GLOBAL CONDITIONS MORE LIKELY TO IMPACT SOUTH AFRICAN

UNCLAS SECTION 01 OF 03 CAPE TOWN 000128 SIPDIS E.O. 12958: N/A TAGS: ECON EINV EFIN EIND ETRD ENRG PGOV SF SUBJECT: GLOBAL CONDITIONS MORE LIKELY TO IMPACT SOUTH AFRICAN ECONOMY THAN CHANGES IN GOVERNMENT This cable was a collaboration between Consulate Cape Town and Embassy Pretoria. ¶1. (U) Summary. The Port Elizabeth Regional Chamber of Commerce organized a briefing on April 21, to discuss the impact of the global economic crisis and the implications of a Jacob Zuma presidency on the country's economic policy. Keynote speaker Econometrix Chief Economist Dr. Azar Jammine noted that the global crisis would have a greater impact on South Africa's economy than any potential changes in government policies under a Zuma presidency. Jammine thought South Africa would feel the impact of the current global downturn more so than in the past due to its increased dependence on global commodities demand. Former Finance Minister Manuel's continued presence in a top policy development position in the new Zuma cabinet reinforces most analysts' predictions that macroeconomic policy would not shift dramatically under a Zuma administration. The incoming administration faces a tough economic outlook as it will have to deal with the first recession the country has seen in seventeen years. End Summary. -------------- SOUTH AFRICA EXPECTED TO WEATHER GLOBAL FINANCIAL STORM -------------- ¶2. (U) Embassy Trade and Investment Officer and Transport Officer attended a breakfast briefing organized by the Port Elizabeth Regional Chamber of Commerce on April 21. Keynote speaker Econometrix Chief Economist Dr. Azar Jammine outlined why the South African economy may have a better chance of surviving the global meltdown, and the implications of a Jacob Zuma presidency for the country's economic policy direction. Jammine thought that South Africa would fare better than most economies during the current global economic downturn because of good macroeconomic management of the national economy. ¶3. (U) Jammine explained that there had been a fiscal surplus under out-going Finance Minister Trevor Manuel's watch. Jammine thought South Africa would have a greater fiscal cushion to stimulate the economy and deal with the global downturn because Manuel had kept government spending under control in the past. Public debt was brought down from above 50 percent to around 23 percent of gross domestic product in the past decade. Jammine also noted that South African banks were secure and had share prices that were more stable than in other parts of the world. Jammine noted that the South African Rand's relative weakness against major currencies in 2008 had also insulated South Africa from major global shocks by allowing South African exports to retain export competitiveness. (Comment: The rand is recovering its former strength in 2009. End Comment) -------------- SOUTH AFRICAN ECONOMY DEPENDENT ON CONTINUED CHINESE DEVELOPMENT -------------- ¶4. (U) Jammine thought South Africa would feel the impact of the current global downturn more so than in the past due to its increased dependence on global commodities demand growth. South African gross domestic product (GDP) grew at an average of three to five percent in the 1990s, mainly due to rising global demand for commodities from China. Jammine stated that South African economic conditions would be most affected by developments in the Chinese economy. According to Jammine, China is the primary consumer of South African commodities; particularly iron, steel, heavy chemicals, and nonferrous metals. If "China goes downhill then South Africa will follow." He thought that as long as China QSouth Africa will follow." He thought that as long as China continued to urbanize it would need South African commodities. -------------- CREDIT CRUNCH REDUCES GLOBAL AND DOMESTIC AUTO DEMAND -------------- ¶5. (U) The South African economy is already experiencing the affects of the current global decrease in demand for metal processing and automobiles. Auto and component manufacturers based in the Eastern Cape Province are among the industries experiencing the greatest distress. Sales in all segments of the South African new vehicle market, including export sales, continue to register sharp declines. The decline in exports of South African-produced automobiles accelerated during April 2009. Monthly exports registered a 49.1 percent decline from to 22,536 in April 2008 to 11,479 in April ¶2009. ¶6. (U) Domestic demand for South African-produced automobiles has also slumped. Jammine stated that house prices in South Africa have followed a global downward trajectory, which has negatively affected equity and consumers' ability to borrow. As a result, domestic demand for products that require credit (i.e., automobiles and appliances) has also been adversely affected. He stressed that CAPE TOWN 00000128 002 OF 003 there was not much the South African government could do to assist the auto industry besides easing credit availability. For example, he did not believe that stimulus and rebate programs to