VZCZCXRO6680
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0071/01 0141503
ZNR UUUUU ZZH
R 141503Z JAN 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 6975
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 000071 
 
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: QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY 
ECONOMIC STATISTICS 
 
REF: STATE 08 134905 
 
¶1. (U) Summary:  The deterioration in the global economic landscape 
affected South Africa's third quarter 2008 economic performance. 
Weaker international demand, falling commodity prices, and the tight 
domestic economic environment resulted in the lowest quarterly real 
GDP growth in ten years. Unemployment increased from 23.1 percent in 
the second quarter to 23.2 percent in the third quarter.  The 
current account deficit increased from 7.3 percent of GDP in the 
second quarter to 7.9 percent in the third quarter.  A combination 
of direct and other investment inflows financed the current account 
deficit in the third quarter, while portfolio investment switched to 
a net outflow.  The outflow was prompted by global financial risk 
and a reduction in commodity prices, which also resulted in a 
significant depreciation in the rand during September and a 
subsequent fluctuation around lower levels.  Uncertainty and 
volatility in global financial markets also affected the South 
African Reserve Bank's reserve accumulation which led to a slight 
decrease in foreign reserves in the third quarter of 2008. 
CPIX-inflation peaked at 13.6 percent in August, before decelerating 
to 12.1 percent in November, while growth in the broadly defined M3 
money supply and credit extensions to the private sector also 
decelerated further in the third quarter.  Declining inflation and 
credit demand together with weakening domestic and international 
economic conditions allowed the South African Reserve Bank's 
Monetary Policy Committee (MPC) to reduce interest rates by 50 basis 
points in December.  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): 
 
 2007            2008 
Sep 7.13       Jan 6.99       May 7.62      Sep  8.05 
Oct 6.77       Feb 7.64       Jun 7.92      Oct  9.67 
Nov 6.70       Mar 7.98       Jul 7.64      Nov 10.12 
Dec 6.83       Apr 7.79       Aug 7.66      Dec  9.94 
 
Trade-Weighted Rand (monthly average; 2000 = 100): 
 
2007            2008 
Sep 75.82      Jan 74.68     May 66.29     Sep 66.11 
Oct 78.65      Feb 67.98     Jun 63.85     Oct 57.32 
Nov 77.92      Mar 63.13     Jul 65.69     Nov 56.61 
Dec 77.03      Apr 64.31     Aug 67.66     Dec 56.73 
 
Comment: The rand depreciated by 31.5 percent against the dollar and 
25.2 percent against the trade-weighted average exchange rate of the 
rand in 2008.  The sharp decline in the exchange rate was caused by 
global financial turmoil, with investors rechanneling funds to 
familiar, mature markets, as well as by the drop in international 
commodity prices, which constitute a large percentage of South 
Africa's exports.  The significant appreciation of the US dollar 
resulted from increased investment in US assets by risk-averse 
investors.  The movement in the rand was not unique as most 
commodity-producing, emerging-market countries with large 
current-account deficits experienced significant declines in their 
currencies.  End Comment. 
 
¶3.  INFLATION (year-on-year, not seasonally adjusted) 
Q3.  INFLATION (year-on-year, not seasonally adjusted) 
         2008 
         Jul      Aug      Sep      Oct     Nov 
CPI      13.4     13.7     13.1     12.1    11.8 
CPIX     13.0     13.6     13.0     12.4    12.1 
PPI      18.9     19.1     16.0     14.5    12.6 
 
Comment:  Almost all inflation-targeting countries, including South 
Africa, continue to experience inflation rates in excess of their 
inflation targets. South Africa's inflation was primarily driven by 
the rising prices of energy and food.  CPIX-inflation (CPI minus 
mortgage interest) peaked at 13.6 percent in August, more than 
double the upper limit of the inflation target range of 3 to 6 
percent, before decelerating to 12.1 percent in November.  Producer 
price inflation was 19.1 percent in August, the highest rate in 22 
years, before decelerating to 12.6 percent in November.  The 
Monetary Policy Committee's (MPC's) most recent central inflation 
 
PRETORIA 00000071  002 OF 006 
 
 
forecast projects that inflation will continue its downward 
trajectory and return to within the target range in the third 
quarter of 2009.  Inflation is expected to average 6.2 percent and 
5.6 percent in 2009 and 2010, respectively.  Monthly inflation is 
expected to drop by as mush as 3 percent in early 2009, when StatsSA 
implements a new inflation basket that gives less importance to food 
and fuel costs.  The MPC highlighted the exchange rate as the most 
significant upside risk to the inflation outlook.  End Comment. 
 
