VZCZCXRO5847
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1500/01 2051525
ZNR UUUUU ZZH
R 241525Z JUL 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9147
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPARTMENT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 06 PRETORIA 001500 
 
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:  The global economy remained firmly in the grips of 
a recession in the first quarter of 2009, causing South Africa to 
record its first recession in 18 years.  Declining export demand and 
lusterless prices of most export commodities acted as powerful 
brakes on South Africa's growth.  Unemployment increased from 21.9 
percent in the fourth quarter of 2008 to 23.5 percent in the first 
quarter of 2009.  The deceleration in the growth in money supply 
(M3) and domestic credit extension to the private sector illustrated 
the financial pressure on consumers and companies.  Consumer price 
inflation moderated further and together with the weak domestic 
demand has allowed the South African Reserve Bank's Monetary Policy 
Committee (MPC) to reduce interest rates by a cumulative 450 basis 
points since December 2008.  South Africa's current account deficit 
increased to 7.0 percent of GDP in the first quarter of 2009.  A 
combination of direct and portfolio investment inflows financed the 
current account deficit in the first quarter.  The rand fluctuated 
at relatively low levels during the first quarter of 2009, but 
appreciated significantly in the second quarter.  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 
--------------------------------------------- -------- 
May 7.62      Sep  8.05      Jan  9.90      May 8.37 
Jun 7.92      Oct  9.67      Feb 10.01      Jun 8.07 
Jul 7.64      Nov 10.12      Mar 10.00 
Aug 7.66      Dec  9.95      Apr  9.02 
 
Trade-Weighted Rand (monthly average; 2000 = 100) 
--------------------------------------------- ------- 
2008                         2009 
--------------------------------------------- ------- 
May 66.29      Sep 66.11     Jan 57.07     May 66.49 
Jun 63.85      Oct 57.32     Feb 57.66     Jun 66.15 
Jul 65.69      Nov 56.61     Mar 57.81 
Aug 67.66      Dec 56.38     Apr 63.36 
 
Comment:  The rand appreciated by 20 percent against the dollar and 
13 percent against the trade-weighted average exchange rate of the 
rand during the first half of 2009.  Analysts expect the rand to 
hold onto these gains.  The strong performance of the rand was 
caused by an increase in commodity prices and more positive investor 
sentiment towards emerging-market economies in the second quarter of 
¶2009.  However, the strengthening of the rand will constrain the 
competitiveness of South African exporters in international markets. 
   End Comment. 
 
¶3.  INFLATION (year-on-year) 
---------------------------- 
         2009 
         Jan      Feb      Mar     Apr     May 
--------------------------------------------- -- 
CPI       8.1     8.6      8.5     8.4     8.0 
PPI       9.2     7.3      5.3     2.9    -3.0 
 
Comment:  Consumer price inflation moderated further in the first 
months of 2009, but nevertheless remained above the inflation target 
range of 3 to 6 percent.  Food price inflation remained stubbornly 
Qrange of 3 to 6 percent.  Food price inflation remained stubbornly 
high, particularly at the consumer level.  Producer price inflation 
continued to fall, consistent with the slowdown in global inflation, 
the contraction in global demand, and declining commodity prices. 
Lower producer prices should continue to put downward pressure on 
consumer inflation.  The Monetary Policy Committee's (MPC's) most 
recent central inflation forecast projects that inflation will 
continue its downward trajectory and return to the 3 to 6 percent 
target range in the second quarter of 2010.  Inflation is expected 
to average 7.5 percent and 6.4 percent in 2009 and 2010, 
respectively.  End Comment. 
 
¶4. MONEY AGGREGATES (percentage change year-on-year) 
--------------------------------------------- ------ 
         2009 
         Jan      Feb      Mar      Apr      May 
--------------------------------------------- ---- 
 
PRETORIA 00001500  002 OF 006 
 
 
M1      -6.04    -5.12    -2.04     4.79     3.53 
M2      13.69    13.76    10.01     7.98     7.41 
M3      13.94    13.17    10.58     8.49     7.31 
 