assist consumers hoping to purchase an automobile (like the ones recently passed in Germany and Japan) would be palatable in the South African political landscape. People would question why the South African Government (SAG) should assist car buyers when the poverty and unemployment rate is so high. -------------- LONGER-TERM ECONOMIC OUTLOOK MIXED -------------- ¶7. (U) Jammine predicted mixed economic results over the long-term for South Africa. He noted that macroeconomic conditions would be boosted by a decrease in inflation and fuel prices, but explained that South Africa's current account deficit was much higher than other similarly-sized economies. In the short-term, he expected the Rand to strengthen, but believed that it would weaken over the longer-term due to the overreliance on imports. ¶8. (U) Jammine also noted that electricity demand had decreased as a result of the economic slowdown, which would provide state-controlled utility Eskom with a temporary reprieve as it attempts to enhance capacity. He emphasized that in the long-term, Eskom would need to increase electricity tariffs to be able to provide adequate capacity. However, Jammine conceded that electricity tariff increases would mean that projects, such as the Coega International Development Zone in the Eastern Cape, would be less competitive in attracting international investors. ¶9. (U) South Africa has attracted major international sporting events, which are expected to boost tourism and infrastructure growth at a time when most economies are contracting. Infrastructure investments such as international airport upgrades made by the government to prepare for the 2010 FIFA World Cup are expected to have longer-term positive impacts on economic growth and trade facilitation in Southern Africa. -------------- IMPLICATIONS OF A ZUMA PRESIDENCY -------------- ¶10. (U) Jammine thought that fears that a Zuma presidency and changes in African National Congress (ANC) leadership would impede economic advances were irrational. He noted that the SAG was already beginning to emphasize regulations and social grant programs under the previous Mbeki administration, and did not envision major economic policy changes under the new Zuma administration. Jammine thought Zuma's popularity was based more on a popular dislike for Mbeki than due to major policy shifts to the left. He noted that Zuma had done a good job of courting the business community during his campaign. ¶11. (U) Jammine emphasized that Wall Street would have a greater impact on South African macroeconomic conditions than a Zuma presidency. Jammine explained that the business community put more value on Manuel's continued presence in economic policy-making then in the shift of power from Mbeki to Zuma. He highlighted the aftermath of the Mbeki resignation as an example. President Mbeki resigned on September 25, 2008, and the markets did not register any fluctuations. However, a subsequent announcement that Manuel would also resign led to market losses of approximately R50 million ($6 million). The market then recovered after Manuel confirmed that he would stay on with the new Zuma administration. Jammine believed this market reaction sent a strong message to the Zuma camp to Qthis market reaction sent a strong message to the Zuma camp to retain Manuel in the new administration and not to fluctuate too much from existing macroeconomic policy. ¶12. (U) President-elect Zuma announced his new cabinet on May 10, which included some government restructuring such as the creation of a new Department of Economic Development. Trade unionist Ebrahim Patel will head this new department. However, former Finance Minister Manuel retained a prominent policy development position as head of the new National Planning Commission based in the Presidency. Former South African Revenue Service (SARS) Commissioner Pravin Gordhan will replace Manuel as Finance Minister. Most analysts believe Gordhan's placement is a another sign of continuity. -------------- COMMENT -------------- ¶13. (U) Manuel's continued presence in a top policy development position in the new Zuma cabinet reinforces most analysts' predictions that SAG macroeconomic policy would not shift dramatically. However, it is unclear at this point how the three entities (the Treasury, National Planning Commission, and CAPE TOWN 00000128 003 OF 003 newly-created Department of Economic Development) would interact to determine South Africa's economic policies under the Zuma administration. The incoming administration faces a tough economic outlook as it will have to deal with the first recession the country has seen in 17 years. Manufacturing and commodities-based sectors face difficulties with the global downturn; however, the World Cup and related boost in tourism and retail sales should provide some growth in the service-based sectors of the economy. Lack of skills development will be another big challenge for the incoming administration as it tries to address historic inadequacies in service delivery and its own failure to provide better education for the general public. PPATIN