VZCZCXRO3722
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0708/01 0991258
ZNR UUUUU ZZH
R 091258Z APR 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8065
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 07 PRETORIA 000708 
 
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:  South Africa did not escape the negative 
consequences of the international financial turmoil, despite the 
fact that its domestic financial institutions had virtually no 
direct exposure to the troubled assets that were central to the 
deterioration of credit markets.  Deteriorating consumer and 
business confidence, declining global demand, and a relatively tight 
domestic monetary policy were reflected in the contraction in real 
GDP in the fourth courter of 2008.  However, declining domestic 
inflation together with weakening domestic and international demand 
allowed the South African Reserve Bank's Monetary Policy Committee 
(MPC) to reduce interest rates by 250 basis points since December 
¶2008.  To bolster confidence and combat the negative impact of the 
slowdown, the SAG announced an expansionary budget which provides 
for a deficit of 3.9 percent of GDP in FY2010.  South Africa's 
current account deficit narrowed to 5.3 percent of GDP in the fourth 
quarter of 2008, as weaker merchandise exports were more than 
countered by a contraction in the value of merchandise imports and 
lower dividend payments to non-resident investors.  A combination of 
direct and other investment inflows financed the current account 
deficit in the fourth quarter, while portfolio investment recorded a 
record outflow.  The outflow was due to the sell-off of domestic 
securities following the uncertainty in global financial markets 
surrounding the magnitude of credit losses in the developed 
economies.  The outflow of portfolio investments and the reduction 
in commodity prices resulted in a significant depreciation in the 
rand during the fourth quarter of 2008.  The rand continued to 
fluctuate at these lower levels during the first quarter 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 
--------------------------------------------- -------- 
Jan 6.99       May 7.62      Sep  8.05      Jan  9.90 
Feb 7.64       Jun 7.92      Oct  9.67      Feb 10.01 
Mar 7.98       Jul 7.64      Nov 10.12      Mar 10.00 
Apr 7.79       Aug 7.66      Dec  9.95 
Trade-Weighted Rand (monthly average; 2000 = 100) 
--------------------------------------------- ------- 
2008                                       2009 
--------------------------------------------- ------- 
Jan 74.68      May 66.29     Sep 66.11     Jan 57.07 
Feb 67.98      Jun 63.85     Oct 5.32     Feb 57.66 
Mar 63.13      Jul 65.69     Nov 56.61     Mar 58.11 
Apr 64.31      Aug 67.66     Dec 56.38 
 
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 
Qcommodity prices, which constitute a large percentage of South 
Africa's exports.  The rand stabilized at around R10/$ on average 
during the first quarter of 2009.  End Comment. 
 
 
¶3.  INFLATION (year-on-year) 
---------------------------- 
         2008                       2009 
         Oct      Nov      Dec      Jan     Feb 
--------------------------------------------- -- 
CPIX     12.4     12.1     11.8 
CPI                                 8.1     8.6 
PPI      14.5     12.6     11.0     9.2     7.3 
 
Comment:  The collapse in international commodity prices as well as 
weak global and domestic demand started to slow the upward inflation 
spiral.  The Monetary Policy Committee's (MPC's) most recent central 
inflation forecast projects that inflation will continue its 
downward trajectory and return to within the 3-6 percent target 
range in the third quarter of 2009.  Inflation is then forecast to 
increase again and to breach the upper end of the target range in 
the first quarter of 2010, mainly as a result of technical base 
 
PRETORIA 00000708  002 OF 007 
 
 
effects.  Thereafter, inflation is expected to return to within the 
target range and remain there until the end of 2010.  Inflation is 
expected to average 6.5 percent and 5.3 percent in 2009 and 2010, 
respectively.  In January 2009, StatsSA introduced a new headline 
consumer price index, the CPI for all urban areas, which replaced 
CPIX as the inflation target measure.  Four fundamental changes 
encapsulate the new consumer price inflation measure.  First, the 
replacement of the International Trade Classification with the 
Classification of Individual Consumption by Purpose (COICOP), which 
is the international norm for the classification of goods and 
services measured in the CPI.  Second, the reweighting of the CPI 
with new expenditure weights primarily based on the Income and 
Expenditure Survey (IES) of 2005/06.  Third, the rebasing of the CPI 
to the 2008 calendar year.  Fourth, the introduction of owners' 
equivalent rent to estimate housing-related costs.  End Comment. 
 
