QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY

UNCLAS SECTION 01 OF 06 PRETORIA 001500 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 global economy remained firmly in the grips of a recession in the first quarter of 2009, causing South Africa to record its first recession in 18 years. Declining export demand and lusterless prices of most export commodities acted as powerful brakes on South Africa's growth. Unemployment increased from 21.9 percent in the fourth quarter of 2008 to 23.5 percent in the first quarter of 2009. The deceleration in the growth in money supply (M3) and domestic credit extension to the private sector illustrated the financial pressure on consumers and companies. Consumer price inflation moderated further and together with the weak domestic demand has allowed the South African Reserve Bank's Monetary Policy Committee (MPC) to reduce interest rates by a cumulative 450 basis points since December 2008. South Africa's current account deficit increased to 7.0 percent of GDP in the first quarter of 2009. A combination of direct and portfolio investment inflows financed the current account deficit in the first quarter. The rand fluctuated at relatively low levels during the first quarter of 2009, but appreciated significantly in the second quarter. 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 8.07 Jul 7.64 Nov 10.12 Mar 10.00 Aug 7.66 Dec 9.95 Apr 9.02 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 66.15 Jul 65.69 Nov 56.61 Mar 57.81 Aug 67.66 Dec 56.38 Apr 63.36 Comment: The rand appreciated by 20 percent against the dollar and 13 percent against the trade-weighted average exchange rate of the rand during the first half of 2009. Analysts expect the rand to hold onto these gains. The strong performance of the rand was caused by an increase in commodity prices and more positive investor sentiment towards emerging-market economies in the second quarter of ¶2009. 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 Jan Feb Mar Apr May -------------- -- CPI 8.1 8.6 8.5 8.4 8.0 PPI 9.2 7.3 5.3 2.9 -3.0 Comment: Consumer price inflation moderated further in the first months of 2009, but nevertheless remained above the inflation target range of 3 to 6 percent. Food price inflation remained stubbornly Qrange of 3 to 6 percent. Food price inflation remained stubbornly high, particularly at the consumer level. Producer price inflation continued to fall, consistent with the slowdown in global inflation, the contraction in global demand, and declining commodity prices. Lower producer prices should continue to put downward pressure on consumer inflation. 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 7.5 percent and 6.4 percent in 2009 and 2010, respectively. End Comment. ¶4. MONEY AGGREGATES (percentage change year-on-year) -------------- -------------- 2009 Jan Feb Mar Apr May -------------- -------------- PRETORIA 00001500 002 OF 006 M1 -6.04 -5.12 -2.04 4.79 3.53 M2 13.69 13.76 10.01 7.98 7.41 M3 13.94 13.17 10.58 8.49 7.31 Comment: The deceleration in the pace of growth of the broadly defined money supply (M3) deepened in 2009. The deceleration reflected deteriorating growth in household and corporate income and expenditure, lower inflation, declining household wealth, and the effects of tight credit conditions. End Comment. ¶5. DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage change year-on-year) -------------- -------------- 2009 Jan Feb Mar Apr May -------------- -------------- 11.85 11.05 8.51 8.47 5.70 Comment: Growth in private sector credit extension eased to its slowest pace in five years, illustrating the financial pressure on consumers and companies. Elevated debt-service ratios limit the ability of consumers to take on new debt, while poor economic prospects make consumers reluctant to borrow and banks more hesitant to lend. 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 Feb Mar Apr May Jun -------------- -------------- SARB Repo Rate 10.50 9.50 8.50 7.50 7.50 Prime Overdraft 14.00 13.00 12.00 11.00 11.00 Rate Comment: The South African Reserve Bank's Monetary Policy Committee (MPC) has decided to increase the frequency of its meetings to monthly meetings, with the exception of July 2009, in order to monitor and respond appropriately to the rapidly changing economic environment. An improved medium-term outlook for inflation and the widening output gap allowed the MPC to reduce the key policy interest rate by 100 basis points at each of its February, March, April, and May meetings. However, the MPC kept the policy interest unchanged at 7.5 percent at its June meeting, blaming the stickiness of inflation. The MPC has cut interest rates by a cumulative 450 basis points since December 2008. Some analysts believe there could be more interest rate cuts in 2009. 