SOUTH AFRICA INPUT FOR 2009 AGOA ELIGIBILITY REVIEW

UNCLAS SECTION 01 OF 04 PRETORIA 002195

SIPDIS

DEPT. PLEASE PASS TO USTR FOR C. HAMILTON
DEPT FOR AF/EPS A. BREITER AND G. MALLORY

E.O. 12958: N/A
TAGS: ECON ETRD AGOA SF
SUBJECT: SOUTH AFRICA INPUT FOR 2009 AGOA ELIGIBILITY REVIEW

REF: SECSTATE 85086


1. In response to Ref A, Post provides the following input
for the 2009 AGOA eligibility review.

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Country Background Summary
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2. The population of South Africa was 48.7 million in
mid-2008. In 2007, South African Gross National Income (GNI)
was $255 billion; GNI per capita was $5,390. South African
exports to the U.S. were $9.1 billion in 2007, an increase of
22% from 2006. Platinum group metals were the biggest export
item to the U.S, followed by vehicles and transport
equipment. Over 98% of South Africa's exports to the U.S.
were duty-free in 2007 due to the combination of AGOA, GSP
benefits, and South Africa's most-favored nation status.

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Market-based Economy
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3. Major Strengths Identified: South Africa continues to
make progress in deepening its market-based economy.
Government expenditure as a percentage of GDP is lower than
the OECD average. That is partially due to the fact that the
country does not have a national pension system. The economy
has achieved record growth on the strength of the private
sector and robust domestic demand. The real annualized
economic growth during the four quarters of 2007 was 5.5
percent (revised from 5.1). The forecast for growth is 3.5
to 4.0 in 2008 with a similar level of growth expected in

2009. The government has set sound macroeconomic objectives,
and has managed to eliminate the fiscal deficit. The
government had a fiscal surplus of 0.3% of GDP in 2007.
Inflation (CPIX, or consumer price inflation less mortgage
costs) was relatively high at 13% in August 2008. Increasing
food and fuel prices have pushed CPIX above the upper end of
the 3% to 6% inflation target range for the better part of
2007 and 2008. Strong fundamentals, comparatively high
interest rates, and the view that the rand is essentially a
commodity-based currency have kept the value of the rand
strong. However, in 2007 the rand started to depreciate
following turbulence in the global financial markets and
concerns about South Africa's large current account deficit.
This caused the rand to depreciate from about R7/1USD in
early June 2007 to almost R8.2/1USD in September 2008. In
June 2008, the South African Reserve Bank (SARB) hiked its
policy interest rate for the 10th time since June 2006. The
SARB's tightened monetary policy can be attributed to higher
food and oil prices, continued growth in domestic credit, and
a weaker rand. The SARB now expects inflation to remain
above the target range until the second half of 2010.


4. Poverty and unemployment, compounded by the impact of
HIV/AIDS on the work force, remain serious issues. Official
unemployment was 23.1% in June 2008 and total unemployment
(including discouraged workers who did not actively seek
employment, was 35%. Researchers estimate that the country
needs 6.0% growth for a decade or more to halve unemployment
(i.e., to reach an official unemployment target of 15%). The
strong rand has been problematic for labor-intensive
industries and exporters of all kinds, especially for
textiles and apparel. The depreciation in the rand during
the last half of 2007 and 2008 has improved the position of
these industries in 2008. The growth in the economy has also
led to an unexpectedly large current account deficit. South
Africa's current account deficit has grown steadily, reaching
7.3% of GDP in the second quarter of 2008. Such levels
Q7.3% of GDP in the second quarter of 2008. Such levels
expose South Africa to the risk of a sharp currency
depreciation should capital inflows fall off dramatically.
Looking forward, the current account is likely to improve,
albeit modestly, during the remainder of 2008 on the back of
an improvement in mining production and a slowdown in the
domestic economy, and hence import demand. The economy is
still encumbered by new regulations and layers of
bureaucratic regulation that can inhibit domestic and foreign
investment. Many government departments and agencies suffer
severe capacity constraints and have thus been unable to
implement programs on time and with minimal confusion. The
economy is still hampered by severe skills shortages in all
sectors. U.S. firms are supportive of the aims of the
government's Black Economic Empowerment (affirmative action)
program, but they continue to have reservations about the
implementation of regulations and provisions calling for 25%
equity ownership for large and medium-sized companies by
black, or formerly disadvantaged, groups in South Africa.
Infrastructure bottlenecks and shortages, including growing

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electrical power outages, limit growth investment. High
crime levels add increased costs to businesses.