¶4. MONEY AGGREGATES (year-on-year) 
--------------------------------- 
         2008       Q              2009 
         Oct      Nov      Dec      Jan      Feb 
--------------------------------------------- ---- 
M1       4.67     2.61     2.07    -6.04    -5.12 
M2      11.61    11.76    11.84    13.67    13.76 
M3      15.59    16.26    14.79    13.92    13.17 
 
Comment: The broadly defined money supply (M3) continued to 
moderate, reflecting tighter credit conditions, a slowing economy 
and significant negative wealth effects, resulting from the 
precipitous decline in asset prices.  End Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (year-on-year) 
--------------------------------------------- ------ 
     2008                          2009 
     Oct       Nov       Dec       Jan       Feb 
--------------------------------------------- ------ 
    16.42     15.37     13.60     11.85     11.05 
 
Comment: Growth in private sector credit extension continued to 
moderate amid tougher economic conditions and tighter credit 
conditions as well as elevated debt-service ratio's which limit the 
ability of consumers to take on new debt.  End Comment. 
 
 
¶6.  KEY INTEREST RATES (at end of month) 
--------------------------------------- 
                 2008             2009 
                  Nov     Dec     Jan     Feb     Mar 
--------------------------------------------- --------- 
SARB Repo Rate   12.00   11.50   11.50   10.50    9.50 
Prime Overdraft  15.50   15.00   15.00   14.00   13.00 
Rate 
 
Comment:  The South African Reserve Bank's Monetary Policy Committee 
(MPC) reduced the key policy interest rate, the repo rate, by a 
cumulative 250 basis points since December 2008.  The rate cuts were 
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 
Oct         65,652.6      75,445.3       -9,792.7 
Nov         53,877.9      65,944.3      -12,066.4 
Dec         48,541.1      50,176.8       -1,635.7 
TOTAL (1)  663,100.0     727,632.2      -64,532.4 
 
2009        EXPORTS       IMPORTS      TRADE BALANCE 
Jan         36,251.7      53,631.5      -17,379.7 
QJan         36,251.7      53,631.5      -17,379.7 
Feb         44,061.8      44,632.4         -570.6 
TOTAL (1)   80,294.0      98,331.1      -18,037.0 
 
JAN - FEB 2008 
TOTAL (1)   85,825.4     102,373.6      -16,548.3 
 
(1) Total After Adjustments (year-to-date) 
 
Comment:  Weaker global demand coupled with declining international 
commodity prices compressed the export earnings of South African 
producers since the fourth quarter of 2008.  The slowdown in foreign 
demand caused the total volume of both mining and manufactured goods 
exports to decrease.  In addition to the general slowdown in global 
demand, exports of South African goods were also affected by the 
tightening of global lending criteria which, in some instances, 
 
PRETORIA 00000708  003 OF 007 
 
 
forced producers in the mining and manufacturing sectors to scale 
down production, reschedule expansion projects and retrench 
employees.  However, exporters received some support from a weaker 
rand, which improved their price competitiveness in international 
markets.  Merchandise imports were weighed down by the subdued 
domestic demand for both capital and consumer goods.  End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
------------------------------- 
                     2008          2009 
                     Nov    Dec    Jan    Feb     Mar 
--------------------------------------------- --------- 
SARB Gross Gold and 
Foreign Reserves     33.22  34.10  33.74  33.78  34.11 
SARB Net Open Forward 
Position             32.58  33.46  33.10  33.15  33.46 
 
