VZCZCXRO2861
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0095/01 0091129
ZNR UUUUU ZZH
R 091129Z JAN 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 7579
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHTN/AMCONSUL CAPE TOWN 3808
RUEHDU/AMCONSUL DURBAN 8469
RUEHJO/AMCONSUL JOHANNESBURG 5995
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 PRETORIA 000095 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON SF
SUBJECT: ENCOURAGING NEWS ON CAPITAL FORMATION IN SOUTH 
AFRICA 
 
REF: 06 PRETORIA 5056 AND PREVIOUS 
 
PRETORIA 00000095  001.2 OF 002 
 
 
¶1.  (U) This cable is sensitive but unclassified; not for 
internet distribution. 
 
¶2.  (SBU) Summary:  Capital spending in South Africa is at 
its highest level since 1990, driven by strong domestic 
demand, high capacity utilization rates, and parastatal 
spending.  The long investment slump that commenced in the 
early 1980s may be at an end.  Increased investment will 
raise the growth potential of the economy.  However, 
achieving sustained GDP growth rates of 6 percent per year 
will require significant further increases in investment. 
End Summary 
 
-------------------------- 
The End of the Long Slump? 
-------------------------- 
 
¶3.  (U) Spending on capital goods (gross fixed capital 
formation) is growing robustly in South Africa, according to 
data published by the South African Reserve Bank (SARB) in 
December 2006.  The data indicate that capital spending in 
the third quarter of 2006 was almost 19 percent of GDP, or 
the highest level since 1990.  Many analysts hailed the news 
as proof that the long investment slump that began in the 
early 1980s -- when capital spending peaked at 28 percent of 
GDP -- may be at an end.  As one bank economist wrote, "Given 
the data since the middle of 2002, it appears that the 
downward trend (in the investment/GDP ratio) that commenced 
in the early 1980s following the boom in the gold price is 
now well and truly over." 
 
¶4.  (U) According to SARB, capital spending in the third 
quarter of 2006 expanded across the entire economy -- in the 
private sector, general government, and parastatals.  The 
strongest growth was registered by parastatal corporations 
(especially Transnet), which expanded their spending on 
machinery and equipment.  Their performance was paralleled by 
stepped-up general government spending on roads and other 
fixed assets.  The pace of capital formation likewise 
quickened in most sectors of the private economy, especially 
in agriculture, manufacturing, construction, commerce, and 
transporation.  (Capital expenditure in the private sector 
has made up about two-thirds of total fixed capital formation 
over the last 10 years.) 
 
------------ 
Looking Back 
------------ 
 
¶5.  (U) From 28 percent of GDP in 1982/83, capital spending 
declined steadily over the next 10 years, bottoming out at 
less than 15 percent of GDP at the time of the democratic 
transition in 1993/94.  The decline in public sector capital 
spending was especially sharp during these years, as 
parastatals lost access to foreign capital markets (because 
of sanctions) and the government was forced to divert 
revenues to current expenditures such as pensions and the 
military.  Low business confidence depressed private sector 
capital formation as well.  Unfortunately, the picture did 
not improve after the ANC took power in 1994.  Investment 
hovered around 15 percent of GDP throughout the 1990s, as the 
public sector -- where the bulk of infrastructure spending 
occurs -- brought fiscal deficits under control and struggled 
with slow implementation of projects.  However, capital 
spending has picked up steadily since 2002. 
 
------------- 
Looking Ahead 
------------- 
 
¶6.  (U) Analysts at Standard Bank believe that investment 
will remain robust for the foreseeable future.  They cite 
strong domestic demand, business optimism, and planned 
increases in parastatal spending as factors supporting 
increased investment.  In particular, the Asian hunger for 
commodities and high levels of capacity utilization 
(according to SARB, the manufacturing sector is now operating 
at "full" capacity) augur well for increased capital 
spending.  According to these analysts, investment in South 
Africa is relatively insensitive to interest rates, and the 
possibility of further hikes in SARB's policy interest rate 
(reftel) should not have a huge impact on investment, if 
other factors remain positive. 
 
------- 
 
PRETORIA 00000095  002.2 OF 002 
 
 
Comment 
------- 
 
¶7.  (SBU) As consumer spending cools in the wake of recent 
interest rate hikes, capital spending is poised to pick up 
the slack and become a vital driver of the economy.  More 
importantly, increased investment will boost South Africa's 
growth potential and help to relieve infrastructure and 
supply bottlenecks that cause the economy to overheat when 
growth approaches 5 percent per year.  Many economists 
believe that South Africa needs to invest 24 percent of GDP 
per year to achieve the SAG target of 6 percent annual 
growth.  (The IMF also cites 24 percent as a benchmark for 
optimal performance of the economy.)  Whether this level of 
investment is attainable is an open question, given the low 
rate of national saving (gross savings is about 14 percent of 
GDP) and the dependence on foreign capital inflows to finance 
domestic investment.  However, even sustained investment 
rates of only 20-22 percent of GDP per year would herald a 
new era of higher growth. 
BOST