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Political Reforms/Rule of Law/Anti-Corruption
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5. Major Strengths Identified: In April 2004, South Africa
held free and fair elections in which the ruling African
National Congress (ANC) won nearly 70% of the vote. Seats in
the Parliament's National Assembly are allocated based on the
percentage of votes each party receives. In the 2004
elections, the ANC won 279 of the 400 seats in the Assembly,
followed by the Democratic Alliance, which won 50 seats, and
the Inkatha Freedom Party, which took 28. Subsequent
"floor-crossing" periods, in which MPs were allowed to change
parties, resulted in the ANC gaining 20 more seats for a
total of 297. The Cabinet includes 28 ministers from the ANC
and one from the Azanian People's Organization (AZAPO).
Mbeki extended the cabinet to include ANC Deputy President
and current state president Kgalema Molanthe as minister
without portfolio. Upon Mbeki's forced resignation in
September 2008, the AZAPO minister, along with eleven other
cabinet ministers, resigned with Mbeki. The Constitution's
bill of rights provides for due process including the right
to a fair and public trial within a reasonable time of being
charged, and the right to appeal to a higher court. South
Africa has an excellent anticorruption regulatory framework,
highlighted by the passage of the Prevention and Combating of
Corrupt Activities Act of 2004. For the first time, the Act
defined the scope of corrupt activities and thus is a welcome
complement to other anticorruption laws. Mbeki made the
fight against corruption a hallmark of his administration.
ANC parliamentarians, and provincial and municipal officials
have been charged, arrested, and convicted of corruption,
signaling official discouragement of this practice. In
addition, the ruling ANC ousted five MPs from the party and
Parliament who were found guilty of pocketing Parliamentary
travel funds. Mbeki lost the leadership of the ANC to Jacob
Zuma in December 2007 at the party's national congress in
Polokwane. Mbeki resigned from the position of President of
South Africa on September 25, 2008 after the ANC recalled him
from the position of President and he was replaced by
President and ANC Deputy President Kgalema Motlanthe.
Elections are scheduled for April 2009.


6. Major Issues/Problems Identified: Police use of lethal
force against suspects resulted in a significant number of
deaths, and deaths in police custody were a problem. The
government investigated and punished some abusers. Violent
crime is high, frightens the public, discourages investment,
and strains the judicial system. Severe prison and prolonged
pretrial detention are problems. Despite advances against
corruption, there is still the widespread view that
corruption is present in some parts of the government,
particularly within the South African Police Service and the
Department of Home Affairs. In May 2008, xenophobic attacks
aimed at African foreigners and some South African ethnic
minorities broke out and spread nationwide. Sixty-two people
died and about 100,000 people were displaced in connection
with the attacks. Other deaths have occurred as the
displaced persons returned to their original or other
communities.

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Poverty Reduction
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7. Major Strengths Identified: Mbeki continued to make the
Q7. Major Strengths Identified: Mbeki continued to make the
reduction in poverty and the raising of the level of
employment cornerstones of his second term in office. Years
of fiscal discipline by the SAG are making it possible for
the government to reduce the interest cost of the national
debt, lower marginal tax rates and increase government
expenditures on social programs and capital expenditures. As
a result, government expenditure on social programs has
doubled in the last five years. In February 2008, Finance
Minister Trevor Manuel presented this year's budget to
Parliament. Once again, the government increased spending on
poverty reduction and social services such as access to
housing, electricity, sanitation, child and pension grants,
education, and HIV/AIDS programs. The government also
allocated new funds to prepare for the 2010 World Cup,
including budget allocation for new roads and energy
infrastructure. In an effort to stimulate faster growth,
generate employment and improve the country's
competitiveness, government expenditure for infrastructure
spending totals some $50 billion between 2007 and 2010. Of
this, about 40% will be spent by public enterprises, mostly

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Eskom ($11 billion covering energy generation, transmission
an distribution) and Transnet ($6 billion, of which $5
billion will go towards harbors, ports, railways and
petroleum pipelines). In 2004, Mbeki launched the Expanded
Public Works Program, a major new jobs initiative similar to
U.S. Depression-era work programs. The objective is to
create one million temporary jobs, and in so doing impart
skills and bring more of the unemployed into the mainstream
workforce. Jobs and skills are increasing through the
government's Expanded Public Works Programme (EPWP) and small
farmers are benefiting from the Agriculture Starter Pack
Programme and the Comprehensive Agricultural Support
Programme. The cumulative number of total new work
opportunities created under the EPWP since its commencement
in April 2004 through December 2007 is at least 776,190. It
is expected that the program will exceed its target of one
million work opportunities, set for its first five years.
The government introduced programs to supply free basic water
and electricity to all, and has been working to expand its
low and no-income housing programs. More than 2.3 million
subsidized housing units have been built since 1994. Since
1994, 10 million more people have access to clean water. The
government raised the age of eligibility for child support
grants to cover all children up to the age of 14. The
government increased welfare grants going to old age
pensioners, reducing the qualifying age of men from 65 to 60
years phased over a period of three years. The government
also increased welfare grants to foster care (important to
the growing number of HIV/AIDS orphans) and the disabled.
The government's expenditure on HIV and AIDS has increased
from R30 million in 1994 to about R4.6 billion in 2008. The
very poor are steadily improving their lives through
increased social assistance grants. The number of people
benefiting has increased from 2.6 million to more than 10
million since 1994. The government continues to commission
research to better understand the dimensions of poverty and
the poverty gap, and to establish a poverty line so as to be
able to monitor success.


