VZCZCXRO7028
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #2072/01 2631525
ZNR UUUUU ZZH
R 191525Z SEP 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5752
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 06 PRETORIA 002072 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR TRINA RAND 
DEPT PASS USTR FOR PCOLEMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: SECOND QUARTER REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY 
ECONOMIC STATISTICS 
 
¶1. (U) Summary.  South Africa's real GDP rebounded in the second 
quarter of 2008, reflecting a recovery in mining and manufacturing 
production as electricity supply improved.  Export volumes benefited 
from the increased production, higher international prices of key 
export commodities increased, and the depreciation of the rand. 
Consequently, the current account deficit narrowed in the second 
quarter and was easily financed by the inflow of portfolio and other 
investment capital.  This in turn improved South Africa's gross 
reserve position and enabled the rand to recover some of its first 
quarter-losses.  Unemployment also dropped from 23.5 percent in the 
first quarter to 23.1 percent in the second quarter.  CPIX-inflation 
accelerated to 13.0 percent in July 2008, driven mainly by 
supply-side factors.  Responding to the deteriorating inflation 
outlook, the Monetary Policy Committee (MPC) raised the repurchase 
rate (repo rate) at its April and June meetings.  The repurchase 
rate was left unchanged at 12 percent in August.  End Summary. 
 
Sources 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): 
 
2007                          2008 
May 7.02       Sep 7.13       Jan 6.99      May 7.62 
Jun 7.17       Oct 6.77       Feb 7.64      Jun 7.92 
Jul 6.97       Nov 6.70       Mar 7.98      Jul 7.64 
Aug 7.23       Dec 6.83       Apr 7.79      Aug 7.67 
 
Trade-Weighted Rand (monthly average; 2000 = 100): 
 
2007                         2008 
May 79.53     Sep 76.68      Jan 75.78     May 67.41 
Jun 78.20     Oct 79.51      Feb 69.03     Jun 65.03 
Jul 79.16     Nov 78.67      Mar 63.95     Jul 66.87 
Aug 76.49     Dec 77.99      Apr 65.31     Aug 66.32 
 
Comment: The rand recovered some of its first quarter losses during 
the second quarter.  On balance, the rand depreciated by 11 percent 
against the dollar and 15 percent against the weighted average 
exchange rate of the rand in the first eight months of 2008.  The 
rand declined sharply in the first quarter as the risk premium 
demanded by non-resident investors increased.  This decline was also 
influenced by factors such as electricity supply disruptions, 
slowing growth and negative perceptions arising from attacks on 
foreigners.  The rand recovered some of its first quarter losses 
during April and May following an aggressive reduction in interest 
rates by the US Federal Reserve in conjunction with higher South 
African interest rates, buoyant commodity prices, and significant 
direct investment inflows arising from corporate deals.  The value 
of the rand declined in June in response to a lower-than-anticipated 
interest rate increase and the announcement of a 
larger-than-expected current account deficit for the first quarter. 
The depreciation in June was further aggravated by the Fitch rating 
agency's decision to change the outlook for South Africa's long-term 
issuer default rating from positive to stable.  The strengthening of 
the rand in July and August was supported by the rebound in domestic 
output during the second quarter.  Analysts expect the future value 
Qoutput during the second quarter.  Analysts expect the future value 
of the rand to be shaped by South Africa's ability to fund its 
current account deficit.  End Comment. 
 
¶3.  INFLATION (year-on-year, not seasonally adjusted) 
         2008 
         Mar      Apr      May     Jun      Jul 
CPI      10.6     11.1     11.7     12.2    13.4 
CPIX     10.1     10.4     10.9     11.6    13.0 
PPI      11.9     12.4     16.4     16.8    18.9 
 
Comment:  Many inflation-targeting economies overshot their 
inflation targets during the last year due to rising food and fuel 
prices, and South Africa was no exception.  CPIX-inflation (CPI less 
mortgage interest) breached the upper limit of the inflation target 
range of 3 to 6 percent in April 2007 and accelerated to 13.0 
percent in July 2008.  The acceleration resulted primarily from 
higher food prices, high international oil prices and mounting 
broad-based price pressures or second-round effects.  The SARB's 
Monetary Policy Committee (MPC) expects inflation to peak at an 
average rate of around 13 percent in the third quarter of 2008. 
 
