AGOA ELIGIBILITY REVIEW

UNCLAS SECTION 01 OF 06 PRETORIA 002091 DEPT FOR AF/S AND AF/EPS/GABRIELLE MALLORY USDOC FOR KEVIN BOYD TREASURY FOR ANTHONY IERONIMO USTR FOR CONSTANCE HAMILTON SIPDIS E.O. 12958: N/A TAGS: EAGR EAID ECON ENRG ETRD PHUM SF SUBJECT: AGOA ELIGIBILITY REVIEW REF: STATE 97769 PRETORIA 00002091 001.2 OF 006 ¶1. In response to Ref A, post provides the following input for the AGOA eligibility review. -------------- Country Background Summary -------------- ¶2. The population of South Africa was 49.3 million in mid-2009. In 2008, South African Gross National Income (GNI) was $268 billion; GNI per capita was $5,454. South African exports to the U.S. were $10 billion in 2008, an increase of 9.1 percent from 2007. Platinum group metals were the biggest export item to the U.S., followed by vehicles and transport equipment. Over 97 percent of South Africa's exports to the U.S. were duty-free in 2008 due to the combination of AGOA, GSP benefits, and South Africa's most-favored nation status. -------------- Market-Based Economy -------------- ¶3. Major Strengths Identified: - Annual GDP growth between 2004 and 2007 averaged 5.0 percent, but fell to a rate of 3.1 percent in 2008 due primarily to higher interest rates, power shortages, and weakening commodity prices. GDP contracted by 6.4 percent and 3 percent, seasonally adjusted and annualized, in the first and second quarters of 2009, respectively. South Africa is now in its first recession in 18 years, and analysts forecast negative real growth of about 2 percent in 2009. - The government has set sound macroeconomic objectives, and managed to eliminate the fiscal deficit in FY 2007 and FY2008. However, a fiscal deficit of 1.2 percent of GDP was recorded in FY2009, mainly due to the impact of weak domestic demand and the global economic crisis on tax revenues. Analysts expect the fiscal deficit to increase to between 6 and 8 percent of GDP in FY2010. - Inflation (CPIX, or consumer price inflation less mortgage costs) averaged 11.3 percent in 2008. Increasing food and fuel prices have pushed CPIX above the upper end of the Reserve Bank's 3 to 6 percent inflation target range for the better part of 2007 and 2008. Since January 2009, the targeted inflation measure has been the headline CPI and accounted for 6.4 percent in August 2009. The Monetary Policy Committee's most recent central inflation forecast projects that inflation will continue its downward trajectory and return to �00A;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. - The rand depreciated by 31.5 percent against the dollar and 25.2 percent against the trade-weighted average exchange rate of the rand in 2008, following global financial turmoil, with investors rechanneling funds to familiar, mature markets. The rand was also affected by the drop in international commodity prices, which constitute a large percentage of South Africa's exports. However, the rand regained most of its 2008 losses in 2009, appreciating 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 sentiment towards emerging-market assets, an increase in commodity prices, and an improvement in South Africa's deficit on the current account. - The South African Reserve Bank (SARB) has been reducing interest Q- The South African Reserve Bank (SARB) has been reducing interest rates at regular intervals since December 2008, and most recently at its August 2009 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, reasoning that domestic economic growth should improve in the coming quarters, while inflation would continue its downward trend. ¶4. Major Issues/Problems Identified: - Poverty and unemployment, compounded by the impact of HIV/AIDS on the work force, remain serious issues. Official unemployment was 23.6 percent in June 2009, and total unemployment (including discouraged workers who did not actively seek employment) was 32.5 percent. Researchers estimate that the country needs 6.0 percent growth for a decade or more to halve unemployment (i.e., to reach the official unemployment target of 15 percent). PRETORIA 00002091 002.2 OF 006 - A stronger rand is problematic for labor-intensive industries and exporters of all kinds as it constrain the competitiveness of South African exporters in international markets. - South Africa's current account deficit has grown steadily and reached 7.8 percent of GDP in the third quarter of 2008. However, the deficit improved to 3.2 percent of GDP in the second quarter of 2009, mainly due 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 smaller deficit on the current account makes South Africa less reliant on capital inflows and reduces the rand's vulnerability to swings in global risk appetite. - The economy is still encumbered by layers of bureaucracy and changing regulations that can inhibit domestic and foreign investment. - Many government departments and agencies suffer severe capacity constraints, at times impeding or complicating program implementation. - The economy is hampered by severe skills shortages in most sectors. - U.S. firms are supportive of the aims of the government's Broad-Based Black Economic Empowerment program, but they continue to have reservations about the implementation of regulations and provisions calling for 25 percent equity ownership for large and medium-sized companies by black, or "formerly disadvantaged," groups in South Africa. - Infrastructure bottlenecks and shortages, including constrained electricity supplies, also limit investment and add to uncertainty. High crime levels add increased costs to businesses. -------------- Political Reforms/Rule of Law/Anti-Corruption -------------- ¶5. Major