ECONOMIC IMPORTANCE OF SOUTH AFRICAN TRADE AND

UNCLAS SECTION 01 OF 04 PRETORIA 003014

SIPDIS

SENSITIVE

DEPT FOR AF/S; AF/EPS; EB/TPP/MTA; EB/IFD
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
COMMERCE ALSO FOR HVINEYARD
TREASURY FOR BRESNICK AND CUSHMAN
DEPT PASS USTR FOR PCOLEMAN

E.O. 12958: N/A
TAGS: ETRD EINV ECON EAID KMCA SF USTR
SUBJECT: ECONOMIC IMPORTANCE OF SOUTH AFRICAN TRADE AND
INVESTMENT TO SADC AND THE REST OF SUB-SAHARAN AFRICA

REF: (A) PRETORIA 2977

(B) PRETORIA 2971

(U) This cable is sensitive but unclassified. Not for Internet
distribution.


1. (SBU) Summary. When South Africa grows, so does Africa. A
main challenge for South Africa is how it can use its engine of
trade to benefit its own poor as well as the poor on the
continent. The South African government regards trade and
investment with the rest of Africa with increasing political and
economic importance. South African trade with SADC has doubled
from R16 billion in 1996 to R32 billion in 2004 while South
African foreign direct investment (FDI) stock in Africa has
increased from R4.7 billion to R15.8 billion during the same
period. The dominant position of the South African economy in
southern Africa has resulted in an imbalance in the country's
trade relationship with sub-Saharan Africa and is regarded as one
of the greatest challenges for trade and industrial integration
in the region. South Africa's ten major African trading partners
(including eight countries in SADC) account for 88% of all South
African trade with sub-Saharan Africa. End summary.

The importance of South Africa to sub-Saharan Africa
-------------- --------------


2. (SBU) When South Africa grows, so does Africa. South Africa
is a regional economic power, representing over 35% of sub-
Saharan GDP. In 2003, 14% of South African exports went to other
African countries. South Africa is the major foreign investor in
every southern African country, and now the major foreign
investor in the rest of sub-Saharan Africa. The Economist
reports that South African firms have invested approximately $1
billion annually in other African countries. South Africa also
serves as a base for many non-African companies wanting to
operate in the region and is an increasingly an important
training hub. An IMF study showed that an increase in South
Africa's growth rate of 2-3 percentage points, if sustained,
would result in a 1 point increase in SADC exports to South
Africa, and an equal increase in SADC GDP.


3. (SBU) South Africa is a model for the rest of the continent
on what can be accomplished through implementing good economic
policies and developing strong institutions. At the same time,
as the other cables in this series show, South Africa's second
economy is an unfortunate match for the misery of millions living
in least developed countries. A main challenge for South Africa
is how it can use its engine of trade to benefit its own poor as
well as the poor on the continent. Increasing its imports from
the rest of sub-Saharan Africa would be one way to do this.
While there are efforts in that direction as discussed below,
much of the trade relationship is skewed in favor of South
Africa's exports. More needs to be done by South Africa in
removing trade barriers to regional trade.


4. (SBU) The South African government states that its global
economic strategy can be viewed through the lens of an
economically reinvigorated Africa, which forms part of the goal
of the New Partnership for Africa's Development (NEPAD). It
regards trade relations with African states of increasing
political and economic importance to South Africa. Investors
regard South Africa as the stepping-stone or gateway for trade
and investment in sub-Saharan Africa.


5. (U) South African Revenue Service (SARS) data indicates that
Africa's share of South Africa's export trade has grown
significantly from 4% in 1991 to 13% in 2004. The Department of
Trade and Industry expects that exports to Africa will continue
to increase in the immediate future, as massive opportunities for
South African capital are opening up with peace in Angola and the
prospect of peace in the Democratic Republic of Congo (DRC).
According to the South African Reserve Bank (SARB),the year-end
stock of foreign direct investment in Africa from South Africa
has increased from R4.7 billion in 1996 to R15.8 billion in 2004.
(Data in this cable refers to continental Africa.)