PRETORIA 00002072  002 OF 006 
 
 
Thereafter, inflation is expected to decline in the first quarter of 
2009, in part because of the introduction of new inflation basket 
weights.  Inflation is than expected to decline gradually, and to 
fall below the upper end of the inflation target range in the second 
quarter of 2010.  PPI-inflation scaled new heights (well above those 
of consumer prices) due to widespread increases in the prices of 
both domestically produced and imported goods.  End Comment. 
 
¶4. MONEY AGGREGATES (percentage change over 12 months) 
         2008 
         Mar      Apr      May      Jun      Jul 
M1      15.46    10.11    12.39    14.33     7.63 
M2      19.94    20.07    19.43    18.07    13.93 
M3      20.98    21.10    20.90    20.28    18.50 
 
Comment: Growth in the broadly defined money supply (M3) continued 
to decelerate during the first seven months of 2008, restrained by 
the tighter credit and the general economic slowdown.  Despite the 
slowdown, growth in M3 remained high, supported by accelerating 
inflation with its impact on nominal income and expenditure.  Weak 
share, bond, and real-estate prices also triggered a stronger 
precautionary and speculative demand for money balances.  End 
Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage 
change over 12 months) 
     2008 
     Mar       Apr       May       Jun       Jul 
    22.62     19.63     19.74     20.39     19.81 
 
Comment: The tightening of credit conditions contributed to a 
moderation in the growth of credit to the private sector during the 
second quarter of 2008.  Tightening monetary policy increased the 
debt-service costs for an already indebted private sector, while 
lending standards for the household sector were raised in accordance 
with the National Credit Act (NCA).  Furthermore, consumers' 
purchasing power was eroded by inflation, and household balance 
sheets were undermined by stagnant house prices and increasingly 
volatile financial markets.  The deteriorating economic climate was 
evident in weakening business and consumer confidence.  Economists 
believe this downward trend will continue in the second-half of 
¶2008.  End Comment. 
 
¶6.  KEY INTEREST RATES (at end of month) 
 
2007              Apr    May    Jun     Jul      Aug 
 
SARB Repo Rate   11.50  11.50   12.00   12.00    12.00 
 
Prime Overdraft  15.00  15.00   15.50   15.50    15.50 
Rate 
 
Comment:  The MPC has hiked interest rates ten times (for a 
cumulative 500 basis-points) since June 2006, making the current 
tightening cycle the longest since South Africa adopted an 
inflation-targeting framework.  This has reversed most of the 
650-basis-point reduction between 2003 and 2005.  The repurchase 
rate (repo rate) was left unchanged at 12.0 percent in August 2008. 
Most analysts believe that interest rates have peaked and that the 
first interest rate cuts can be expected from the second quarter of 
¶2009.  End Comment. 
 
¶7.  MERCHANDISE TRADE ACCOUNT (R millions) 
------------------------------------------ 
 
 
2008         EXPORTS      IMPORTS    TRADE BALANCE 
Jan         39,356.8      49,573.2      -10,216.4 
Feb         46,946.3      52,766.1       -5,819.8 
Mar         51,150.9      56,181.0       -5,030.1 
Apr         56,174.3      66,169.0       -9,994.7 
May         56,240.5      57,900.0       -1,659.5 
Jun         60,159.9      60,343.8         -183.9 
QJun         60,159.9      60,343.8         -183.9 
Jul         61,268.2      75,599.6      -14,331.4 
TOTAL (1)  367,761.0     418,431.1      -50,670.1 
 
JAN - JUL 2007 
TOTAL (1)  275,760.0     316,683.8      -40,923.8 
 
(1) Total After Adjustments (year-to-date) 
 
Comment:  Strong international prices and demand for South African 
mining products, alongside the depreciation of the rand, caused 
merchandise exports to increase by 32 percent in the first seven 
 
