VZCZCXRO9120
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1981/01 2741417
ZNR UUUUU ZZH
R 011417Z OCT 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9729
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 06 PRETORIA 001981 
 
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 South African economy recorded negative real 
growth in the second quarter of 2009, the third successive quarterly 
contraction. Some 475,000 jobs were lost in the first half of 2009. 
The trade data continued to reflect depressed global as well as 
domestic demand conditions. The faster contraction in imports 
relative to exports resulted in monthly trade surpluses since May 
¶2009.  As a result, the deficit on the current account narrowed 
significantly to 3.2 percent of GDP.  This deficit was financed 
through a combination of direct and portfolio investment inflows. 
The improvement in the deficit on the current account and 
substantial capital inflows resulted in strong rand appreciation. 
The stronger rand together with weak domestic demand improved the 
inflation outlook and allowed the South African Reserve Bank's 
Monetary Policy Committee (MPC) to reduce interest rates by a 
cumulative 500 basis points since December 2008.  The deceleration 
in the growth of the money supply (M3) and domestic credit extension 
to the private sector illustrated the financial pressure on 
consumers and companies.  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 8.05 
Jul 7.64      Nov 10.12      Mar 10.00      Jul 7.95 
Aug 7.66      Dec  9.95      Apr  9.02      Aug 7.98 
 
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 67.84 
Jul 65.69      Nov 56.61     Mar 57.81     Jul 68.48 
Aug 67.66      Dec 56.38     Apr 63.36     Aug 68.52 
 
Comment:  The rand appreciated by almost 20 percent against both the 
dollar and the trade-weighted average exchange rate of other 
currencies during the first eight months of 2009.  The rand 
benefited from substantial capital inflow into South Africa, 
following the improvement in investor's sentiment towards 
emerging-market assets, an increase in commodity prices, and an 
improvement in South Africa's deficit on the current account. 
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 
          Mar     Apr      May     Jun     Jul 
--------------------------------------------- -- 
CPI       8.5     8.4      8.0     6.9     6.7 
PPI       5.3     2.9     -3.0    -4.1    -3.8 
 
Comment:  The stronger rand contributed to a decrease in the price 
of imported goods and improved the outlook for inflation. 
Furthermore, almost all commodity prices remained well below their 
QFurthermore, almost all commodity prices remained well below their 
peak levels in mid-2008, despite an upward trend in many commodity 
prices since early 2009.  Accordingly, producer price inflation not 
only slowed but showed deflation in recent months.  This started to 
work through to consumer price inflation, although the targeted 
headline consumer price index (CPI) remained above the 3-6 percent 
inflation target range.  CPI had exceeded the upper limit of the 
inflation target range for 29 consecutive months as of August 2009. 
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 5.8 
percent and 5.6 percent in 2010 and 2011, respectively. End 
Comment. 
 
 
PRETORIA 00001981  002 OF 006 
 
 
¶4. MONEY AGGREGATES (percentage change year-on-year) 
--------------------------------------------- ------ 
         2009 
         Mar      Apr      May      Jun      Jul 
--------------------------------------------- ---- 
M1      -2.04     4.77     3.53     1.44     3.90 
M2      10.01     7.97     7.74     4.86     3.84 
M3      10.58     8.49     7.86     6.07     5.78 
 
Comment: The deceleration in the growth of the broadly defined money 
supply (M3) deepened in the second quarter of 2009.  The 
deceleration was a reflection of the slowdown in economic activity, 
lower inflation, and the fragility of both corporate- and 
household-sector incomes and balance sheets.  End Comment. 
 
¶5.  DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage 
change year-on-year) 
--------------------------------------------- ------ 
     2009 
     Mar       Apr      May       Jun       Jul 
--------------------------------------------- ------ 
    8.51      8.47      5.70      3.98      3.40 
 
Comment: During the second quarter of 2009, growth in banks' total 
loans and advances extended to the private sector approached levels 
previously observed in the 1960s, as stricter recession lending 
conditions curbed household and corporate demand for credit. 
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 
                  May     Jun     Jul     Aug    Sep 
--------------------------------------------- --------- 
SARB Repo Rate    7.50   7.00    7.50    7.00    7.00 
Prime Overdraft  11.00  11.00   11.00   10.50   10.50 
Rate 
 
Comment:  The South African Reserve Bank's Monetary Policy Committee 
(MPC) has been reducing the report rate at regular intervals since 
December 2008, and most recently at its August meeting.  The 
cumulative reduction over the past nine months has been 500 basis 
points, bringing the prime overdraft rate to 10.5 percent.  The MPC 
decided to leave interest rates unchanged at its September meeting, 
based on its view that the domestic economic growth should improve 
in the coming quarters, while inflation continue its downward trend. 
 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 
Jun         43,039.2      39,817.5        3,221.7 
Jul         44,461.9      44,015.1          446.8 
TOTAL (1)  298,281.6     315,651.1      -17,369.4 
 