¶4. MONEY AGGREGATES (percentage change over 12 months) 
         2008 
         Jul      Aug      Sep      Oct      Nov 
M1       7.64     2.40     4.57     4.67     2.61 
M2      13.86     9.45    10.17    11.61    11.76 
M3      18.10    15.42    15.23    15.59    16.26 
 
Comment: After a two-year period of high growth in the broadly 
defined money supply (M3), some moderation set in towards the end of 
2007 and became more pronounced in 2008.  The deceleration in M3 
growth reflected tighter credit conditions, diminishing wealth 
effects as asset prices receded, and slower underlying growth in 
income and expenditure.  End Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage 
change over 12 months) 
     2008 
     Jul       Aug       Sep       Oct       Nov 
    19.43     18.52     16.28     16.36     15.30 
 
Comment: Growth in private sector credit extension continued to 
moderate amid tougher economic conditions and tighter credit 
conditions.  The progressive tightening in the monetary policy 
stance, which began in the middle of 2006, has slowly but surely 
reduced credit demand by households and corporate sectors. 
Furthermore, consumers' purchasing power was eroded by inflation, 
household balance sheets were undermined by stagnant house prices 
and volatile financial markets, and lending standards were raised by 
the National Credit Act (NCA).  Economists believe this downward 
trend in credit extension will continue in 2009.  In a typical 
credit cycle, credit growth starts rising only 12 to 18 months after 
the first cut in interest rates.  Consequently, the December 
interest rate cut is not expected to bolster credit growth until the 
first half of 2010.  However, some economists expect that the 2010 
World Cup may cause a "feel good" reaction that would accelerate the 
expected consumer response to lower interest rates.  End Comment. 
 
¶6.  KEY INTEREST RATES (at end of month) 
 
2007             Aug     Sep     Oct     Nov      Dec 
 
SARB Repo Rate   12.00   12.00   12.00   12.00   11.50 
 
Prime Overdraft  15.50   15.50   15.50   15.50   15.00 
Rate 
 
Comment:  The South African Reserve Bank's Monetary Policy Committee 
(MPC) reduced the key policy interest rate, the repo rate, by 50 
basis points to 11.5 percent in December, ending a period of 
unchanged monetary policy during its August and October meetings. 
The rate cut was made possible by declining domestic inflation and 
weakening domestic and international demand.  Most analysts believe 
there will be further interest rate cuts in 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 
QFeb         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 
Jul         61,268.2      75,599.6      -14,331.4 
Aug         60,390.9      65,514.4       -5,123.5 
Sep         61,067.3      68,179.2       -7,111.9 
Oct         65,652.6      75,445.3       -9,792.7 
Nov         53,877.9      65,944.3      -12,066.4 
TOTAL (1)  609,463.0     693,641.2      -84,178.2 
 
JAN - NOV 2007 
TOTAL (1)  449,357.9     517,410.7      -68,052.7 
 
(1) Total After Adjustments (year-to-date) 
 
PRETORIA 00000071  003 OF 006 
 
 
 
Comment:  The trade balance improved during the first half of the 
year as a result of growing merchandise exports, but deteriorated 
during the second half due to rising imports.  Merchandise export 
growth stagnated in the third quarter due the slowdown in global 
demand and the substantial decline in international commodity 
prices.  Sluggish growth in export volumes was recorded in the 
subcategory for motor vehicles and transport equipment, while the 
volume of exported machinery, electrical equipment and precious 
metals receded in the third quarter.  Merchandise imports increased 
in the third quarter despite the moderation in domestic economic 
activity and more stringent international credit conditions. 
Economists expect the trade balance to narrow in 2009 as weak 
domestic spending contains import volumes and the global recession 
keeps import prices under control.  Export volumes and prices will 
also be impacted by the global downturn, but exporters will receive 
some support from a weaker rand.  End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
-------------------------------- 
                     2008 
                     Jul    Aug    Sep    Oct    Nov 
SARB Gross Gold and 
Foreign Reserves    35.00  34.33  34.42  32.91  33.22 
SARB Net Open Forward 
Position            34.17  33.50  33.64  32.11  32.58 
 
 
Comment:  South Africa's gross foreign reserves decreased slightly 
in the third quarter of 2008. Valuation changes rather than outflows 
caused these declines.  Uncertainty and volatility in global 
financial markets inhibited the SARB's natural tendency to 
accumulate reserves.  Economists expect South Africa's reserve 
position to remain under pressure in 2009, given the weakness of the 
rand and volatility in financial markets.  End Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- ------ 
                    2007          2008 
                     Q3     Q4    Q1     Q2     Q3 
--------------------------------------------- ------ 
Primary Sector      1.7    1.2  -14.5   19.2   -0.5 
Agriculture         7.1   15.5   16.2   19.4   16.1 
Mining             -0.4   -4.4  -25.8   19.2   -8.0 
 
