combating the Finance of Terrorism 
-- HIV/AIDS:  A Crisis of Epic Proportions 
 
POLITICAL OVERVIEW:  DEMOCRACY WON 
---------------------------------- 
 
¶5.  (SBU) The African National Congress (ANC) dominates the 
South African political scene.  The party controls 293 of 400 
seats in the National Assembly and leads the administrations 
in all nine provinces.  In municipal elections held on March 
1, the party extended its dominance over government, 
capturing the outright majority in 214 of 284 municipal 
councils.  The ANC operates as a tripartite alliance among 
ANC stalwarts, the South African Communist Party (SACP), and 
the Congress of South African Trade Unions (COSATU).  In 
recent years, schisms have begun to appear as the SACP and 
COSATU have become more vocal in their opposition to the 
government's economic, HIV/AIDS, and Zimbabwe policies, and 
as a result of tensions over the dismissal of former Deputy 
President Zuma and subsequent trials for corruption and rape. 
These tensions are surfacing at the same time with 
increasing dissatisfaction at the grass roots level over the 
poor delivery of public services.  Notwithstanding these 
pressures, the alliance is likely to hold together, at least 
in the short term. 
 
¶6.  (SBU) Thabo Mbeki was elected president in June 1999 and 
began his second five-year presidential term in April 2004. 
During his tenure, he has shifted the focus of government 
from "reconciliation" (binding together of the body politic 
and society across racial groups) to "transformation" 
(transforming political and economic relationships to reflect 
the society's racial make-up), particularly on the economic 
front through affirmative action, i.e., "Black Economic 
Empowerment" (BEE).  Progress on developing a comprehensive 
BEE policy for the private sector, however, has been slow. 
 
PROMOTING AFRICA 
---------------- 
 
¶7.  (SBU) South Africa has taken a high-profile role in 
promoting Africa's development and engagement with the rest 
of the world.  Until July 2003, South Africa served as the 
first chair of the African Union (AU) and currently holds the 
chair of the G-77.  Since becoming president seven years ago, 
President Mbeki has been invited to participate on the 
 
PRETORIA 00001397  002 OF 004 
 
 
subject of African development at each successive G-8 Summit. 
 He continues to be the driving force behind the New 
Partnership for Africa's Development (NEPAD), an AU program 
to strengthen political governance and promote regional 
economic development.  As Chair of the Joint World Bank and 
International Monetary Fund Development Committee from April 
2002 to September 2005, South African Finance Minister Trevor 
Manuel also has figured prominently in the international 
dialogue on Africa.  On the political side, President Mbeki 
and his top aides have devoted considerable resources to 
ending Congo's civil war and to the Burundi peace process. 
President Mbeki mediated in Cote d'Ivoire and provided 
support to the AU's Mission to Sudan.  In Zimbabwe, however, 
President Mbeki's "quiet diplomacy" has not produced any 
discernible result, nor has a bilateral effort to negotiate 
political conditions on a bailout loan.  Notwithstanding, 
South African officials still argue that additional pressure, 
such as economic sanctions, would be ineffective, risk 
destabilizing Zimbabwe, and create spillover problems for 
South Africa. 
 
THE ECONOMY 
----------- 
 
¶8.  (SBU) As the dominant and most developed economy in 
sub-Saharan Africa, South Africa has little in common with 
the other countries of the region.  An upper middle income, 
emerging market economy with GDP per capita of $5107 (2005), 
South Africa may have more in common with Chile, Malaysia, 
and Thailand.  On the other hand, a large of segment of South 
Africa's population lives in typical third world poverty. 
The National Treasury under Finance Minister Trevor Manuel 
and the independent South African Reserve Bank (SARB) under 
Governor Tito Mboweni have pursued fiscal and monetary 
policies that have resulted in increasing economic growth 
within a moderately inflationary environment.  The government 
has steadily reduced the fiscal deficit from nearly 6.0% of 
GDP in 1994-95 to 0.5% in 2005-06.  Robust tax collections 
have consistently reduced the forecast deficit the past 
several years.  In 2006-2007, the Treasury forecasts that its 
moderately expansionary budget will produce a 1.5% deficit. 
Dedicated to inflation control, the SARB has reduced the 
consumer price index minus mortgage costs from 12.4% at the 
beginning of 2003 to 4.3% in January 2006, well within the 
SARB's target range of 3-6%.  In the meantime, real GDP 
growth has climbed from 3.0% in 2003 to 4.9% in 2005, mostly 
as a result of strong consumer spending by an emerging black 
middle class. 
 