6. (U) An article published in the African Business Journal
states that few anticipated the rapidity with which South African
corporates would exploit African trade and investment
opportunities. The article offered four reasons for South
Africa's rapid market penetration into sub-Saharan Africa. The
first was the surplus of investment capital that South African
corporations had after apartheid sanctions were lifted. The
second was that the end of the Cold War convinced many African
countries to accept market economics and relax barriers to trade.
The third was the many opportunities to rehabilitate and
modernize the Africa's deteriorating and outdated infrastructure.
The fourth was the gap created by the developed world becoming
increasingly disillusioned with Africa, but increasingly
interested in eastern and central Europe as an investment
destination.

The importance of South Africa in SACU
--------------


7. (SBU) South Africa's greatest economic influence resides in
southern Africa. Within the Southern African Customs Union
(SACU),South Africa has unimpeded market access to the Namibian,
Botswana, Lesotho, and Swaziland markets under a common external
tariff. Because of the size of South Africa's economy, SACU is
the dominating economic force within the Southern African
Development Community (SADC). In fact, SACU trade with SADC
countries has doubled from R16 billion (put in dollars) in 1996
to R32 billion in 2004, accounting for 62% of SACU's total trade
with Africa


8. (SBU) Reflecting the dominant market position of South
Africa, SACU enjoys an overwhelming trade surplus with the rest
of sub-Saharan Africa. Total SACU trade with sub-Saharan Africa
in 2004 amounted to R36.7 billion in exports against R12.7
billion in imports. A trade surplus with SADC countries mostly
in manufactured goods, intermediate inputs, and capital
equipment. The trade imbalance is complemented by SACU outward
investment in infrastructure, water and waste management,
agribusiness, and mining. Paul Kalenga, senior researcher at the
University of Cape Town, feels that one of the greatest
challenges for trade and industrial integration in Southern
Africa relates to the dominant position of the South African
economy in southern Africa and that it does not exacerbate
existing inequalities.

The importance of South Africa to SADC
--------------


9. (SBU) Implementation of the SADC Protocol on trade, which
sets out the terms and conditions for the reduction and
elimination of tariffs among members, began in 2000 and includes
the establishment of a SADC free trade area by 2008. According
to Paul Kalenga, the SADC Trade Protocol has contributed in
reducing the trade imbalance by improved access to the South
African market for SADC exports. SARS trade data indicates that
exports by SADC countries to SACU have increased substantially
from R2.6 billion in 2001 to R6.5 billion in 2004.


10. (SBU) According to a researcher at the Human Sciences
Research Council in Durban, a key feature of the investment drive
into sub-Saharan Africa has been its broad and diverse nature:
all six primary sectors of the South African economy (mining,
retail, construction/manufacturing, financial services,
telecommunications, tourism) have worked hand in hand in securing
South African investment throughout the continent. For example,
major retailers such as Shoprite, Metro Cash and Carry and Pep
stores as well as the food chains Nando's and Steers have opened
their stores across the continent. An accompanying movement of
South African property developers who build shopping centers to
house these chains has mirrored this development. In addition,
burgeoning business travel stemming from trade and investment
from South African groups like MTN, Vodacom, M-Net, Shoprite,
ABSA and the mining conglomerates, coupled with the growth of
regional tourism, has created new opportunities for hotel
interest like the Protea group which has expanded a line of
hotels across Africa. South African Airways expanded throughout
the continent, including purchasing Air Tanzania, to become the
dominant air carrier in the region.


11. (SBU) According to Lumkile Mondi, Chief Economist at the
Industrial Development Corporation (IDC),South Africa's growing
penetration of the African economy has been characterized by the
promotional role played by the South African government through
the IDC. He explained that the IDC not only provides funding but
also shares the risk by taking a direct stake in some projects.
He said that in cases where the IDC has not been available, South
African operatives have been keen to invest new capital in
refurbishing and expanding local businesses and infrastructure
through joint venture arrangements with African partners.


