SOUTH AFRICA: SCENESETTER FOR VISIT OF CODEL

UNCLAS SECTION 01 OF 04 PRETORIA 001397

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR H/BFLECK; AF/S; AF/EPS; EB/IFD

E.O. 12958: N/A
TAGS: OREP PREL EFIN EINV ETRD ECON KHIV SF
SUBJECT: SOUTH AFRICA: SCENESETTER FOR VISIT OF CODEL
SHELBY, APRIL 20-22

REF: STATE 54245


1. (U) Sensitive but Unclassified; Not for Internet
Distribution.


2. (SBU) Welcome to South Africa. In the twelve years since
the end of apartheid, the South African government (SAG) has
taken major steps toward establishing a democracy and
market-based economy. Despite problems of income inequality
and poverty, a severe HIV/AIDS pandemic, and political
tensions within the ANC, South Africa remains the continent's
best prospect for an economically prosperous democratic
country. President Mbeki's visit to the White House in June
2005 reinforced our good bilateral relations. We share
important goals on the African continent, particularly in the
area of conflict resolution. While South Africa's
involvement in global issues, such as Haiti, North Korea and
Iran, are not always in sync with U.S. interests, bilateral
cooperation in other areas has helped to advance the U.S.
global agenda.


3. (SBU) Since 1994, the United States Government has
contributed approximately $1.2 billion toward South Africa's
development, excluding $201 million in credit guarantees.
Over two dozen U.S. agencies, including the Office of
Technical Assistance at Treasury, U.S. Secret Service,
Customs, Peace Corps, Foreign Agriculture Service, Health and
Human Services, and USAID are represented within our Mission,
which includes the embassy in Pretoria and consulates in
Johannesburg, Cape Town, and Durban.


4. (SBU) In this message, we provide a brief overview of the
major issues facing South Africa and key concerns in
U.S.-South Africa relations.

-- Political Overview: Democracy Won
-- Promoting Africa
-- The Economy
-- Bilateral Trade and Investment
-- OPIC Focus on Housing and Capital Markets
-- Combating the Finance of Terrorism
-- HIV/AIDS: A Crisis of Epic Proportions

POLITICAL OVERVIEW: DEMOCRACY WON
--------------


5. (SBU) The African National Congress (ANC) dominates the
South African political scene. The party controls 293 of 400
seats in the National Assembly and leads the administrations
in all nine provinces. In municipal elections held on March
1, the party extended its dominance over government,
capturing the outright majority in 214 of 284 municipal
councils. The ANC operates as a tripartite alliance among
ANC stalwarts, the South African Communist Party (SACP),and
the Congress of South African Trade Unions (COSATU). In
recent years, schisms have begun to appear as the SACP and
COSATU have become more vocal in their opposition to the
government's economic, HIV/AIDS, and Zimbabwe policies, and
as a result of tensions over the dismissal of former Deputy
President Zuma and subsequent trials for corruption and rape.
These tensions are surfacing at the same time with
increasing dissatisfaction at the grass roots level over the
poor delivery of public services. Notwithstanding these
pressures, the alliance is likely to hold together, at least
in the short term.


6. (SBU) Thabo Mbeki was elected president in June 1999 and
began his second five-year presidential term in April 2004.
During his tenure, he has shifted the focus of government
from "reconciliation" (binding together of the body politic
and society across racial groups) to "transformation"
(transforming political and economic relationships to reflect
the society's racial make-up),particularly on the economic
front through affirmative action, i.e., "Black Economic
Empowerment" (BEE). Progress on developing a comprehensive
BEE policy for the private sector, however, has been slow.

PROMOTING AFRICA
--------------


7. (SBU) South Africa has taken a high-profile role in
promoting Africa's development and engagement with the rest
of the world. Until July 2003, South Africa served as the
first chair of the African Union (AU) and currently holds the
chair of the G-77. Since becoming president seven years ago,
President Mbeki has been invited to participate on the

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subject of African development at each successive G-8 Summit.
He continues to be the driving force behind the New
Partnership for Africa's Development (NEPAD),an AU program
to strengthen political governance and promote regional
economic development. As Chair of the Joint World Bank and
International Monetary Fund Development Committee from April
2002 to September 2005, South African Finance Minister Trevor
Manuel also has figured prominently in the international
dialogue on Africa. On the political side, President Mbeki
and his top aides have devoted considerable resources to
ending Congo's civil war and to the Burundi peace process.
President Mbeki mediated in Cote d'Ivoire and provided
support to the AU's Mission to Sudan. In Zimbabwe, however,
President Mbeki's "quiet diplomacy" has not produced any
discernible result, nor has a bilateral effort to negotiate
political conditions on a bailout loan. Notwithstanding,
South African officials still argue that additional pressure,
such as economic sanctions, would be ineffective, risk
destabilizing Zimbabwe, and create spillover problems for
South Africa.