Comment: The deceleration in the pace of growth of the broadly 
defined money supply (M3) deepened in 2009.  The deceleration 
reflected deteriorating growth in household and corporate income and 
expenditure, lower inflation, declining household wealth, and the 
effects of tight credit conditions.  End Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage 
change year-on-year) 
--------------------------------------------- ------ 
     2009 
     Jan       Feb       Mar       Apr      May 
--------------------------------------------- ------ 
    11.85     11.05     8.51      8.47      5.70 
 
Comment: Growth in private sector credit extension eased to its 
slowest pace in five years, illustrating the financial pressure on 
consumers and companies.  Elevated debt-service ratios limit the 
ability of consumers to take on new debt, while poor economic 
prospects make consumers reluctant to borrow and banks more hesitant 
to lend.  Analysts expected no recovery in credit extension in the 
short term due to the lag between lower interest rates and the 
ultimate impact on demand.  End Comment. 
 
 
¶6.  KEY INTEREST RATES (at end of month) 
--------------------------------------- 
                  2009 
                  Feb     Mar     Apr     May     Jun 
--------------------------------------------- --------- 
SARB Repo Rate   10.50    9.50    8.50    7.50    7.50 
Prime Overdraft  14.00   13.00   12.00   11.00   11.00 
Rate 
 
Comment:  The South African Reserve Bank's Monetary Policy Committee 
(MPC) has decided to increase the frequency of its meetings to 
monthly meetings, with the exception of July 2009, in order to 
monitor and respond appropriately to the rapidly changing economic 
environment.  An improved medium-term outlook for inflation and the 
widening output gap allowed the MPC to reduce the key policy 
interest rate by 100 basis points at each of its February, March, 
April, and May meetings.  However, the MPC kept the policy interest 
unchanged at 7.5 percent at its June meeting, blaming the stickiness 
of inflation.  The MPC has cut interest rates by a cumulative 450 
basis points since December 2008.  Some analysts believe there could 
be more interest rate cuts in 2009.  End Comment. 
 
¶7.  MERCHANDISE TRADE ACCOUNT (R millions) 
----------------------------------------- 
2009        EXPORTS       IMPORTS      TRADE BALANCE 
Jan         36,251.7      53,631.5      -17,379.7 
Feb         44,061.8      44,632.4         -570.7 
Mar         51,966.3      52,478.2         -511.9 
Apr         40,656.3      42,112.4       -1,456.1 
May         41,456.8      39,437.2        2,019.6 
TOTAL (1)  212,155.5     231,881.4      -19,725.9 
 
JAN - MAY 2008 
TOTAL (1)  248,623.1     282,639.9      -34,016.7 
 
(1) Total After Adjustments (year-to-date) 
 
Comment:  The economic deterioration in South Africa's most 
important trading partners resulted in a 15 percent reduction in the 
value of merchandise exports during the first five months of 2009. 
The domestic demand for imported goods also declined, while the 
relatively low level of international crude oil prices continued to 
weigh down the rand price of merchandise imports.  The value of 
Qweigh down the rand price of merchandise imports.  The value of 
merchandise imports declined by 18 percent during the first five 
months of 2009.  Analysts expect the trade environment to remain 
weak as long as the global economy is depressed.  However, capital 
imports are expected to remain fairly robust in view of the 
underlying momentum in capital spending.  End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
------------------------------- 
                     2009 
                     Jan    Feb    Mar    Apr     May 
--------------------------------------------- --------- 
SARB Gross Gold and 
Foreign Reserves     33.74  33.78  34.11  34.05  35.84 
 
PRETORIA 00001500  003 OF 006 
 
 
SARB Net Open Forward 
Position             33.10  33.15  33.46  33.42  34.50 
 
Comment:  South Africa's gross gold and foreign reserves remained 
broadly unchanged at $34 billion before increasing to $35.8 billion 
in May.  The uncertain and volatile global environment remains a 
hindrance on the SARB's natural tendency to accumulate reserves. 
Analysts expect South Africa's reserves to remain under pressure 
over the next few months, given the persistent global uncertainty. 
End Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- --- 
                     2008                    2009 
                      Q2      Q3      Q4      Q1 
--------------------------------------------- ---- 
PRIMARY SECTOR       18.3     3.3     5.9   -23.0 
Agriculture          16.7    31.6    16.7    -2.9 
Mining               19.2    -8.8     0.4   -32.8 
 
