VZCZCXRO3918
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTN #0128/01 1471448
ZNR UUUUU ZZH
R 271448Z MAY 09
FM AMCONSUL CAPE TOWN
TO RUEHC/SECSTATE WASHDC 3103
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0125

UNCLAS SECTION 01 OF 03 CAPE TOWN 000128 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN EIND ETRD ENRG PGOV SF
SUBJECT: GLOBAL CONDITIONS MORE LIKELY TO IMPACT SOUTH AFRICAN 
ECONOMY THAN CHANGES IN GOVERNMENT 
 
This cable was a collaboration between Consulate Cape Town and 
Embassy Pretoria. 
 
¶1. (U) Summary.  The Port Elizabeth Regional Chamber of Commerce 
organized a briefing on April 21, to discuss the impact of the 
global economic crisis and the implications of a Jacob Zuma 
presidency on the country's economic policy.  Keynote speaker 
Econometrix Chief Economist Dr. Azar Jammine noted that the global 
crisis would have a greater impact on South Africa's economy than 
any potential changes in government policies under a Zuma 
presidency.  Jammine thought South Africa would feel the impact of 
the current global downturn more so than in the past due to its 
increased dependence on global commodities demand.  Former Finance 
Minister Manuel's continued presence in a top policy development 
position in the new Zuma cabinet reinforces most analysts' 
predictions that macroeconomic policy would not shift dramatically 
under a Zuma administration.  The incoming administration faces a 
tough economic outlook as it will have to deal with the first 
recession the country has seen in seventeen years.  End Summary. 
 
-------------------------------- 
SOUTH AFRICA EXPECTED TO WEATHER 
GLOBAL FINANCIAL STORM 
-------------------------------- 
 
¶2. (U) Embassy Trade and Investment Officer and Transport Officer 
attended a breakfast briefing organized by the Port Elizabeth 
Regional Chamber of Commerce on April 21.  Keynote speaker 
Econometrix Chief Economist Dr. Azar Jammine outlined why the South 
African economy may have a better chance of surviving the global 
meltdown, and the implications of a Jacob Zuma presidency for the 
country's economic policy direction.  Jammine thought that South 
Africa would fare better than most economies during the current 
global economic downturn because of good macroeconomic management of 
the national economy. 
 
¶3. (U) Jammine explained that there had been a fiscal surplus under 
out-going Finance Minister Trevor Manuel's watch.  Jammine thought 
South Africa would have a greater fiscal cushion to stimulate the 
economy and deal with the global downturn because Manuel had kept 
government spending under control in the past.  Public debt was 
brought down from above 50 percent to around 23 percent of gross 
domestic product in the past decade.  Jammine also noted that South 
African banks were secure and had share prices that were more stable 
than in other parts of the world.  Jammine noted that the South 
African Rand's relative weakness against major currencies in 2008 
had also insulated South Africa from major global shocks by allowing 
South African exports to retain export competitiveness.  (Comment: 
The rand is recovering its former strength in 2009.  End Comment) 
 
 
-------------------------------- 
SOUTH AFRICAN ECONOMY DEPENDENT 
ON CONTINUED CHINESE DEVELOPMENT 
-------------------------------- 
 
¶4. (U) Jammine thought South Africa would feel the impact of the 
current global downturn more so than in the past due to its 
increased dependence on global commodities demand growth.  South 
African gross domestic product (GDP) grew at an average of three to 
five percent in the 1990s, mainly due to rising global demand for 
commodities from China.  Jammine stated that South African economic 
conditions would be most affected by developments in the Chinese 
economy.  According to Jammine, China is the primary consumer of 
South African commodities; particularly iron, steel, heavy 
chemicals, and nonferrous metals.  If "China goes downhill then 
South Africa will follow."  He thought that as long as China 
QSouth Africa will follow."  He thought that as long as China 
continued to urbanize it would need South African commodities. 
 
-------------------------------- 
CREDIT CRUNCH REDUCES GLOBAL AND 
DOMESTIC AUTO DEMAND 
-------------------------------- 
 
¶5. (U) The South African economy is already experiencing the affects 
of the current global decrease in demand for metal processing and 
automobiles.  Auto and component manufacturers based in the Eastern 
Cape Province are among the industries experiencing the greatest 
distress.  Sales in all segments of the South African new vehicle 
market, including export sales, continue to register sharp declines. 
 The decline in exports of South African-produced automobiles 
accelerated during April 2009.  Monthly exports registered a 49.1 
percent decline from to 22,536 in April 2008 to 11,479 in April 
¶2009. 
 