¶9.  (SBU) South Africa's greatest economic challenges are 
accelerating growth, alleviating unemployment, and reducing 
income inequality between white and black South Africans. 
The official unemployment rate of 26.7% is significantly 
higher among black South Africans than whites.  Moreover, 56% 
of black South Africans, as opposed to just 4% of whites, 
live in poverty.  To achieve its target growth rate of 6% and 
create jobs, the government believes that it must increase 
public sector spending on economic infrastructure, encourage 
labor-intensive industries, and promote the development of 
small business.  To increase the black employment and reduce 
income inequality, the government believes that it must 
implement a comprehensive affirmative action policy, improve 
programs for skills development, and continue to improve the 
quality of life for the nation's poor through transfer 
payments and the provision of public services such as water, 
electricity, and housing.  Since 1994, nearly 1.8 million 
low-cost homes have been built and ten million people have 
been connected to clean water.  In addition, the government 
wants the poor to have greater access to the modern economy 
in areas such as finance.  This has led to the "Big 4" banks 
(Standard, Barclays/ABSA, FirstRand, and Nedcor, which 
together control 85% of the market) to agree to offering 
low-cost bank accounts to the poor and locating bank branches 
in low income areas. 
 
BILATERAL TRADE AND INVESTMENT 
------------------------------ 
 
¶10.  (SBU) In June 2003, the United States launched bilateral 
free trade negotiations with the Southern African Customs 
Union (South Africa, Botswana, Lesotho, Namibia, and 
Swaziland).  In 2004, negotiations stalled over the inclusion 
of chapters on services, investment, intellectual property 
rights, government procurement, labor, and environment.  In 
December 2004, SACU trade ministers reaffirmed their 
commitment to a comprehensive agreement, but talks stalled 
 
PRETORIA 00001397  003 OF 004 
 
 
again shortly after resuming in September 2005.  On February 
21, U.S. Trade Representative Portman sent a letter to each 
SACU trade minister explaining that it was unlikely that the 
two sides would be able to bridge their differences before 
Trade Promotion Authority expired in 2007.  On April 18, 
Deputy U.S. Trade Representative Karan Bahatia will meet with 
SACU deputy ministers of trade to discuss the status of 
negotiations and U.S.-SACU trade relations. 
 
¶11.  (SBU) Because of the strong presence of U.S. companies in 
South Africa and unilateral trade preferences provided to 
South Africa under the African Growth and Opportunity Act, 
U.S.-South Africa bilateral trade has grown steadily over the 
past five years.  In 2005, total bilateral trade reached $9.5 
billion, up 7.0% from the year before, and approximating that 
of Norway or Chile.  U.S. exports to South Africa grew 23% to 
$3.7 billion, once again making South Africa our largest 
export market in sub-Saharan Africa -- twice that of Nigeria. 
The only negative development was a slight decline in South 
African exports to the United States, to $5.9 billion.  This 
was because of the adverse effect of Chinese competition on 
South African exports of clothing to the United States after 
the expiration of the Agreement on Textiles and Clothing, and 
the continued strength of the rand vis-a-vis the dollar. 
 