Secondary Sector    1.6    9.4    1.2   11.8   -2.6 
Manufacturing      -1.4    9.0   -0.6   14.3   -6.9 
Electricity         3.6   -0.8   -5.8   -2.1    3.0 
Construction       15.5   17.8   13.9    9.1   15.0 
 
Tertiary Sector     6.1    4.7    3.7    1.6    1.5 
Trade & catering    4.4    2.0    4.1   -4.0   -6.9 
Transport & Comm.   4.5    3.6    3.4    4.3    4.5 
Finance            10.4    8.0    2.6    3.3    3.2 
Government          3.7    4.3    4.6    2.5    3.9 
--------------------------------------------- ------ 
TOTAL               4.5    5.4    1.6    5.1    0.2 
--------------------------------------------- ------ 
 
Comment: South Africa's real GDP growth slowed noticeably in the 
third quarter of 2008, recording the lowest quarterly growth rate in 
ten years.  The sluggish growth was visible in all the major 
goods-producing sectors of the economy. 
 
Primary sector:  The decline in economic activity in the primary 
sector in the third quarter was primarily the result of a decline in 
mining production, in particular, in platinum-group metals, gold, 
Qmining production, in particular, in platinum-group metals, gold, 
diamonds, and coal.  Lower growth in the third quarter also 
reflected the statistical effect of the high base established in the 
second quarter, and was exacerbated by weaker international demand 
and falling commodity prices.  Platinum output was adversely 
affected by intensive maintenance programs usually conducted in 
February, safety-related shutdowns and one-day strikes.  In 
contrast, the agricultural sector made a positive contribution to 
overall growth in the third quarter, benefiting from increased 
planting of field crops and bolstered by favorable weather 
conditions. 
The result was a bumper maize crop. 
 
 
PRETORIA 00000071  004 OF 006 
 
 
Secondary sector:  Growth in the secondary sector turned negative in 
the third quarter, mainly due to a decline in manufacturing output. 
The decline in manufacturing was caused by slowing domestic demand, 
falling commodity prices, and decelerating global economic growth. 
Notably slower growth was observed in the subsectors for motor 
vehicles, parts and accessories, textiles, clothing, leather and 
footwear, and food and beverages.  The domestic demand for these 
products was probably affected by the sluggish growth in real 
income, higher interest rates, and already high debt levels, which 
inhibited the take-up of more credit.  However, 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 for the 2010 FIFA World Cup under 
construction. 
 
Tertiary sector:  The slower pace of growth in the tertiary sector 
reflected a slowdown in the trade sector.  This sector slipped into 
a technical recession following negative growth in the second and 
third quarters.  Tighter credit conditions and inflationary 
pressures negatively affected consumer spending and consumer 
confidence levels in the third quarter of 2008.  Growth in the 
financial services sector, the largest sector of the economy, 
moderated marginally in the third quarter.  This was due to a 
moderation in the real output in the banking sector, which was 
partly offset by higher trading volumes in equities, bonds and other 
financial market instruments, as investors repositioned themselves 
in a volatile market.  The increase value added in the general 
government sector was largely due to increased employment in the 
sector.  End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2007      2008 
                    Q4        Q1       Q2      Q3 
--------------------------------------------- ------- 
Merchandise Exp.  133,320  138,082  172,201  178,975 
 
Net Gold Exports   11,268   11,516   11,877   10,239 
 
Merchandise Imp.  152,260  161,474  188,411  204,626 
 
Income Payments    33,497   31,608   29,566   34,380 
 
Service payment    30,418   30,579   36,642   36,241 
--------------------------------------------- ------- 
Current Account   -37,431  -42,773  -40,485  -52,827 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -7.2     -9.2     -7.3     -7.9 
(percentage) 
 
Comment: The widening deficit on the current account in the third 
quarter reflected the impact of the slowdown in global economic 
activity and a substantial decline in international commodity prices 
as well as an increase in merchandise imports.  The decline in 
global demand affected both the volume and prices of merchandise 
exports adversely.  Over the same period, the growth in the value of 
merchandise imports also slowed alongside the moderation in domestic 
economic activity and more stringent international credit 
conditions.  The trade deficit was further exacerbated by higher 
income payments accruing to non-resident investors on their 
investment in domestic securities.  End Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- -------- 
Q-------------------------------------------- --------- 
                      2007      2008 
                       Q4       Q1      Q2        Q3 
--------------------------------------------- -------- 
Direct Investment     7,401   35,432   1,310   16,920 
 
Portfolio Investment -6,055  -20,572  22,466  -12,970 
 
Other Investment     35,280   40,525  14,798   20,550 
--------------------------------------------- --------- 
Financial Account    36,507   55,385  38,574   24,500 
--------------------------------------------- --------- 
 
Comment:  South Africa continued to attract capital inflows to 
finance the current account deficit in the third quarter of 2008. 
As in the first quarter of 2008, when portfolio investments turned 
negative, capital inflows in the third quarter were from direct and 
other investment capital.  The outflow of portfolio capital 
reflected conditions in the global capital markets where foreign 
 