8. Major Issues/Problems Identified: There are serious
skills shortages throughout the economy. An area of
particular concern for economists and the government is the
shortage of skilled professionals such as doctors, nurses,
math and science teachers, social workers, engineers,
artisans, and project managers. Critics increasingly focus
on problems with the education system and inadequacies in
vocational training programs for not producing the skills
that the country needs. The quality of South African schools
remains uneven and education, though compulsory, is not free.
The government has moved to fully subsidize schools in the
poorest areas and all schools are officially required to
inform parents that they may apply for fee exemptions.
Nevertheless, school fees and associated costs for uniforms,
books and stationery have an adverse impact on school
attendance. The capacity of local government to administer
services (administrative and physical infrastructure
services),public-private partnerships, and welfare payments
is limited.

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Workers' Rights/Child Labor/Human Rights
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9. Major Strengths Identified: The law recognizes workers'
rights and provides for freedom of association, the freedom
to organize and bargain collectively and the right to strike.
Qto organize and bargain collectively and the right to strike.
The law prohibits forced or compulsory labor, including
forced child labor and the commercial sexual exploitation of
children. The government is ahead of its target in
implementing child benefits grants, now available to children
14 and under. ILO Conventions 182 on the worst forms of
child labor and 138 on the minimum age have been ratified.
The Children's Act prohibits trafficking of children and the
Child Protection Unit raises awareness of child trafficking
and conducts investigations. On May 13, 2008, the South
African magistrates' courts charged a Mozambican woman with
child trafficking. This was the first child trafficking case
in South Africa. The law provides for freedom of speech and
of the press, and the government generally respected these
rights. The law provides for freedom of religion and the
government generally respected this right.


10. Major Issues/Problems Identified: Since 2006, strikes
have become more violent. A strike by private security
guards against their employers resulted in over 50 deaths.
Police and strikers in other sectors clashed during a number
of legal marches. Food price inflation caused the number of
strikes in 2007 to reach a new record, with 11.5 million
workdays being lost to strike activity, according to data

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published by the South African Reserve Bank. The trend has
continued in 2008. In May 2008, the South African Municipal
Workers Union (SAMWU) led a three-week strike in Heidelberg
in which a teenager and a municipal worker were killed as a
result of a disagreement between government contract workers
and SAMWU members. Hundreds have died in the workplace due
to unsafe working conditions. Health and safety regulations
were often not observed when chemicals were used in
agricultural work, and deaths in mining increased by 10%
between 2006 and 2007. Although labor laws protected farm
workers, some farm workers' unions encountered difficulties
trying to organize workers. Farm workers or farm residents
who attempted to organize were harassed, dismissed and/or
evicted. Child labor remains a problem in the information
and agricultural sectors, partly fueled by the impact of
HIV/AIDS in creating poverty. Child sexual exploitation
continued to be an issue. Most prisons did not meet
international standards, and prison conditions did not always
meet the country's minimum legal requirements. Violence
against women is pervasive. Societal attitudes and a lack of
infrastructure, resources, and training for law enforcement
officials hampered the implementation of domestic violence
legislation. Violence against children, including domestic
violence and child rape remains widespread. Despite
increased attention to the problem, a lack of coordinated and
comprehensive strategies to deal with violent crime impeded
the delivery of needed services to young victims. Police
forcibly dispersed several demonstrations during 2007 which
resulted in injuries. Some of the demonstrations had turned
destructive prior to the police taking action to break them
up.

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International Terrorism/U.S. National Security
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11. Major Strengths Identified: South Africa is a party to
11 of the 12 UN counter-terrorism conventions and protocols
and has ratified nine of the 11 as well as the African Union
Convention of the Prevention and Combating of Terrorism. In
May 2005, South Africa enacted comprehensive anti-terrorism
legislation entitled, the Protection of Constitutional
Democracy Against Terrorist and Related Activities Act, which
required citizens and financial institutions to report
suspicious activity to law enforcement and allowed terrorist
assets to be seized. South Africa remains a member of the
Financial Action Task Force, an intergovernmental
organization that combats money laundering and terrorist
financing.


12. Major Issues/Problems Identified: South Africa must
still become a party to and ratify three of the UN
counter-terrorism conventions, including: Safety of Maritime
Navigation, Safety of Fixed Platforms on the Continental
Shelf and Protection of Nuclear Material. South Africa needs
to take stronger steps to secure its identity documents and
passports.



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