JAN - JUL 2008 
TOTAL (1)  369,132.2     417,152.3      -48,020.2 
 
(1) Total After Adjustments (year-to-date) 
 
Comment:  Trade data continued to reflect depressed global and 
domestic demand.  The economic deterioration in South Africa's most 
important trading partners resulted in a 19 percent reduction in the 
value of merchandise exports during the first seven months of 2009. 
During the same period, weaker domestic demand resulted in a decline 
Qof 24 percent in the value of merchandise imports.  South Africa 
recorded a third successive monthly trade surplus in July, the first 
time this has happened since September 2003.  The trade surplus was 
attributable to a deeper contraction in imports relative to exports. 
 Analysts noted indications that global conditions are beginning to 
stabilize which could support domestic exports in the coming months. 
 However, analysts do not expect exports to rebound strongly as long 
as global demand remains weak.  Furthermore, demand for imports from 
consumer spending and private sector fixed investment spending is 
expected to be subdued in the months ahead, even though public 
sector capital investment is expected to remain strong.  Most 
analysts expect the overall effect on the trade balance to be 
 
PRETORIA 00001981  003 OF 006 
 
 
positive.  End Comment. 
 
¶8. FOREIGN RESERVES ($ billions) 
------------------------------- 
                      2009 
                      Apr    May   Jun    Jul     Aug 
--------------------------------------------- --------- 
SARB Gross Gold and 
Foreign Reserves     34.05  35.84  35.76  35.75  38.00 
SARB Net Open Forward 
Position             33.42  34.50  34.57  34.67  36.92 
 
Comment:  South Africa's gross gold and foreign reserves continued 
to rise, boosted mainly by the receipt of $2.17 billion from the 
International Monetary Fund (South Africa's GDP-weighted share of 
the IMF's general allocation of $250 billion to its member 
countries).  The level of import cover (i.e. the value of gross 
international reserves relative to the value of imports of goods, 
services and income) advanced from 19.2 weeks at the end of March 
2009 to 20.2 weeks at the end of July.  End Comment. 
 
--------------------- 
II. QUARTERLY FIGURES 
--------------------- 
 
¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted 
and annualized) 
--------------------------------------------- --- 
                     2008             2009 
                      Q3      Q4      Q1      Q2 
--------------------------------------------- ---- 
PRIMARY SECTOR        3.3     5.9   -23.0    -3.6 
Agriculture          31.6    16.7    -2.9   -17.1 
Mining               -8.8     0.4   -32.8     5.5 
 
SECONDARY SECTOR     -4.6   -15.0   -14.7    -5.7 
Manufacturing        -9.4   -21.8   -22.1   -10.9 
Electricity           3.0    -2.7    -7.9    -1.4 
Construction         15.0    10.8    14.7    12.2 
 
TERTIARY SECTOR       1.7     2.4    -0.8    -1.2 
Trade & catering     -6.9    -0.2    -2.5    -4.5 
Transport & Comm.     4.5     1.8    -1.8    -1.1 
Finance               3.2     3.0    -2.3    -2.4 
Government            5.2     4.5     2.7     2.4 
--------------------------------------------- ---- 
TOTAL                 0.2    -1.8    -6.4    -3.0 
--------------------------------------------- ---- 
 
Comment: The second quarter GDP figures showed a somber picture of 
an economy in recession. Real GDP shrank by 3 percent in the second 
quarter, the third consecutive quarterly contraction, with all three 
sectors of the economy (primary, secondary, and tertiary) recording 
negative growth.  Analysts expect economic conditions to remain weak 
for the rest of 2009, with some leveling expected in the third 
quarter of 2009, followed by a slightly better performance in the 
final quarter. However, much will depend on the state of the global 
economy. 
 
Primary sector:  Economic activity in the primary sector contracted 
by 3.6 percent in the second quarter, following a decline of 23 
percent in the preceding quarter.  Positive growth in the mining 
sector was more than offset by a contraction in agricultural.  A 
smaller summer crop was largely to blame for the decline in 
agricultural activity.  Increased output, mainly by the platinum 
group metals, which benefited from firmer international commodity 
prices, restored positive momentum in mining. 
 
Secondary sector:  Economic activity in the secondary sector receded 
at a more moderate rate of 5.7 percent in the second quarter.  A 
smaller contraction in the manufacturing sector was the main 
contributing factor to the slower pace.  Although the decline in 
Qcontributing factor to the slower pace.  Although the decline in 
manufacturing output was broad-based and consistent with subdued 
demand growth, pronounced declines were recorded in chemicals, wood 
and paper products, electrical machinery, and textiles and clothing. 
 The contraction in the electricity, gas and water production slowed 
as a result of higher mining production and several very cold winter 
spells during the second quarter.  The construction sector remained 
buoyant in the second 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 contraction in economic activity in the 
 
PRETORIA 00001981  004 OF 006 
 
 
tertiary sector in the second quarter was mainly due to weakness in 
the financial intermediation, insurance, real-estate and business 
services sector, as well as a further decline in the commerce 
sector.  Subdued activity in the commerce sector persisted due to a 
further decrease in activity in the wholesale, retail and motor 
trade subsectors which continued to feel the effects of weak 
household and corporate demand.  Rising unemployment, low confidence 
and expectations of further declines in house prices still 
undermined real estate activity.    End Comment. 
 
