QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY

UNCLAS SECTION 01 OF 06 PRETORIA 001981 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 South African economy recorded negative real growth in the second quarter of 2009, the third successive quarterly contraction. Some 475,000 jobs were lost in the first half of 2009. The trade data continued to reflect depressed global as well as domestic demand conditions. The faster contraction in imports relative to exports resulted in monthly trade surpluses since May ¶2009. As a result, the deficit on the current account narrowed significantly to 3.2 percent of GDP. This deficit was financed through a combination of direct and portfolio investment inflows. The improvement in the deficit on the current account and substantial capital inflows resulted in strong rand appreciation. The stronger rand together with weak domestic demand improved the inflation outlook and allowed the South African Reserve Bank's Monetary Policy Committee (MPC) to reduce interest rates by a cumulative 500 basis points since December 2008. The deceleration in the growth of the money supply (M3) and domestic credit extension to the private sector illustrated the financial pressure on consumers and companies. 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 8.05 Jul 7.64 Nov 10.12 Mar 10.00 Jul 7.95 Aug 7.66 Dec 9.95 Apr 9.02 Aug 7.98 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 67.84 Jul 65.69 Nov 56.61 Mar 57.81 Jul 68.48 Aug 67.66 Dec 56.38 Apr 63.36 Aug 68.52 Comment: The rand appreciated by almost 20 percent against both the dollar and the trade-weighted average exchange rate of other currencies during the first eight months of 2009. The rand benefited from substantial capital inflow into South Africa, following the improvement in investor's sentiment towards emerging-market assets, an increase in commodity prices, and an improvement in South Africa's deficit on the current account. 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 Mar Apr May Jun Jul -------------- -- CPI 8.5 8.4 8.0 6.9 6.7 PPI 5.3 2.9 -3.0 -4.1 -3.8 Comment: The stronger rand contributed to a decrease in the price of imported goods and improved the outlook for inflation. Furthermore, almost all commodity prices remained well below their QFurthermore, almost all commodity prices remained well below their peak levels in mid-2008, despite an upward trend in many commodity prices since early 2009. Accordingly, producer price inflation not only slowed but showed deflation in recent months. This started to work through to consumer price inflation, although the targeted headline consumer price index (CPI) remained above the 3-6 percent inflation target range. CPI had exceeded the upper limit of the inflation target range for 29 consecutive months as of August 2009. 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 5.8 percent and 5.6 percent in 2010 and 2011, respectively. End Comment. PRETORIA 00001981 002 OF 006 ¶4. MONEY AGGREGATES (percentage change year-on-year) -------------- -------------- 2009 Mar Apr May Jun Jul -------------- -------------- M1 -2.04 4.77 3.53 1.44 3.90 M2 10.01 7.97 7.74 4.86 3.84 M3 10.58 8.49 7.86 6.07 5.78 Comment: The deceleration in the growth of the broadly defined money supply (M3) deepened in the second quarter of 2009. The deceleration was a reflection of the slowdown in economic activity, lower inflation, and the fragility of both corporate- and household-sector incomes and balance sheets. End Comment. ¶5. DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage change year-on-year) -------------- -------------- 2009 Mar Apr May Jun Jul -------------- -------------- 8.51 8.47 5.70 3.98 3.40 Comment: During the second quarter of 2009, growth in banks' total loans and advances extended to the private sector approached levels previously observed in the 1960s, as stricter recession lending conditions curbed household and corporate demand for credit. 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 May Jun Jul Aug Sep -------------- -------------- SARB Repo Rate 7.50 7.00 7.50 7.00 7.00 Prime Overdraft 11.00 11.00 11.00 10.50 10.50 Rate Comment: The South African Reserve Bank's Monetary Policy Committee (MPC) has been reducing the report rate at regular intervals since December 2008, and most recently at its August meeting. The cumulative reduction over the past nine months has been 500 basis points, bringing the prime overdraft rate to 10.5 percent. The MPC decided to leave interest rates unchanged at its September meeting, based on its view that the domestic economic growth should improve in the coming quarters, while inflation continue its downward trend. 