THE ECONOMY
--------------


8. (SBU) As the dominant and most developed economy in
sub-Saharan Africa, South Africa has little in common with
the other countries of the region. An upper middle income,
emerging market economy with GDP per capita of $5107 (2005),
South Africa may have more in common with Chile, Malaysia,
and Thailand. On the other hand, a large of segment of South
Africa's population lives in typical third world poverty.
The National Treasury under Finance Minister Trevor Manuel
and the independent South African Reserve Bank (SARB) under
Governor Tito Mboweni have pursued fiscal and monetary
policies that have resulted in increasing economic growth
within a moderately inflationary environment. The government
has steadily reduced the fiscal deficit from nearly 6.0% of
GDP in 1994-95 to 0.5% in 2005-06. Robust tax collections
have consistently reduced the forecast deficit the past
several years. In 2006-2007, the Treasury forecasts that its
moderately expansionary budget will produce a 1.5% deficit.
Dedicated to inflation control, the SARB has reduced the
consumer price index minus mortgage costs from 12.4% at the
beginning of 2003 to 4.3% in January 2006, well within the
SARB's target range of 3-6%. In the meantime, real GDP
growth has climbed from 3.0% in 2003 to 4.9% in 2005, mostly
as a result of strong consumer spending by an emerging black
middle class.


9. (SBU) South Africa's greatest economic challenges are
accelerating growth, alleviating unemployment, and reducing
income inequality between white and black South Africans.
The official unemployment rate of 26.7% is significantly
higher among black South Africans than whites. Moreover, 56%
of black South Africans, as opposed to just 4% of whites,
live in poverty. To achieve its target growth rate of 6% and
create jobs, the government believes that it must increase
public sector spending on economic infrastructure, encourage
labor-intensive industries, and promote the development of
small business. To increase the black employment and reduce
income inequality, the government believes that it must
implement a comprehensive affirmative action policy, improve
programs for skills development, and continue to improve the
quality of life for the nation's poor through transfer
payments and the provision of public services such as water,
electricity, and housing. Since 1994, nearly 1.8 million
low-cost homes have been built and ten million people have
been connected to clean water. In addition, the government
wants the poor to have greater access to the modern economy
in areas such as finance. This has led to the "Big 4" banks
(Standard, Barclays/ABSA, FirstRand, and Nedcor, which
together control 85% of the market) to agree to offering
low-cost bank accounts to the poor and locating bank branches
in low income areas.

BILATERAL TRADE AND INVESTMENT
--------------


10. (SBU) In June 2003, the United States launched bilateral
free trade negotiations with the Southern African Customs
Union (South Africa, Botswana, Lesotho, Namibia, and
Swaziland). In 2004, negotiations stalled over the inclusion
of chapters on services, investment, intellectual property
rights, government procurement, labor, and environment. In
December 2004, SACU trade ministers reaffirmed their
commitment to a comprehensive agreement, but talks stalled

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again shortly after resuming in September 2005. On February
21, U.S. Trade Representative Portman sent a letter to each
SACU trade minister explaining that it was unlikely that the
two sides would be able to bridge their differences before
Trade Promotion Authority expired in 2007. On April 18,
Deputy U.S. Trade Representative Karan Bahatia will meet with
SACU deputy ministers of trade to discuss the status of
negotiations and U.S.-SACU trade relations.