PRETORIA 00002072  003 OF 006 
 
 
months of 2008.  There was a rise in the volume of manufactured 
exports such as chemical products, machinery and electrical 
equipment, and vehicles and transport equipment.  Imports were 
boosted by an even greater amount by the government's capital 
expansion program as well as strong fixed investment spending by the 
private sector, high international oil prices and the weaker rand. 
End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
-------------------------------- 
                     2008 
                     Mar    Apr    May    Jun    Jul 
SARB Gross Gold and 
Foreign Reserves    34.39  34.28  34.41  34.85  35.00 
SARB Net Open Forward 
Position            33.13  32.97  33.23  33.76  34.17 
 
Comment:  South Africa's gross reserve position improved from $25.6 
billion at the end of 2006 to almost $33.0 billion at the end of 
2007, and by a further $2 billion to $35.0 billion by the end of 
July 2008.  Analysts believe the SARB has adopted a more cautious 
approach to reserve accumulation to avoid unnecessary downward 
pressure on the rand.  South Africa's reserves remain low as a 
percentage of exports, when compared to other emerging market 
economies.  Furthermore, import coverage decreased from 
five-and-a-half to four weeks of imports as imports surged in July. 
This is regarded as a source of weakness by the major international 
credit rating agencies.  End Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- ------ 
                    2007                 2008 
                     Q2     Q3     Q4    Q1     Q2 
--------------------------------------------- ------ 
Primary Sector     -4.5    1.9   -1.1  -13.9   16.9 
Agriculture         8.3    4.4   11.2   17.2   19.6 
Mining             -9.1    0.9   -5.8  -25.1   15.6 
 
Secondary Sector    2.0    0.6    8.1    1.0   12.3 
Manufacturing      -0.1   -2.5    8.2   -1.0   14.5 
Electricity         2.8    3.0   -1.8   -6.2   -1.3 
Construction       11.8   14.7   14.2   14.9   10.6 
 
Tertiary Sector     5.9    6.8    5.1    4.2    1.4 
Trade & catering    4.7    4.5    2.1    3.6   -2.2 
Transport & Comm.   6.1    4.4    3.6    3.5    4.1 
Finance            10.2   12.3    8.5    4.9    2.3 
Government          1.2    3.3    4.4    4.6    1.1 
--------------------------------------------- ------ 
TOTAL               4.0    4.6    5.1    2.1    4.9 
--------------------------------------------- ------ 
 
Comment: South Africa's real GDP rebounded in the second quarter of 
2008 and expanded at an annualized rate of 4.9 percent, following a 
sluggish growth rate of only 2.1 percent in the first quarter.  The 
improvement in growth in the second quarter reflected increased 
output in the primary and secondary sectors, which offset a further 
moderation in output growth of the tertiary sector. 
 
Primary sector:  Growth in the agricultural sector edged higher in 
the second quarter of 2008, primarily due to favorable weather 
conditions for field crop production, combined with a marked 
increase in the acreage planted.  The mining sector recovered some 
of its first quarter losses.  Production of gold, diamonds, coal and 
platinum increased in the second quarter of 2008, even though mines 
Qplatinum increased in the second quarter of 2008, even though mines 
had to operate at power levels of between 90 and 95 percent of their 
earlier electricity requirements.  The more stable supply of 
electricity and favorable commodity prices more than offset the loss 
of production due to continuing, but fewer, safety-related shutdowns 
over the period. 
 
Secondary sector:  Growth in the secondary sector expanded in the 
second quarter primarily due to the improved performance of 
manufacturing.  The strong manufacturing performance was partly 
attributable to base effects as the availability of electricity 
supply improved considerably in the second quarter.  The increase in 
manufacturing production was especially pronounced in food and 
beverages, and petroleum-related products.  Electricity output 
contracted only marginally in the second quarter of 2008 as the 
 
PRETORIA 00002072  004 OF 006 
 
 
availability of electricity improved considerably and the export of 
electricity to neighboring countries declined.  The construction 
sector remained buoyant in the second quarter of 2008, although the 
increase in output was lower than in the first quarter.  This 
moderation in growth reflected deteriorating conditions in the 
residential and non-residential building sectors, as developers 
increasingly felt the strain of higher interest rates and mounting 
inflationary pressures. 
 