Comment:  South Africa's gross gold and foreign reserves decreased 
slightly in January, caused mainly by valuation changes rather than 
outflows.  In March, the SARB used the opportunity of a weaker rand, 
in the second half of the month, to boost the reserves through its 
foreign exchange operations.  South Africa's net reserves have risen 
over the past five years, after the SARB eliminated its loss-making 
forward foreign exchange book in 2004.  End Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- --- 
                     2008 
                      Q1      Q2      Q3      Q4 
--------------------------------------------- ---- 
PRIMARY SECTOR      -12.4    18.3     3.3     5.9 
Agriculture          25.0    16.7    31.6    16.7 
Mining              -25.8    19.2    -8.8     0.4 
 
SECONDARY SECTOR      1.2    11.8    -4.6   -15.0 
Manufacturing        -0.6    14.3    -9.4   -21.8 
Electricity          -5.8    -2.1     3.0    -2.7 
Construction         13.9     9.1    15.0    10.8 
 
TERTIARY SECTOR       3.7     1.6     1.7     2.4 
Trade & catering      4.1    -4.0    -6.9    -0.2 
Transport & Comm.     3.4     4.3     4.5     1.8 
Finance               2.6     3.3     3.2     3.0 
Government            4.6     2.5     5.2     4.5 
--------------------------------------------- ---- 
TOTAL                 1.7     5.0     0.2    -1.8 
--------------------------------------------- ---- 
 
Comment: Deteriorating consumer and business confidence, declining 
global demand, and a relatively tight domestic monetary policy were 
reflected in the contraction in real GDP in the fourth quarter of 
¶2008.  The decline could mainly be attributed to a pronounced 
deterioration in real value in the secondary sector, particularly 
manufacturing. 
 
Primary sector:  The strong growth in economic activity in the 
primary sector in the fourth quarter was largely the result of 
increased agricultural production.  Output in the agricultural 
sector benefited from an increase in the production of field crops, 
particularly corn, where the crop harvested increased from 7.1 
million tons in the 2006/07 production year to 12.7 million tons in 
the 2007/08 production year.  The mining sector showed positive 
growth in the fourth quarter, following a decline in the third 
quarter.  This turnaround was underpinned by improved production at 
the platinum and gold mines. 
 
Secondary sector:  Growth in the secondary sector turned negative 
QSecondary sector:  Growth in the secondary sector turned negative 
since the third quarter, mainly due to a decline in manufacturing 
output.  The decline in manufacturing was mainly evident in the 
subsectors that manufacture petroleum products, chemicals, rubber 
and plastic products; basic iron and steel products; and motor 
vehicles, parts and accessories.  These developments were a 
reflection of the strained export market for manufactured goods and 
the concurrent impact of households' weaker demand for durable 
consumer goods.  The contraction in the real value added by the 
electricity, gas and water sector in the fourth quarter was largely 
due to a decline in the output of electricity, which reflected the 
faltering domestic demand and the fact that energy-intensive smelter 
operations were terminated on account of the weaker export demand 
 
PRETORIA 00000708  004 OF 007 
 
 
for South African commodities.  The construction sector remained 
buoyant in the fourth 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 is in a 
technical recession following negative growth in the second, third, 
and fourth quarters, caused in part by the weakness in trade 
volumes, exacerbated by the global crisis, subdued real income, and 
higher interest rates that consequently dampened demand.  Some of 
the fiercest headwinds were faced by the motor trade subsector, 
where total new vehicle sales declined by roughly 143,000 units, or 
21.1 percent, in 2008.  This was the lowest level of annual sales 
since 2004.  The slower growth in the transport and communication 
sector in the fourth quarter was the result of decreasing volumes of 
merchandise imports and exports.  End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2008 
                    Q1       Q2       Q3       Q4 
--------------------------------------------- ------- 
Merchandise Exp.  138,082  172,201  178,975  166,501 
 
Net Gold Exports   11,516   11,877   12,351   12,790 
 
Merchandise Imp.  161,474  188,411  204,626  185,341 
 
Income Payments    31,548   29,506   34,270   26,774 
 
Service payment    30,579   36,642   36,438   34,971 
--------------------------------------------- ------- 
Current Account   -42,655  -40,375  -52,816  -33,304 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -8.8     -7.3     -7.8     -5.3 
(percentage) 
 