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 TOTAL (1) 212,155.5 231,881.4 -19,725.9 JAN - MAY 2008 TOTAL (1) 248,623.1 282,639.9 -34,016.7 (1) Total After Adjustments (year-to-date) Comment: The economic deterioration in South Africa's most important trading partners resulted in a 15 percent reduction in the value of merchandise exports during the first five months of 2009. The domestic demand for imported goods also declined, while the relatively low level of international crude oil prices continued to weigh down the rand price of merchandise imports. The value of Qweigh down the rand price of merchandise imports. The value of merchandise imports declined by 18 percent during the first five months of 2009. Analysts expect the trade environment to remain weak as long as the global economy is depressed. However, capital imports are expected to remain fairly robust in view of the underlying momentum in capital spending. End Comment. ¶8. FOREIGN RESERVES ($ billions) -------------- 2009 Jan Feb Mar Apr May -------------- -------------- SARB Gross Gold and Foreign Reserves 33.74 33.78 34.11 34.05 35.84 PRETORIA 00001500 003 OF 006 SARB Net Open Forward Position 33.10 33.15 33.46 33.42 34.50 Comment: South Africa's gross gold and foreign reserves remained broadly unchanged at $34 billion before increasing to $35.8 billion in May. The uncertain and volatile global environment remains a hindrance on the SARB's natural tendency to accumulate reserves. Analysts expect South Africa's reserves to remain under pressure over the next few months, given the persistent global uncertainty. End Comment. -------------- II. QUARTERLY FIGURES -------------- ¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted and annualized) -------------- --- 2008 2009 Q2 Q3 Q4 Q1 -------------- -------------- PRIMARY SECTOR 18.3 3.3 5.9 -23.0 Agriculture 16.7 31.6 16.7 -2.9 Mining 19.2 -8.8 0.4 -32.8 SECONDARY SECTOR 11.8 -4.6 -15.0 -15.5 Manufacturing 14.3 -9.4 -21.8 -22.1 Electricity -2.1 3.0 -2.7 -7.9 Construction 9.1 15.0 10.8 9.4 TERTIARY SECTOR 1.6 1.7 2.4 -0.5 Trade & catering 4.0 -6.9 -0.2 -2.5 Transport & Comm. 4.3 4.5 1.8 -1.8 Finance 3.3 3.2 3.0 -2.3 Government 2.5 5.2 4.5 4.1 -------------- -------------- TOTAL 5.0 0.2 -1.8 -6.4 -------------- -------------- Comment: The South African economy recorded its first contraction in ten years in the final quarter of 2008. In the first quarter of 2009, economic activity contracted further, and at a considerably faster pace, confirming that the domestic economy was in a recession for the first time in 18 years. The manufacturing and mining sectors were the worst affected. In the first quarter of 2009, the tertiary sector experienced its first contraction since 1992, thereby resulting in all three of the major sectors (primary, secondary, and tertiary) recording negative real growth. Analysts pointed out that the fortunes of the South African economy remain tied to the global economy. Primary sector: Economic activity in the primary sector contracted by a massive 23 percent in the first quarter of 2009. The decline in the agricultural sector was mainly due to lower income from livestock, horticultural and field crop production. The mining sector showed negative growth due to a sizable decline in mining production, concentrated largely in platinum mining, and to a lesser extent coal and diamond mining. The sharp decline in global economic activity led to a significant decrease in demand for basic metal and mineral products, while lower commodity prices prompted producers to scale down output. A decline in industrial and jewellery demand for diamonds caused a temporary shutdown of certain diamond-mining operations. Platinum production declined as a result of maintenance-related shutdowns, the upgrading of safety-related systems at smelters, and the drop in demand from the auto-catalyst sector, impelled by the decline in new vehicle sales in both the domestic and foreign markets. Qdomestic and foreign markets. Secondary sector: The secondary sector recorded its third consecutive quarter of decline. The further weakening of global and domestic demand conditions, sluggish domestic real income, as well as high input costs, weighed heavily on the production of the manufacturing sector. The decline in manufacturing was widespread, with virtually all subsectors, except for electrical machinery, recording declining output. The