11. (SBU) Because of the strong presence of U.S. companies in
South Africa and unilateral trade preferences provided to
South Africa under the African Growth and Opportunity Act,
U.S.-South Africa bilateral trade has grown steadily over the
past five years. In 2005, total bilateral trade reached $9.5
billion, up 7.0% from the year before, and approximating that
of Norway or Chile. U.S. exports to South Africa grew 23% to
$3.7 billion, once again making South Africa our largest
export market in sub-Saharan Africa -- twice that of Nigeria.
The only negative development was a slight decline in South
African exports to the United States, to $5.9 billion. This
was because of the adverse effect of Chinese competition on
South African exports of clothing to the United States after
the expiration of the Agreement on Textiles and Clothing, and
the continued strength of the rand vis-a-vis the dollar.


12. (SBU) After a surge in the mid 1990's, U.S. foreign
direct investment in South Africa has reached a plateau, a
trend that has been true for other investing countries. With
the notable exception of two large British acquisitions in
2005, South Africa has been unable to attract its fair share
of foreign direct investment. Reasons often cited are a high
crime rate, poor governance, uncertainty surrounding BEE
policies, inflexible labor regulations, the dominance of
state owned enterprises and other monopolies in certain
sectors, and the prevalence of HIV/AIDS. Nonetheless, the
United States is still the second largest foreign direct
investor in South Africa ($5.0 billion at year-end 2004),and
by far the largest portfolio investor ($22.5 billion year-end
2004, i.e., 41% of all foreign portfolio investment). Almost
600 U.S. firms have a presence in South Africa, with the vast
majority treating the country as a base for regional
business. With a market capitalization of $650 billion.
South Africa's JSE Securities Exchange is 17th largest in the
world.

OPIC FOCUS ON HOUSING AND CAPITAL MARKETS
--------------


13. (SBU) The Overseas Private Investment Corporation (OPIC)
has initiated a number of investment funds that benefit South
Africa. OPIC is about to lend $250 million for the start up
of two additional investment funds, one focused on the South
African market and the other on emerging African markets. To
help South Africa contend with a deficit of 2.4 low income
million homes, OPIC provided a $15 million loan guaranty to
finance home construction and a $250 million loan guaranty to
mitigate the risk of mortgage default for HIV-positive
homeowners. On May 2-4 in Cape Town, OPIC will host a
conference on housing in Africa to promote housing
construction and finance on the continent.

COMBATING TERRORIST FINANCE
--------------


14. (SBU) South Africa has been building its capability to
combat money laundering and terrorist finance since September
11, 2001. In 2003, the Financial Intelligence Centre (FIC)
was established to monitor suspicious financial transactions.
In 2005, South Africa's Protection of Constitutional
Democracy Against Terrorist and Related Activities Act came
into force, thus criminalizing terrorist activity and
granting government the power to seize assets belonging to
terrorists. Also in 2005, South Africa assumed the one-year
presidency of the Financial Action Task Force. While
cooperation with us has been very good when it comes to
terrorist finance, officially South Africa only takes action
against an individual or organization after it has been
listed by the United Nations Sanctions Committee under
Resolution 1267. FinCEN is close to concluding a Memorandum
of Understanding with the FIC that will facilitate greater
exchange of information between the two organizations.

HIV/AIDS: A CRISIS OF EPIC PROPORTIONS
--------------


15. (SBU) South Africa has the largest number of HIV

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infections in the world, and HIV/AIDS is the country's
leading cause of death. Well over five million South
Africans are HIV-positive, including 2.9 million women. The
number of AIDS-related deaths and AIDS orphans is expected to
climb by 2010 to 5.2 million and 1.5 million respectively.
The U.S. Census Bureau estimates that South Africa will have
negative population growth and a 25% decrease in life
expectancy by 2010, if nothing is done. President Bush's
Emergency Plan for AIDS Relief (PEPFAR),in its third year of
implementation, is working with public and private sector
prevention, treatment, and care programs. During the first
two years, the U.S. provided almost $240 million through
PEPFAR to support HIV/AIDS programs in South Africa, making
it the largest recipient of Emergency Plan resources. PEPFAR
funding for FY2006 will be more than $220 million. After two
and a half years of funding, the Emergency Plan supports more
than 50,000 in ARV treatment through programs it supports in
all provinces. In addition, the South African military has
expanded prevention programs and collaborates with the U.S.
military and NIH on ARV-based AIDS treatment research (a $45
million five-year program). Global Health, and HIV/AIDS in
particular, is our highest Mission Performance Plan priority.
South Africa also is a major recipient of Global Fund
resources, of which about one-third is contributed by the
United States.

TEITELBAUM