SECONDARY SECTOR     11.8    -4.6   -15.0   -15.5 
Manufacturing        14.3    -9.4   -21.8   -22.1 
Electricity          -2.1     3.0    -2.7    -7.9 
Construction          9.1    15.0    10.8     9.4 
 
TERTIARY SECTOR       1.6     1.7     2.4    -0.5 
Trade & catering      4.0    -6.9    -0.2    -2.5 
Transport & Comm.     4.3     4.5     1.8    -1.8 
Finance               3.3     3.2     3.0    -2.3 
Government            2.5     5.2     4.5     4.1 
--------------------------------------------- ---- 
TOTAL                 5.0     0.2    -1.8    -6.4 
--------------------------------------------- ---- 
 
Comment: The South African economy recorded its first contraction in 
ten years in the final quarter of 2008.  In the first quarter of 
2009, economic activity contracted further, and at a considerably 
faster pace, confirming that the domestic economy was in a recession 
for the first time in 18 years.  The manufacturing and mining 
sectors were the worst affected.  In the first quarter of 2009, the 
tertiary sector experienced its first contraction since 1992, 
thereby resulting in all three of the major sectors (primary, 
secondary, and tertiary) recording negative real growth.  Analysts 
pointed out that the fortunes of the South African economy remain 
tied to the global economy. 
 
Primary sector:  Economic activity in the primary sector contracted 
by a massive 23 percent in the first quarter of 2009.  The decline 
in the agricultural sector was mainly due to lower income from 
livestock, horticultural and field crop production.  The mining 
sector showed negative growth due to a sizable decline in mining 
production, concentrated largely in platinum mining, and to a lesser 
extent coal and diamond mining.  The sharp decline in global 
economic activity led to a significant decrease in demand for basic 
metal and mineral products, while lower commodity prices prompted 
producers to scale down output.  A decline in industrial and 
jewellery demand for diamonds caused a temporary shutdown of certain 
diamond-mining operations.  Platinum production declined as a result 
of maintenance-related shutdowns, the upgrading of safety-related 
systems at smelters, and the drop in demand from the auto-catalyst 
sector, impelled by the decline in new vehicle sales in both the 
domestic and foreign markets. 
Qdomestic and foreign markets. 
 
Secondary sector:  The secondary sector recorded its third 
consecutive quarter of decline.  The further weakening of global and 
domestic demand conditions, sluggish domestic real income, as well 
as high input costs, weighed heavily on the production of the 
manufacturing sector.  The decline in manufacturing was widespread, 
with virtually all subsectors, except for electrical machinery, 
recording declining output.  The contraction in the electricity, gas 
and water sector in the first quarter was largely due to a decline 
in industrial consumption of electricity.  The construction sector 
remained buoyant in the first quarter, benefiting from the upgrading 
of existing infrastructure and large projects such as the Gautrain, 
power stations, roads, sport stadiums and related infrastructure 
developments in preparation for the 2010 FIFA World Cup. 
 
Tertiary sector:  The decline in economic activity in the tertiary 
sector reflected the depressed state of the domestic market, which 
 
PRETORIA 00001500  004 OF 006 
 
 
is characterized by high levels of indebtedness and subdued consumer 
and business confidence.  Growth in the government sector resulted 
from the purchase of an aircraft as part of the defense procurement 
program that more than offset a slower pace of increase in the 
number of civil servants.  End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2008                       2009 
                     Q2       Q3       Q4       Q1 
--------------------------------------------- ------- 
Merchandise Exp.  172,201  178,975  166,501  131,101 
 
Net Gold Exports   11,877   12,351   12,790   12,744 
 
Merchandise Imp.  188,411  204,626  185,341  153,761 
 
Income Payments    29,506   34,270   26,774   24,486 
 
Service payment    36,642   36,438   34,971   30,540 
--------------------------------------------- ------- 
Current Account   -40,375  -52,816  -33,304  -33,541 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -7.3     -7.8     -5.3     -7.0 
(percentage) 
 