Tertiary sector:  The slower pace of growth in the tertiary sector 
reflected a slowdown in the trade sector.  The contraction in the 
trade sector was the first since the third quarter of 2001 and was 
primarily due to slower output growth in the retail and motor trade 
subsectors.  Tighter credit conditions and inflationary pressures 
negatively affected consumer spending and consumer confidence levels 
in the second quarter of 2008.  Likewise, growth in the finance 
sector also tapered off.  End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2007               2008 
                    Q3       Q4        Q1       Q2 
--------------------------------------------- ------- 
Merchandise Exp.  124,858  132,032  138,702  172,558 
 
Net Gold Exports   10,239   11,268   11,516   11,877 
 
Merchandise Imp.  150,425  152,374  161,339  188,055 
 
Income Payments    29,752   31,868   31,607   28,862 
--------------------------------------------- ------- 
Current Account   -45,314  -38,072  -41,089  -39,133 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -8.1     -7.5     -8.9     -7.3 
(percentage) 
 
Comment: The second quarter output recovery after power supply 
disruptions in the first quarter, coupled with high international 
commodity prices and a more competitive rand, resulted in 
significant increaQs in both the volume and average price of South 
African exports in the second quarter.  This improved export 
performance coincided with more subdued domestic demand and a 
marginal increase in imports, and resulted in the narrowing of the 
current deficit in the second quarter of 2008.  End Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- -------- 
                      2007             2008 
                       Q3      Q4      Q1      Q2 
--------------------------------------------- -------- 
Direct Investment    10,880    5,528   35,169     981 
 
Portfolio Investment 29,215   -6,055  -20,572  22,547 
 
Other Investment     16,015   34,863   29,688  19,150 
 
--------------------------------------------- -------- 
Financial Account    56,110   34,336   44,285  42,678 
--------------------------------------------- -------- 
 
Comment:  South Africa continued to attract capital inflows to 
finance the current account deficit in the second quarter of 2008. 
Unlike the first quarter of 2008, when portfolio investments turned 
negative, capital inflows in the second quarter were primarily 
portfolio and other investment capital.  Foreign investor confidence 
in the country was positively affected by the recovery in output and 
high commodity prices, coupled with the government's commitment to 
address structural shortages.  However, the South Africa economy 
Qaddress structural shortages.  However, the South Africa economy 
would have to generate similar capital inflows in the second-half of 
2008 to prevent the rand from depreciating further.  End Comment. 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
------------------------------------------- 
                     2007              2008 
                     Mar     Sep       Q1       Q2 
--------------------------------------------- -------- 
Employed           12,648   13,234    13,623   13,729 
Unemployed          4,336    3,945     4,191    4,114 
Total Labor Force  16,984   17,178    17,814   17,844 
Not Econ. Active   13,211   13,235    12,794   12,861 
Population 15-64   30,195   30,413    30,608   30,705 
--------------------------------------------- -------- 
Unemployment rate   25.5     23.0      23.5     23.1 
 
PRETORIA 00002072  005 OF 006 
 
 
(percentage) 
 
Absorption rate     41.9     43.5      44.5     44.7 
(Employed/population ratio) 
 
Comment: Unemployment in South Africa dropped from 23.5 percent in 
the first quarter of 2008 to 23.1 percent in the second quarter. 
The number of jobless persons decreased by 77,000 to 4.1 million 
people, while the number of employed persons increased by 106,000 to 
13.7 million.  The prospect of slower economic growth for the next 
year or two could slow down or even halt this progress on 
employment.   End Comment. 
 
------------------ 
III. ANNUAL FIGURES 
------------------ 
 
¶13. GROSS DOMESTIC PRODUCT 
(R millions, at market prices) 
--------------------------------------------- ---- 
                   2005        2006        2007 
--------------------------------------------- ----- 
 Nominal GDP    1,541,067    1,741,060   1,993,894 
 
--------------------------------------------- ----- 
GDP Growth Rate    5.0         5.4         5.1 
(constant 2000 prices, y-o-y growth percentage) 
 
Comment:  The strong growth in 2007 was due to high commodity 
prices, strong domestic consumer demand, and increased fixed capital 
investment.  Economists expect economic growth to slow to between 3 
percent and 4 percent in 2008.  This slowdown is due to the 
sustained monetary policy tightening since mid-2006, energy supply 
constraints, and slower global growth.  End Comment. 
 