¶6. (U) Domestic demand for South African-produced automobiles has 
also slumped.  Jammine stated that house prices in South Africa have 
followed a global downward trajectory, which has negatively affected 
equity and consumers' ability to borrow.  As a result, domestic 
demand for products that require credit (i.e., automobiles and 
appliances) has also been adversely affected.  He stressed that 
 
CAPE TOWN 00000128  002 OF 003 
 
 
there was not much the South African government could do to assist 
the auto industry besides easing credit availability.  For example, 
he did not believe that stimulus and rebate programs to assist 
consumers hoping to purchase an automobile (like the ones recently 
passed in Germany and Japan) would be palatable in the South African 
political landscape.  People would question why the South African 
Government (SAG) should assist car buyers when the poverty and 
unemployment rate is so high. 
 
-------------------- 
LONGER-TERM ECONOMIC 
OUTLOOK MIXED 
-------------------- 
 
¶7. (U) Jammine predicted mixed economic results over the long-term 
for South Africa.  He noted that macroeconomic conditions would be 
boosted by a decrease in inflation and fuel prices, but explained 
that South Africa's current account deficit was much higher than 
other similarly-sized economies.  In the short-term, he expected the 
Rand to strengthen, but believed that it would weaken over the 
longer-term due to the overreliance on imports. 
 
¶8. (U) Jammine also noted that electricity demand had decreased as a 
result of the economic slowdown, which would provide 
state-controlled utility Eskom with a temporary reprieve as it 
attempts to enhance capacity.  He emphasized that in the long-term, 
Eskom would need to increase electricity tariffs to be able to 
provide adequate capacity.  However, Jammine conceded that 
electricity tariff increases would mean that projects, such as the 
Coega International Development Zone in the Eastern Cape, would be 
less competitive in attracting international investors. 
 
¶9. (U) South Africa has attracted major international sporting 
events, which are expected to boost tourism and infrastructure 
growth at a time when most economies are contracting. 
Infrastructure investments such as international airport upgrades 
made by the government to prepare for the 2010 FIFA World Cup are 
expected to have longer-term positive impacts on economic growth and 
trade facilitation in Southern Africa. 
 
--------------------------------- 
IMPLICATIONS OF A ZUMA PRESIDENCY 
--------------------------------- 
 
¶10. (U) Jammine thought that fears that a Zuma presidency and 
changes in African National Congress (ANC) leadership would impede 
economic advances were irrational.  He noted that the SAG was 
already beginning to emphasize regulations and social grant programs 
under the previous Mbeki administration, and did not envision major 
economic policy changes under the new Zuma administration.  Jammine 
thought Zuma's popularity was based more on a popular dislike for 
Mbeki than due to major policy shifts to the left.  He noted that 
Zuma had done a good job of courting the business community during 
his campaign. 
 
 
¶11. (U) Jammine emphasized that Wall Street would have a greater 
impact on South African macroeconomic conditions than a Zuma 
presidency.  Jammine explained that the business community put more 
value on Manuel's continued presence in economic policy-making then 
in the shift of power from Mbeki to Zuma.  He highlighted the 
aftermath of the Mbeki resignation as an example.  President Mbeki 
resigned on September 25, 2008, and the markets did not register any 
fluctuations.  However, a subsequent announcement that Manuel would 
also resign led to market losses of approximately R50 million ($6 
million).  The market then recovered after Manuel confirmed that he 
would stay on with the new Zuma administration.  Jammine believed 
this market reaction sent a strong message to the Zuma camp to 
Qthis market reaction sent a strong message to the Zuma camp to 
retain Manuel in the new administration and not to fluctuate too 
much from existing macroeconomic policy. 
 
¶12. (U) President-elect Zuma announced his new cabinet on May 10, 
which included some government restructuring such as the creation of 
a new Department of Economic Development.  Trade unionist Ebrahim 
Patel will head this new department.  However, former Finance 
Minister Manuel retained a prominent policy development position as 
head of the new National Planning Commission based in the 
Presidency.  Former South African Revenue Service (SARS) 
Commissioner Pravin Gordhan will replace Manuel as Finance Minister. 
 Most analysts believe Gordhan's placement is a another sign of 
continuity. 
 
------- 
COMMENT 
------- 
 
¶13. (U) Manuel's continued presence in a top policy development 
position in the new Zuma cabinet reinforces most analysts' 
predictions that SAG macroeconomic policy would not shift 
dramatically.  However, it is unclear at this point how the three 
entities (the Treasury, National Planning Commission, and 
 
CAPE TOWN 00000128  003 OF 003 
 
 
newly-created Department of Economic Development) would interact to 
determine South Africa's economic policies under the Zuma 
administration.  The incoming administration faces a tough economic 
outlook as it will have to deal with the first recession the country 
has seen in 17 years.  Manufacturing and commodities-based sectors 
face difficulties with the global downturn; however, the World Cup 
and related boost in tourism and retail sales should provide some 
growth in the service-based sectors of the economy.  Lack of skills 
development will be another big challenge for the incoming 
administration as it tries to address historic inadequacies in 
service delivery and its own failure to provide better education for 
the general public. 
 
PPATIN