PRETORIA 00000071  005 OF 006 
 
 
investors limited their exposure to emerging-market assets and 
transferred funds to familiar home markets.  Other investment flows 
consisted mainly of short-term foreign loans drawn upon by South 
African banks, as well as non-resident investors' foreign-currency 
denominated deposits with these banks.  End Comment. 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
------------------------------------------- 
                     2007      2008 
                     Sep       Q1       Q2      Q3 
--------------------------------------------- -------- 
Employed           13,234    13,623   13,729   13,655 
Unemployed          3,945     4,191    4,114    4,122 
Total Labor Force  17,178    17,814   17,844   17,777 
Not Econ. Active   13,235    12,794   12,861   13,024 
Population 15-64   30,413    30,608   30,705   30,801 
--------------------------------------------- -------- 
Unemployment rate   23.0      23.5     23.1     23.2 
(percentage) 
 
Absorption rate     43.5      44.5     44.7     44.3 
(Employed/population ratio) 
 
 
Comment: Unemployment in South Africa increased from 23.1 percent in 
the second quarter of 2008 to 23.2 percent in the third quarter. 
The number of employed persons decreased by 74,000 to 13.6 million. 
The decrease in employment was primarily due to a drop in informal 
sector employment, which more than offset a gain of 24,000 new jobs 
in the formal sector and the creation of 89,000 new jobs by private 
households.  The prospect of slower economic growth in 2009 will 
slow employment growth and result in job losses in some sectors of 
the economy.  End Comment. 
 
------------------ 
III. ANNUAL FIGURES 
------------------ 
 
¶13. GROSS DOMESTIC PRODUCT 
(R millions, at market prices) 
--------------------------------------------- ---- 
                   2005        2006        2007 
--------------------------------------------- ----- 
 Nominal GDP    1,543,976    1,745,217   1,999,086 
 
--------------------------------------------- ----- 
GDP Growth Rate    5.0         5.3         5.1 
(constant 2000 prices, y-o-y growth percentage) 
 
Comment:  Strong growth in 2007 was due to high commodity prices, 
strong domestic consumer demand, and increased fixed capital 
investment.  Economists expect economic growth to have slowed 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      1,296    -5,088    -6,827 
 
Corporate Savings         40,265    29,322    14,914 
 
Government Savings       -12,217     5,953    27,810 
 
Consumption of fixed     190,705   219,506   256,373 
capital 
--------------------------------------------- ------- 
Gross savings            220,049   249,693   292,270 
 
 
Foreign Investment        62,179   110,198   146,076 
--------------------------------------------- ------- 
Gross Capital Formation  282,228   359,891   438,346 
--------------------------------------------- ------- 
 
Gross 
Savings/GDP               14.3      14.3       14.6 
(percentage) 
 
Dependence on Foreign     22.0      30.6       33.3 
QDependence on Foreign     22.0      30.6       33.3 
Investment 
 
PRETORIA 00000071  006 OF 006 
 
 
 
Foreign Investment/GDP     4.0       6.3        7.3 
(percentage) 
 
Gross Capital 
Formation/GDP             17.1      18.8       21.1 
(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 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 formation increased to its highest rate ever 
in 2007.  Investment programs by private business enterprises, 
public corporations, and the general government boosted growth in 
gross capital formation.  The ratio of gross capital formation to 
GDP increased to its highest level since 1985 and is approaching the 
SAG's target of 25 percent.  Government savings are expected to 
decrease, if not end, in 2009, adding to even greater dependence on 
foreign capital to finance gross capital formation.  End Comment 
 
¶15.  NATIONAL BUDGET (R billions) 
--------------------------------- 
 
Fiscal Year Ending 31 March: 
                        2005    2006     2007   2008 
--------------------------------------------- ------- 
Total Revenue          347.4   411.2   482.7   559.8 
Total Expenditure      368.6   416.8   470.2   541.7 
Budget Balance         -21.2    -5.6    12.5    18.1 
--------------------------------------------- ------- 
 
Budget Balance/GDP      -1.5    -0.4     0.7     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.  The fiscal surplus is 
expected to decline, if not disappear in 2009.  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 
 
Debt Service Cost     48.9     50.9     52.2     52.8 
--------------------------------------------- -------- 
Government Debt/GDP   36.8     33.2     28.9     25.4 
(percentage) 
 
Debt Service 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.  As a result, 
government spending on social priorities has more than doubled since 
¶2003.  End Comment. 
 
--------------------------------------------- -------- 
 
For additional information please consult the following websites: 
 
South African Reserve Bank  
South African Revenue Service  
Statistics South Africa  
QStatistics South Africa  
National Treasury  
 
BOST