¶14.  FINANCING OF GROSS CAPITAL FORMATION (R millions) 
--------------------------------------------- -------- 
                           2005      2006      2007 
--------------------------------------------- ------- 
 
Savings by Households      1,264    -5,164    -6,885 
 
Corporate Savings         35,598    21,140    14,118 
 
Savings of Government    -10,836     9,032    19,636 
 
Consumption of fixed     190,148   218,070   255,033 
capital 
--------------------------------------------- ------- 
Gross savings            216,174   243,078   281,648 
 
Foreign Investment        62,179   112,346   145,016 
--------------------------------------------- ------- 
Gross capital formation  278,353   355,424   426,664 
--------------------------------------------- ------- 
 
Gross 
Savings/GDP               14.0      14.0       14.1 
(percentage) 
 
Dependence on Foreign     22.3      31.6       34.0 
Investment 
 
Foreign Investment/GDP     4.0       6.5        7.3 
(percentage) 
 
Gross Capital 
Formation/GDP             18.1      20.4       21.4 
(percentage) 
 
Comment:  The savings rates for households and corporations 
continued to decline, while the government increased its savings 
rate in 2007.  The government's higher savings rate was mainly due 
to an increase in tax revenue collected which more than offset 
growth in expenditure.  Notwithstanding the minor improvement in the 
national savings/GDP ratio, South Africa's dependence on foreign 
capital to finance gross capital investment increased to its highest 
rate ever in 2007.  Investment programs by private business 
enterprises, public corporations, and the general government boosted 
growth in capital investment.  The ratio of gross fixed investment 
to GDP increased to its highest level since 1985 and is approaching 
the SAG's target of 25 percent.  End Comment 
 
¶15.  NATIONAL BUDGET (R billions) 
 
PRETORIA 00002072  006 OF 006 
 
 
--------------------------------- 
 
Fiscal Year Ending 31 March: 
                        2005    2006     2007   2008 
--------------------------------------------- ------- 
Total Revenue          347.4   411.2   481.2   560.1 
Total Expenditure      368.6   416.8   470.2   541.6 
Budget Balance         -20.7    -5.0    11.0    18.5 
--------------------------------------------- ------- 
 
Budget Balance/GDP      -1.4    -0.3     0.6     0.9 
 
Comment:  The fiscal surplus in 2008, only the second since 1960, 
was the result of a large increase in tax revenue (owing to strong 
economic activity and stepped up revenue enforcement) that was only 
partly absorbed by additional expenditure.  End Comment. 
 
¶16.  GOVERNMENT DEBT (R billions) 
--------------------------------- 
 
Fiscal Year Ending 31 March: 
                      2005    2006     2007      2008 
--------------------------------------------- -------- 
Total Debt           501.7    528.5    551.9    571.7 
  of Which: 
   -- Domestic       431.8    461.2    469.0    475.2 
   -- Foreign         69.4     66.8     82.6     96.2 
   -- Other debt       0.5      0.4      0.3      0.2 
 
State Debt Cost       48.9     50.9     52.2     52.8 
--------------------------------------------- -------- 
Government Debt/GDP   36.8     33.2     28.9     25.4 
(percentage) 
State Debt Cost/GDP    3.4      3.2      2.9      2.6 
(percentage) 
 
Comment: The decline in government debt as a percentage of GDP can 
be attributed to the rapid growth of the economy and the creation of 
a fiscal surplus.  Debt service costs have shown a steadily 
declining trend 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 finance social priorities.  End Comment. 
 
 
--------------------------------------------- -------- 
 
For additional information please consult the following websites: 
 
South African Reserve Bank  
South African Revenue Service  
Statistics South Africa  
National Treasury  
 
BOST