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 Jun 43,039.2 39,817.5 3,221.7 Jul 44,461.9 44,015.1 446.8 TOTAL (1) 298,281.6 315,651.1 -17,369.4 JAN - JUL 2008 TOTAL (1) 369,132.2 417,152.3 -48,020.2 (1) Total After Adjustments (year-to-date) Comment: Trade data continued to reflect depressed global and domestic demand. The economic deterioration in South Africa's most important trading partners resulted in a 19 percent reduction in the value of merchandise exports during the first seven months of 2009. During the same period, weaker domestic demand resulted in a decline Qof 24 percent in the value of merchandise imports. South Africa recorded a third successive monthly trade surplus in July, the first time this has happened since September 2003. The trade surplus was attributable to a deeper contraction in imports relative to exports. Analysts noted indications that global conditions are beginning to stabilize which could support domestic exports in the coming months. However, analysts do not expect exports to rebound strongly as long as global demand remains weak. Furthermore, demand for imports from consumer spending and private sector fixed investment spending is expected to be subdued in the months ahead, even though public sector capital investment is expected to remain strong. Most analysts expect the overall effect on the trade balance to be PRETORIA 00001981 003 OF 006 positive. End Comment. ¶8. FOREIGN RESERVES ($ billions) -------------- 2009 Apr May Jun Jul Aug -------------- -------------- SARB Gross Gold and Foreign Reserves 34.05 35.84 35.76 35.75 38.00 SARB Net Open Forward Position 33.42 34.50 34.57 34.67 36.92 Comment: South Africa's gross gold and foreign reserves continued to rise, boosted mainly by the receipt of $2.17 billion from the International Monetary Fund (South Africa's GDP-weighted share of the IMF's general allocation of $250 billion to its member countries). The level of import cover (i.e. the value of gross international reserves relative to the value of imports of goods, services and income) advanced from 19.2 weeks at the end of March 2009 to 20.2 weeks at the end of July. End Comment. -------------- II. QUARTERLY FIGURES -------------- ¶9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted and annualized) -------------- --- 2008 2009 Q3 Q4 Q1 Q2 -------------- -------------- PRIMARY SECTOR 3.3 5.9 -23.0 -3.6 Agriculture 31.6 16.7 -2.9 -17.1 Mining -8.8 0.4 -32.8 5.5 SECONDARY SECTOR -4.6 -15.0 -14.7 -5.7 Manufacturing -9.4 -21.8 -22.1 -10.9 Electricity 3.0 -2.7 -7.9 -1.4 Construction 15.0 10.8 14.7 12.2 TERTIARY SECTOR 1.7 2.4 -0.8 -1.2 Trade & catering -6.9 -0.2 -2.5 -4.5 Transport & Comm. 4.5 1.8 -1.8 -1.1 Finance 3.2 3.0 -2.3 -2.4 Government 5.2 4.5 2.7 2.4 -------------- -------------- TOTAL 0.2 -1.8 -6.4 -3.0 -------------- -------------- Comment: The second quarter GDP figures showed a somber picture of an economy in recession. Real GDP shrank by 3 percent in the second quarter, the third consecutive quarterly contraction, with all three sectors of the economy (primary, secondary, and tertiary) recording negative growth. Analysts expect economic conditions to remain weak for the rest of 2009, with some leveling expected in the third quarter of 2009, followed by a slightly better performance in the final quarter. However, much will depend on the state of the global economy. Primary sector: Economic activity in the primary sector contracted by 3.6 percent in the second quarter, following a decline of 23 percent in the preceding quarter. Positive growth in the mining sector was more than offset by a contraction in agricultural. A smaller summer crop was largely to blame for the decline in agricultural activity. Increased output, mainly by the platinum group metals, which benefited from firmer international commodity prices, restored positive momentum in mining. Secondary sector: Economic activity in the secondary sector receded at a more moderate rate of 5.7 percent in the second quarter. A smaller contraction in the manufacturing sector was the main contributing factor to the slower pace. Although the decline in Qcontributing factor to the slower pace. Although the decline in manufacturing output was broad-based and consistent with subdued demand growth, pronounced declines were recorded in chemicals, wood and paper products, electrical machinery, and textiles and clothing. The contraction in the electricity, gas and water production slowed as a result of higher mining production and several very cold winter spells during the second quarter. The construction sector remained buoyant in the second 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 contraction in economic