contraction in the electricity, gas and water sector in the first quarter was largely due to a decline in industrial consumption of electricity. The construction sector remained buoyant in the first 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 decline in economic activity in the tertiary sector reflected the depressed state of the domestic market, which PRETORIA 00001500 004 OF 006 is characterized by high levels of indebtedness and subdued consumer and business confidence. Growth in the government sector resulted from the purchase of an aircraft as part of the defense procurement program that more than offset a slower pace of increase in the number of civil servants. End Comment. ¶10. BALANCE ON CURRENT ACCOUNT (R millions) -------------- -------------- 2008 2009 Q2 Q3 Q4 Q1 -------------- -------------- Merchandise Exp. 172,201 178,975 166,501 131,101 Net Gold Exports 11,877 12,351 12,790 12,744 Merchandise Imp. 188,411 204,626 185,341 153,761 Income Payments 29,506 34,270 26,774 24,486 Service payment 36,642 36,438 34,971 30,540 -------------- -------------- Current Account -40,375 -52,816 -33,304 -33,541 -------------- -------------- Current Account Deficit/GDP -7.3 -7.8 -5.3 -7.0 (percentage) Comment: The deterioration in global economic activity led to a deterioration in South Africa's current account balance. The main cause was the widening trade account deficit. Since almost 47 percent of South Africa's merchandise exports are destined for the US, Europe, and Japan, the slump in these economies severely affected the volume of merchandise exports in the first quarter. Unfortunately, lower merchandise imports and lower dividend payments accruing to non-resident investors on their investments in domestic securities were unable to counter the deterioration in merchandise exports. End Comment. ¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) -------------- -------------- 2008 2009 Q2 Q3 Q4 Q1 -------------- -------------- Direct Investment 3,372 10,765 53,928 16,091 Portfolio Investment 10,733 -11,924 -108,368 9,123 Other Investment 10,398 27,616 54,923 -10,837 -------------- -------------- Financial Account 24,503 26,457 483 14,377 -------------- -------------- Comment: South Africa continued to record capital inflows on the financial account of the balance of payments in the first quarter of 2009, albeit at a slightly slower pace than before. Softening risk aversion towards assets in emerging-market economies, including South Africa, resulted in an inflow of portfolio investment capital, in sharp contrast to the large outflow recorded in the previous quarter. Foreign direct investment into South Africa also contributed to the overall net inflow of capital. End Comment. ¶12. KEY LABOR MARKET VARIABLES (thousand) -------------- -------------- 2008 2009 Q2 Q3 Q4 Q1 -------------- -------------- Employed 13,729 13,655 13,844 13,636 Unemployed 4,114 4,122 3,873 4,184 Total Labor Force 17,844 17,777 17,718 17,820 Not Econ. Active 12,861 13,024 13,176 13,166 QNot Econ. Active 12,861 13,024 13,176 13,166 Population 15-64 30,705 30,801 30,894 30,987 -------------- -------------- Unemployment rate 23.1 23.2 21.9 23.5 (percentage) Absorption rate 44.7 44.3 44.8 44.0 (Employed/population ratio) Comment: Unemployment in South Africa increased from 21.9 percent in the fourth quarter of 2008 to 23.5 percent in the first quarter of ¶2009. The number of employed persons decreased by 208,000 to 13.6 million during this period. The prospect of slower economic growth PRETORIA 00001500 005 OF 006 in 2009 will slow employment growth and result in job losses in some sectors of the economy. 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. Some 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 ¶15. NATIONAL BUDGET (R billions) -------------- Fiscal Year Ending 31 March: 2006 2007 2008 2009 -------------- -------------- Q -------------- -------------- Total Revenue 411.2 482.7 559.8 608.3 PRETORIA 00001500 006 OF 006 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 are primarily to blame for the change in fiscal stance in 2009. Analysts expect corporate tax payments to deteriorate further in FY 2010, especially since sectors such as manufacturing and mining, which have been savaged by the global downturn, loom large in corporate tax take. Analysts expect the fiscal deficit to increase to between 4.5 and 5.0 percent of GDP in ¶2010. 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 FY 2007 and FY 2008. However, total debt is set to increase to 31.1 percent of GDP in FY 2012 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 CONNERS