Comment: South Africa's current account deficit narrowed to 5.3 
percent of GDP in the fourth quarter of 2008, influenced by 
developments in the global economy.  With global demand waning, the 
volume of merchandise exports contracted noticeably in the fourth 
quarter of 2008, while at the same time the prices of most export 
commodities declined.  The weakening of the export performance was 
more than countered by a contraction in the value of imports due to 
a substantial drop in the international price of crude oil and a 
moderation in the domestic demand for imported manufactured goods. 
The current account was further supported by lower dividend payments 
accruing to non-resident investors on their investments in domestic 
securities.  Some key South African companies have already announced 
no dividend payments in 2009, which could lead to a further decline 
in income payments on the balance of payments, and a further 
narrowing of the current account deficit.  End Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- -------- 
                      2008 
                       Q1       Q2      Q3       Q4 
--------------------------------------------- -------- 
Direct Investment     35,432   3,372  10,765   53,928 
 
Portfolio Investment -21,953  10,733 -11,924 -180,368 
 
Other Investment      38,775  10,198  27,616   54,923 
--------------------------------------------- -------- 
Financial Account     52,254  24,503  26,457      483 
QFinancial Account     52,254  24,503  26,457      483 
--------------------------------------------- -------- 
 
Comment:  The inflow of foreign direct investment in the fourth 
quarter can mainly be attributed to the acquisition of equity in 
South African companies by non-resident investors, which more than 
offset a reduction of South African subsidiaries' long-and 
short-term loan liabilities against overseas parent companies. 
Foreign portfolio investment registered a record quarterly outflow 
of capital in the fourth quarter as non-resident investors continued 
to reduce their holdings of South African equity and debt 
securities.  The sell-off of domestic securities followed the 
uncertainty in global financial markets surrounding the magnitude of 
credit losses in the developed economies.  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. 
 
PRETORIA 00000708  005 OF 007 
 
 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
--------------------------------------------- -------- 
                     2008 
                     Q1        Q2       Q3       Q4 
--------------------------------------------- -------- 
Employed           13,623    13,729   13,655   13,844 
Unemployed          4,191     4,114    4,122    3,873 
Total Labor Force  17,814    17,844   17,777   17,718 
Not Econ. Active   12,794    12,861   13,024   13,176 
Population 15-64   30,608    30,705   30,801   30,894 
--------------------------------------------- -------- 
Unemployment rate   23.5      23.1     23.2     21.9 
(percentage) 
 
Absorption rate     44.5      44.7     44.3     44.8 
(Employed/population ratio) 
 
Comment: Unemployment in South Africa decreased from 23.5 percent in 
the first quarter of 2008 to 21.9 percent in the fourth quarter. 
The number of employed persons increased by 221,000 to 13.8 million 
during this period.  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) 
--------------------------------------------- ---- 
                   2006         2007       2008 
--------------------------------------------- ---- 
 Nominal GDP    1,745,217   1,999,086   2,283,777 
 
--------------------------------------------- ---- 
GDP Growth Rate    5.3         5.1         3.1 
(constant 2000 prices, y-o-y growth percentage) 
 
Comment:  Deteriorating consumer and business confidence due to the 
relatively tight domestic monetary policy, energy supply 
constraints, and declining global demand were reflected in the 
slower growth rate in 2008.  Economists expect growth to slow 
further in 2009 on the back of the global slowdown.  Some economists 
predict a contraction in GDP of between 0.5 and 1 percent in 2009. 
This would be the first contraction in GDP since 1992.  End 
Comment. 
 