¶12.  (SBU) After a surge in the mid 1990's, U.S. foreign 
direct investment in South Africa has reached a plateau, a 
trend that has been true for other investing countries.  With 
the notable exception of two large British acquisitions in 
2005, South Africa has been unable to attract its fair share 
of foreign direct investment.  Reasons often cited are a high 
crime rate, poor governance, uncertainty surrounding BEE 
policies, inflexible labor regulations, the dominance of 
state owned enterprises and other monopolies in certain 
sectors, and the prevalence of HIV/AIDS.  Nonetheless, the 
United States is still the second largest foreign direct 
investor in South Africa ($5.0 billion at year-end 2004), and 
by far the largest portfolio investor ($22.5 billion year-end 
2004, i.e., 41% of all foreign portfolio investment).  Almost 
600 U.S. firms have a presence in South Africa, with the vast 
majority treating the country as a base for regional 
business.  With a market capitalization of $650 billion. 
South Africa's JSE Securities Exchange is 17th largest in the 
world. 
 
OPIC FOCUS ON HOUSING AND CAPITAL MARKETS 
----------------------------------------- 
 
¶13.  (SBU) The Overseas Private Investment Corporation (OPIC) 
has initiated a number of investment funds that benefit South 
Africa.  OPIC is about to lend $250 million for the start up 
of two additional investment funds, one focused on the South 
African market and the other on emerging African markets.  To 
help South Africa contend with a deficit of 2.4 low income 
million homes, OPIC provided a $15 million loan guaranty to 
finance home construction and a $250 million loan guaranty to 
mitigate the risk of mortgage default for HIV-positive 
homeowners.  On May 2-4 in Cape Town, OPIC will host a 
conference on housing in Africa to promote housing 
construction and finance on the continent. 
 
COMBATING TERRORIST FINANCE 
--------------------------- 
 
¶14.  (SBU) South Africa has been building its capability to 
combat money laundering and terrorist finance since September 
11, 2001.  In 2003, the Financial Intelligence Centre (FIC) 
was established to monitor suspicious financial transactions. 
 In 2005, South Africa's Protection of Constitutional 
Democracy Against Terrorist and Related Activities Act came 
into force, thus criminalizing terrorist activity and 
granting government the power to seize assets belonging to 
terrorists.  Also in 2005, South Africa assumed the one-year 
presidency of the Financial Action Task Force.  While 
cooperation with us has been very good when it comes to 
terrorist finance, officially South Africa only takes action 
against an individual or organization after it has been 
listed by the United Nations Sanctions Committee under 
Resolution 1267.  FinCEN is close to concluding a Memorandum 
of Understanding with the FIC that will facilitate greater 
exchange of information between the two organizations. 
 
HIV/AIDS:  A CRISIS OF EPIC PROPORTIONS 
--------------------------------------- 
 
¶15.  (SBU) South Africa has the largest number of HIV 
 
PRETORIA 00001397  004 OF 004 
 
 
infections in the world, and HIV/AIDS is the country's 
leading cause of death.  Well over five million South 
Africans are HIV-positive, including 2.9 million women.  The 
number of AIDS-related deaths and AIDS orphans is expected to 
climb by 2010 to 5.2 million and 1.5 million respectively. 
The U.S. Census Bureau estimates that South Africa will have 
negative population growth and a 25% decrease in life 
expectancy by 2010, if nothing is done.  President Bush's 
Emergency Plan for AIDS Relief (PEPFAR), in its third year of 
implementation, is working with public and private sector 
prevention, treatment, and care programs.  During the first 
two years, the U.S. provided almost $240 million through 
PEPFAR to support HIV/AIDS programs in South Africa, making 
it the largest recipient of Emergency Plan resources.  PEPFAR 
funding for FY2006 will be more than $220 million.  After two 
and a half years of funding, the Emergency Plan supports more 
than 50,000 in ARV treatment through programs it supports in 
all provinces.  In addition, the South African military has 
expanded prevention programs and collaborates with the U.S. 
military and NIH on ARV-based AIDS treatment research (a $45 
million five-year program).  Global Health, and HIV/AIDS in 
particular, is our highest Mission Performance Plan priority. 
South Africa also is a major recipient of Global Fund 
resources, of which about one-third is contributed by the 
United States. 
 
TEITELBAUM