¶10. BALANCE ON CURRENT ACCOUNT (R millions) 
--------------------------------------------- ------- 
                    2008              2009 
                     Q3      Q4       Q1       Q2 
--------------------------------------------- ------- 
Merchandise Exp.  178,975  166,501  131,101  122,970 
 
Net Gold Exports   12,351   12,790   12,744   11,871 
 
Merchandise Imp.  204,626  185,341  153,761  124,392 
 
Income Payments    34,270   26,774   24,486   22,281 
 
Service payment    36,438   34,971   30,540   31,228 
--------------------------------------------- ------- 
Current Account   -52,816  -33,304  -33,541  -19,723 
--------------------------------------------- ------- 
Current Account 
Deficit/GDP        -7.8     -5.3     -7.0      -3.2 
(percentage) 
 
Comment: The negative balance on the current account improved from 
7.0 percent of GDP in the first quarter of 2009 to 3.2 percent in 
the second quarter.  This was mainly attributable to the switch of 
South Africa's trade balance from a deficit (since the third quarter 
of 2005) to a surplus in the second quarter of 2009.  The 
improvement in the service and income accounts, mainly due to lower 
dividend payments to foreign investors as well as lower 
transportation costs, also supported the current account.  The 
smaller shortfall on the current account makes South Africa less 
reliant on capital inflows and reduces the rand's vulnerability to 
swings in global risk appetite.  End Comment. 
 
¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) 
--------------------------------------------- --------- 
                      2008                2009 
                       Q3       Q4        Q1       Q2 
--------------------------------------------- --------- 
Direct Investment    10,765   53,928   16,091   20,193 
 
Portfolio Investment -11,924 -108,368   9,123   28,781 
 
Other Investment      27,616  54,923  -10,837   -9,669 
--------------------------------------------- --------- 
Financial Account     26,457     483   14,377  39,305 
--------------------------------------------- --------- 
 
Comment:  The smaller deficit on the current account was financed 
through a combination of direct and portfolio investment inflows. 
Foreign direct investment in South African telecommunications 
enterprises increased further, while non-resident interest in South 
African shares and debt securities picked up alongside an 
improvement in sentiment towards emerging-market assets.  The inflow 
of portfolio investment capital through the Johannesburg Stock 
Exchange (JSE) and the Bond Exchange of South Africa (BESA) in the 
second quarter of 2009 was supplemented by the issuance of a $1.5 
billion international bond by the South African government.  End 
Comment. 
 
¶12.  KEY LABOR MARKET VARIABLES (thousand) 
Q12.  KEY LABOR MARKET VARIABLES (thousand) 
--------------------------------------------- -------- 
                     2008                      2009 
                     Q3       Q4       Q1       Q2 
--------------------------------------------- -------- 
Employed           13,655   13,844   13,636   13,369 
Unemployed          4,122    3,873    4,184    4,125 
Total Labor Force  17,777   17,718   17,820   17,495 
Not Econ. Active   13,024   13,176   13,166   13,585 
Population 15-64   30,801   30,894   30,987   31,080 
--------------------------------------------- -------- 
Unemployment rate   23.2     21.9     23.5     23.6 
(percentage) 
 
Absorption rate     44.3     44.8     44.0     43.0 
 
PRETORIA 00001981  005 OF 006 
 
 
(Employed/population ratio) 
 
Comment: Unemployment in South Africa increased from 21.9 percent in 
the fourth quarter of 2008 to 23.6 percent in the second quarter of 
¶2009.  During this period, the number of employed persons decreased 
by 475,000 to 13.6 million.  Analysts expect more job losses in 2009 
as economic conditions remain weak.   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.  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 
Qapproaching the SAG's target of 25 percent.  End Comment 
 
¶15.  NATIONAL BUDGET (R billions) 
 
PRETORIA 00001981  006 OF 006 
 
 
--------------------------------- 
Fiscal Year Ending 31 March: 
                        2006     2007   2008    2009 
--------------------------------------------- ------- 
Total Revenue          411.2   482.7   559.8   608.3 
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 is primarily to blame for the change in 
fiscal stance in 2009.  Analysts expect corporate tax payments to 
deteriorate further in FY2010, especially since sectors such as 
manufacturing and mining, which have been savaged by the global 
downturn, loom large in the corporate tax take.  Analysts expect the 
fiscal deficit to increase to between 5.0 and 8.0 percent of GDP in 
FY2010.  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 FY2007 and FY2008. However, total 
debt is set to increase to 31.1 percent of GDP in FY2012 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  
 
GIPS