12. (U) SARS and SARB data for South Africa's ten key trading
partners in Africa follow. Trade with these ten sub-Saharan
African countries account for respectively 85% and 94% of all
SACU exports and imports to and from sub-Saharan Africa. Nigeria
and Kenya are the only major trading partners outside SADC.
(Note: Technically the data is for SACU, but as South Africa
accounts for the vast majority of trade captured in the SACU
statistics, it is a good proxy of South African trade.)

Zimbabwe
--------------


13. (U) Despite political instability, Zimbabwe remains South
Africa's largest trading partner in Africa. Zimbabwe was the
largest export destination for South African goods in 2004,
accounting for R5.96 billion or 16% of all South African exports
to Africa. Imports from Zimbabwe amounted to R2.76 billion in
the same year. FDI stock from South Africa at the end of 2003
amounted to R2.03 billion.

Nigeria
--------------


14. (U) The South African government regards bilateral and
multilateral relations with Nigeria as strategically important,
particularly in a forum such as Nepad. South African companies
have been successful in several sectors in Nigeria, namely the
hospitality, financial services, communications and energy
sectors. Nigeria accounted for R2.85 billion worth of South
African exports, while R5.19 billion or 41% of all of South
Africa's sub-Saharan African imports came from Nigeria in 2004.
Nigeria is South Africa's only sub-Saharan trading partner in
which the trade balance shows a deficit

Zambia
--------------


15. (U) Trade data indicates that trade and investment between
South Africa and Zambia has increased substantially since 1993 as
both countries are taking advantage of existing bilateral
agreements. South Africa's third largest trading partner, Zambia
imported goods worth R4.7 billion in 2004, while Zambian exports
to South Africa amounted to almost R1 billion in 2004. Total
year-end stock of South African FDI in Zambia at the end of 2003
amounted to R415 million.

Mozambique
--------------


16. (U) South African exporters regard Mozambique as a key
African export destination. South African exports, R5.05 billion
in 2004, accounted for 13.2% of its total exports to Africa.
South African imports from Mozambique measured only R196 million
in the same year. South African foreign direct investment stock
into Mozambique amounted to R5.07 billion in December 2003, 32%
of total South African FDI stock in Africa. According to
Department of Trade and Industry officials, the skewed trade
balance (heavily in South Africa's favor) can be attributed to
Mozambique's under-development.

Angola
--------------


17. (SBU) Angola accounts for 9% of total South African trade
with Africa. Exports to Angola amounted to R3.08 billion in
2004, while imports from Angola amounted to R1.68 billion. South
African businesses view the post-war Angola as a huge
construction site strewn with lucrative contracts to be signed.
Government expects trade and investment to Angola to increase in
future.

Kenya
--------------

18. (U) Like almost every African trading partner, the trade
balance with Kenya is strongly in South Africa's favor.
Exports to Kenya amounted to R2.89 billion in 2004 while imports
were only R324 million.

Tanzania
--------------


19. (U) Exports totaled R2.19 billion in 2004 and imports R206
million. Tanzania and South Africa have signed a Memorandum Of
Understanding (MOU) on trade and industry programmes and a
general agreement on economic, scientific, technical and cultural
co-operation.

Malawi
--------------


20. (U) The financial, retail, construction and telecommunication
sectors are providing strong opportunities for investment in
Malawi. In 2004, exports to Malawi totaled nearly R1.6 billion
and imports were R429 million.

Mauritius
--------------


21. (U) After Mozambique, Mauritius is South Africa's favorite
destination for foreign direct investment. The total South
African FDI year-end stock in Mauritius amounted to R4.1 billion
at the end of 2003. Exports to Mauritius amounted to R1.73
billion in 2004. (Note: part of these exports include South
African fabric that goes into Mauritian apparel exported duty-
free to the United States under AGOA.)

Democratic Republic of Congo
--------------


22. (U) Despite an unsettled time in the DRC, exports to the
country were worth R1.33 billion and imports R44 million in 2004.
With the prospect of peace, the DRC should provide massive
opportunities for South African capital in future.

HARTLEY