activity in the PRETORIA 00001981 004 OF 006 tertiary sector in the second quarter was mainly due to weakness in the financial intermediation, insurance, real-estate and business services sector, as well as a further decline in the commerce sector. Subdued activity in the commerce sector persisted due to a further decrease in activity in the wholesale, retail and motor trade subsectors which continued to feel the effects of weak household and corporate demand. Rising unemployment, low confidence and expectations of further declines in house prices still undermined real estate activity. End Comment. ¶10. BALANCE ON CURRENT ACCOUNT (R millions) -------------- -------------- 2008 2009 Q3 Q4 Q1 Q2 -------------- -------------- Merchandise Exp. 178,975 166,501 131,101 122,970 Net Gold Exports 12,351 12,790 12,744 11,871 Merchandise Imp. 204,626 185,341 153,761 124,392 Income Payments 34,270 26,774 24,486 22,281 Service payment 36,438 34,971 30,540 31,228 -------------- -------------- Current Account -52,816 -33,304 -33,541 -19,723 -------------- -------------- Current Account Deficit/GDP -7.8 -5.3 -7.0 -3.2 (percentage) Comment: The negative balance on the current account improved from 7.0 percent of GDP in the first quarter of 2009 to 3.2 percent in the second quarter. This was mainly attributable to the switch of South Africa's trade balance from a deficit (since the third quarter of 2005) to a surplus in the second quarter of 2009. The improvement in the service and income accounts, mainly due to lower dividend payments to foreign investors as well as lower transportation costs, also supported the current account. The smaller shortfall on the current account makes South Africa less reliant on capital inflows and reduces the rand's vulnerability to swings in global risk appetite. End Comment. ¶11. BALANCE ON FINANCIAL ACCOUNT (R millions) -------------- -------------- 2008 2009 Q3 Q4 Q1 Q2 -------------- -------------- Direct Investment 10,765 53,928 16,091 20,193 Portfolio Investment -11,924 -108,368 9,123 28,781 Other Investment 27,616 54,923 -10,837 -9,669 -------------- -------------- Financial Account 26,457 483 14,377 39,305 -------------- -------------- Comment: The smaller deficit on the current account was financed through a combination of direct and portfolio investment inflows. Foreign direct investment in South African telecommunications enterprises increased further, while non-resident interest in South African shares and debt securities picked up alongside an improvement in sentiment towards emerging-market assets. The inflow of portfolio investment capital through the Johannesburg Stock Exchange (JSE) and the Bond Exchange of South Africa (BESA) in the second quarter of 2009 was supplemented by the issuance of a $1.5 billion international bond by the South African government. End Comment. ¶12. KEY LABOR MARKET VARIABLES (thousand) Q12. KEY LABOR MARKET VARIABLES (thousand) -------------- -------------- 2008 2009 Q3 Q4 Q1 Q2 -------------- -------------- Employed 13,655 13,844 13,636 13,369 Unemployed 4,122 3,873 4,184 4,125 Total Labor Force 17,777 17,718 17,820 17,495 Not Econ. Active 13,024 13,176 13,166 13,585 Population 15-64 30,801 30,894 30,987 31,080 -------------- -------------- Unemployment rate 23.2 21.9 23.5 23.6 (percentage) Absorption rate 44.3 44.8 44.0 43.0 PRETORIA 00001981 005 OF 006 (Employed/population ratio) Comment: Unemployment in South Africa increased from 21.9 percent in the fourth quarter of 2008 to 23.6 percent in the second quarter of ¶2009. During this period, the number of employed persons decreased by 475,000 to 13.6 million. Analysts expect more job losses in 2009 as economic conditions remain weak. 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. 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 Qapproaching the SAG's target of 25 percent. End Comment ¶15. NATIONAL BUDGET (R billions) PRETORIA 00001981 006 OF 006 -------------- Fiscal Year Ending 31 March: 2006 2007 2008 2009 -------------- -------------- Total Revenue 411.2 482.7 559.8 608.3 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 is primarily to blame for the change in fiscal stance in 2009. Analysts expect corporate tax payments to deteriorate further in FY2010, especially since sectors such as manufacturing and mining, which have been savaged by the global downturn, loom large in the corporate tax take. Analysts expect the fiscal deficit to increase to between 5.0 and 8.0 percent of GDP in FY2010. 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 FY2007 and FY2008. However, total debt is set to increase to 31.1 percent of GDP in FY2012 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 GIPS