Strengths Identified: - South Africa held free and fair elections in which the ruling African National Congress (ANC) won 65.9 percent of the vote on April 22, 2009. - Seats in the Parliament's National Assembly are allocated based on the percentage of votes each party receives. In the 2009 elections, the ANC won 264 of the 400 seats in the Assembly, followed by the Democratic Alliance, which won 67 seats with 11.66 percent of the vote, the Congress of the People (COPE) which won 30 seats with 7.42 percent of the vote, and the Inkatha Freedom Party, which took 18 seats with 4.55 percent of the vote. Twenty-one seats went to other parties. - President Zuma expanded the Cabinet to 36 ministries, adding ministerial positions within the Presidency for a National Planning Commission and a Monitoring and Evaluation Competency Body, splitting the Ministry of Education into Basic Education and Higher Education, and adding new Ministries of Energy; Mining; Economic Development; Human Settlements; Cooperative Governance and Traditional Affairs; and Women, Youth and People with Disabilities. Zuma awarded deputy ministerial positions to members of the South African Communist Party and the Freedom Front Plus. - 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 anti-corruption regulatory framework, highlighted by the passage of the Prevention and Qframework, highlighted by the passage of the Prevention and Combating of Corrupt Activities Act of 2004. The Act defined the scope of corrupt activities. - Following the forced resignation of President Mbeki, who made the fight against corruption a hallmark of his administration, and the election of Jacob Zuma, who faced corruption charges until the eve of the election, the Government still lists the fight against corruption among its highest priorities. It is not yet clear whether the newly formed South African Police Force Priority Crimes Unit, known as the Hawks, will prove as effective as the Scorpions, the disbanded anti-corruption unit. PRETORIA 00002091 003.2 OF 006 ¶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 endemic, frightens the public, discourages investment and strains the judicial system. - Severe prison conditions 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 foreigners from other African countries, as well as some South African ethnic minorities, broke out and spread nation-wide. 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. -------------- Poverty Reduction -------------- ¶7. Major Strengths Identified: - The fight against poverty as articulated in the Accelerated and Shared Growth Initiative for South Africa (ASGISA) remains the cornerstone of the Government's focus under President Zuma. Creating decent work (as defined by the International Labor Organization) will continue to be at the center of economic policies and will influence investment attraction and job-creation initiatives. - As of March 2009, just over 13 million people received assistance in the form of government welfare (social) grants, and 5.5 percent of GDP is spent on such assistance. The majority of grant recipients (8.8 million) receive the Child Support Grant, provided to children in need up to the age of 15 years. The Foster Child Grant, which continues to show strong growth in its recipient list, provides support for families that have taken in orphaned children (such as those who have lost parents to AIDS). Uptake of the Old Age Grant remains stable, as most of the intended beneficiaries are being reached. This should change with the progressive reduction of the threshold for qualification from 65 to 60 years for males. - Since 1994, Government has intensified its efforts to accelerate the delivery of housing to the poor. The number of housing units completed under the subsidized housing program reached a cumulative total of 2.8 million as of March 2009. Approximately 70.5 percent of South African households now live in formal dwellings, up from 64.4 percent in 1996. Provincial variations in the pace of housing delivery are a reflection of the challenge of capacity in some of the provinces. The housing sector is expected to strengthen its service delivery models within the context of the comprehensive implementation plan for sustainable human settlements. - The percentage of households with access to water infrastructure above or equal to the Reconstruction and Development Program standard increased from 61.7 percent in 1994 to 91.8 percent in March 2009. This means that South Africa has surpassed the Millennium Development Goal of halving the proportion of people without sustainable water, and is likely to achieve the 2014 ASGISA goal of universal access to potable water, despite the challenge of Qgoal of universal access to potable water, despite the challenge of an ever-increasing number of households. The Government is deploying the municipal drinking water management system in all water services authorities to ensure that water is of good quality across municipalities. - The estimate number of households with access to electricity has increased from 4.5 million (50.9 percent) in 1994 to 9.1 million (73 percent) in 2008. However, the rate of new electricity connections is slowing considerably, as it now is concentrated on areas not previously served that require the establishment of bulk infrastructure. The construction and improvement of energy infrastructure forms an important element of the Government's focus PRETORIA 00002091 004.2 OF 006 on infrastructure development, particularly in rural areas. As such, better long-term planning of power generation, distribution and maintenance is critical for the achievement of