 
Comment: The deterioration in global economic activity led to a 
deterioration in South Africa's current account balance.  The main 
cause was the widening trade account deficit.  Since almost 47 
percent of South Africa's merchandise exports are destined for the 
US, Europe, and Japan, the slump in these economies severely 
affected the volume of merchandise exports in the first quarter. 
Unfortunately, lower merchandise imports and lower dividend payments 
accruing to non-resident investors on their investments in domestic 
securities were unable to counter the deterioration in merchandise 
exports.  End Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- --------- 
                      2008                       2009 
                       Q2      Q3       Q4        Q1 
--------------------------------------------- --------- 
Direct Investment     3,372   10,765   53,928   16,091 
 
Portfolio Investment 10,733  -11,924 -108,368    9,123 
 
 
Other Investment     10,398   27,616   54,923  -10,837 
--------------------------------------------- --------- 
Financial Account    24,503   26,457     483    14,377 
--------------------------------------------- --------- 
 
Comment:  South Africa continued to record capital inflows on the 
financial account of the balance of payments in the first quarter of 
2009, albeit at a slightly slower pace than before.  Softening risk 
aversion towards assets in emerging-market economies, including 
South Africa, resulted in an inflow of portfolio investment capital, 
in sharp contrast to the large outflow recorded in the previous 
quarter.  Foreign direct investment into South Africa also 
contributed to the overall net inflow of capital.  End Comment. 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
--------------------------------------------- -------- 
                     2008                       2009 
                     Q2        Q3       Q4       Q1 
--------------------------------------------- -------- 
Employed           13,729    13,655   13,844   13,636 
Unemployed          4,114     4,122    3,873    4,184 
Total Labor Force  17,844    17,777   17,718   17,820 
Not Econ. Active   12,861    13,024   13,176   13,166 
QNot Econ. Active   12,861    13,024   13,176   13,166 
Population 15-64   30,705    30,801   30,894   30,987 
--------------------------------------------- -------- 
Unemployment rate   23.1     23.2     21.9      23.5 
(percentage) 
 
Absorption rate     44.7     44.3     44.8      44.0 
(Employed/population ratio) 
 
Comment: Unemployment in South Africa increased from 21.9 percent in 
the fourth quarter of 2008 to 23.5 percent in the first quarter of 
¶2009.  The number of employed persons decreased by 208,000 to 13.6 
million during this period.  The prospect of slower economic growth 
 
PRETORIA 00001500  005 OF 006 
 
 
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 one and two 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) 
 
Comment:  The national savings ratio, gross saving as a percentage 
of GDP, increased further in 2008.  This was due to improved savings 
performance in the corporate sector, supported by more household 
savings.  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 savings 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 
--------------------------------------------- ------- 
Q-------------------------------------------- -------- 
Total Revenue          411.2   482.7   559.8   608.3 
 
PRETORIA 00001500  006 OF 006 
 
 
Total Expenditure      416.8   470.2   541.4   635.6 
Budget Balance          -5.6    12.5    18.3   -27.3 
--------------------------------------------- ------- 
 
Budget Balance/GDP      -0.4     0.7     0.9    -1.2 
 
Comment:  The impact of weak domestic demand and the global economic 
crisis on tax revenues are primarily to blame for the change in 
fiscal stance in 2009.  Analysts expect corporate tax payments to 
deteriorate further in FY 2010, especially since sectors such as 
manufacturing and mining, which have been savaged by the global 
downturn, loom large in corporate tax take.  Analysts expect the 
fiscal deficit to increase to between 4.5 and 5.0 percent of GDP in 
¶2010.  End Comment. 
 
¶16.  GOVERNMENT DEBT (R billions) 
--------------------------------- 
Fiscal Year Ending 31 March: 
                     2006     2007      2008     2009 
--------------------------------------------- -------- 
Total Debt           528.5    551.9    571.7    616.4 
  of Which: 
   -- Domestic       461.2    469.0    475.2    518.9 
   -- Foreign         66.8     82.6     96.2     97.3 
   -- Other debt       0.4      0.3      0.2      0.2 
 
Debt Service Cost     50.9     52.2     52.8     54.3 
--------------------------------------------- -------- 
Government Debt/GDP   33.3     30.5     27.6     26.6 
(percentage) 
 
Debt Service Cost/GDP  3.2      2.9      2.6      2.3 
(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 
5.6 percent of GDP in the 1999 fiscal year.  The decline in debt 
service costs has created the necessary "fiscal space" to respond to 
the current global economic crisis.  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  
 
CONNERS