¶14.  FINANCING OF GROSS CAPITAL FORMATION (R millions) 
--------------------------------------------- -------- 
                           2006      2007      2008 
--------------------------------------------- ------- 
 
Savings by Households     -5,088    -6,827    -5,665 
 
Corporate Savings         29,322    14,914    50,603 
 
Government Savings         5,953    27,810      -729 
 
Consumption of fixed     219,506   256,373   306,946 
capital 
--------------------------------------------- ------- 
Gross savings            249,693   292,270   351,155 
 
Foreign Investment       110,198   146,076   169,150 
--------------------------------------------- ------- 
Gross Capital Formation  359,891   438,346   520,305 
--------------------------------------------- ------- 
 
Gross 
Savings/GDP               14.3       14.6       15.4 
(percentage) 
 
Dependence on Foreign     30.6       33.3       32.5 
Investment 
 
Foreign Investment/GDP     6.3        7.3        7.4 
(percentage) 
 
Gross Capital 
Formation/GDP             20.6       21.9       22.8 
(percentage) 
 
 
PRETORIA 00000708  006 OF 007 
 
 
Comment:  The national savings ratio, measured by expressing gross 
saving as a percentage of GDP, increased further in 2008.  This was 
due to an improved saving performance of the corporate sector, while 
households' gross savings underpinned the national savings ratio 
further.  The increase in corporate savings can be attributed to an 
increase in the gross operating surpluses of business enterprises 
and a decline in dividend payments in the final quarter of 2008. 
Gross saving by the general government turned negative in 2008 due 
to lower tax revenue in response to the subdued economic climate. 
The improvement in the savings performance in 2008 lowered South 
Africa's dependency on foreign capital to finance gross capital 
formation.  Investment programs by private business enterprises, 
public corporations, and the general government boosted growth in 
gross capital formation in 2008.  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.  End Comment 
 
¶15.  NATIONAL BUDGET (R billions) 
--------------------------------- 
Fiscal Year Ending 31 March: 
                        2006     2007   2008    2009 
--------------------------------------------- ------- 
Total Revenue          411.2   482.7   559.8   611.1 
Total Expenditure      416.8   470.2   541.5   633.9 
Budget Balance          -5.6    12.5    18.3   -22.8 
--------------------------------------------- ------- 
 
Budget Balance/GDP      -0.4     0.7     0.9    -1.0 
 
Comment:  The impact of the weak domestic demand and the global 
economic crisis on tax revenues are primarily to blame for the 
change in fiscal stance in 2009.  However, analysts warned that the 
effect of the global crisis on company profits has not yet been 
fully reflected in the 2009 revenue numbers.  Analysts expect 
corporate tax payments to deteriorate further in the 2010 fiscal 
year, especially since sectors such as manufacturing and mining, 
which have been savaged by the global downturn, loom large in 
corporate tax take.  The fiscal deficit is expected to increase to 
3.9 percent of GDP in 2010.  End Comment. 
 
¶16.  GOVERNMENT DEBT (R billions) 
--------------------------------- 
Fiscal Year Ending 31 March: 
                     2006     2007      2008     2009 
--------------------------------------------- -------- 
Total Debt           528.3    553.7    577.0    628.7 
  of Which: 
   -- Domestic       461.2    470.8    480.6    533.3 
   -- Foreign         66.8     82.6     96.2     95.2 
   -- Other debt       0.3      0.3      0.2      0.2 
 
 
Debt Service Cost     50.9     52.2     52.8     54.3 
--------------------------------------------- -------- 
Government Debt/GDP   33.3     30.6     27.9     27.3 
(percentage) 
 
Debt Service Cost/GDP  3.2      2.9      2.6      2.4 
(percentage) 
 
Comment: The SAG continued to finance its borrowing needs 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 FY 2007 and FY 2008. However, total 
debt is set to increase to 31.1 percent of GDP in FY 2012 to finance 
the projected budget deficits over the next three years.  Debt 
service costs have shown a steadily declining trend since peaking at 
Qservice 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.  Despite the projected increase in total debt 
over the next three years, debt servicing cost is set to remain 
stable at about 2.5 percent of GDP.  National Treasury attributed 
this to lower interest rates and active debt swap and refinancing 
programs.  End Comment. 
 
--------------------------------------------- -------- 
 
For additional information please consult the following websites: 
 
South African Reserve Bank  
South African Revenue Service  
Statistics South Africa  
National Treasury  
 
 
PRETORIA 00000708  007 OF 007 
 
 
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