the 2014 goal of universal access to electricity. - 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 doubled from 2002 to 2009. - In an effort to stimulate faster growth, generate employment, and improve the country's competitiveness, government expenditure for infrastructure spending will total some $50 billion between 2007 and ¶2010. Of this, about 40 percent will be spent by public enterprises, mostly Eskom ($11 billion covering energy generation, transmission and distribution) and Transnet ($6 billion, of which $5 billion will go towards harbors, ports, railways and petroleum pipelines). - Former President Thabo Mbeki launched the Expanded Public Works Program (EPWP),a major new jobs initiative similar to U.S. Depression-era work programs, in April 2004. The objective was to create one million jobs, and in so doing impart skills and bring more of the unemployed into the mainstream workforce. The cumulative number of total net work opportunities created under the EPWP from its commencement until the end of December 2009 will be at least one million. The second phase of the program will aim to create about four million job opportunities by 2014. - 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. Statistics South Africa is carrying out a Living Conditions Survey (2008-2009) that could be a major data source for poverty measurement and profiling and will possibly be supplemented by survey information on aspirations and expectations of young South Africans. ¶8. Major Issues/Problems Identified: - The official unemployment rate declined from 27.9 percent in March 2004 to 23.6 percent in June 2009. However, South Africa recently has witnessed massive job losses due largely to the global economic crisis and the associated decline in economic activity. The high number of unemployed youth is especially worrying. The global economic crisis poses a challenge to the ASGISA goal of cutting unemployment by half by 2014. The massive public sector-led construction package and expansion of public works projects, undertaken both as intentional stimulus and job creation and to prepare for the 2010 FIFA World Cup, is mitigating what would have been an even greater employment challenge. - There are serious skills shortages throughout the economy. An area of particular concern 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 division of the Department of Education into Basic Education and Higher Education and Training Qof Education into Basic Education and Higher Education and Training was intended to help the Government devote more resources to addressing these skills shortages. - The quality of South African schools remains uneven and education, while 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 how to 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. -------------- Workers' Rights/Child Labor/Human Rights -------------- ¶9. Major Strengths Identified: PRETORIA 00002091 005.2 OF 006 - The law recognizes and protects workers' rights and provides for freedom of association, the freedom to 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. - South African government policies are promulgated with the intent of developing an educated and skilled work force and keeping children in school. South Africa uses a variety of financial support mechanisms to prevent children's entry to and encourage children's withdraw from the workforce including the widely used Child Support Grant. - ILO Conventions 182, on the worst forms of child labor, and 138, on the minimum working 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. The Prevention and Combating of Trafficking in Persons Bill was introduced to Parliament on May 8 and is expected to be approved by Cabinet. - South African law provides for freedom of speech and of the press, and the government generally respected these rights. - South African law provides for freedom of religion, and the government generally respected this right. ¶10. Major Issues/Problems Identified: - Strikes are commonplace throughout the South African economy. Wage negotiations were characterized by robust strike action in ¶2009. Most unions demanded double-digit wage increases to compensate for rising inflation and price hikes. Some strikes were violent. On August 26, a wage protest by soldiers represented by the South African National Defense Union (SANDU) turned violent, as 3,000 soldiers attempted to gain access to Union Buildings in Pretoria to demand a thirty percent wage increase. Soldiers armed with various weapons hurled rocks, bottles and petrol bombs at police and bystanders. - Workplace deaths and injuries due to unsafe working conditions continue to be reported. Health and safety regulations were often not observed when chemicals were used in agricultural work, and deaths in the mining sector increased by 10 percent between 2006 and ¶2007. The Department of Mining and Energy 2008 Presidential Mine Audit reported 200 mining deaths in 2005 and 2006, and 220 mining deaths during 2007. The data was compiled in 2007, but the report was only released in February 2009. The report showed a steady reduction from 1995 to 2006, and attributed the 2007 increase to new and smaller operators who have limited experience in health and safety. - Labor conditions on some farms remained harsh. While labor laws protected farm workers, some farm workers' unions encountered difficulties trying to organize workers. Some farm workers or farm residents who attempted to organize were harassed, dismissed, and/or evicted. - Child labor remains a problem in the informal and agricultural sectors, partly fueled by the impact of HIV/AIDS on adult wage earners. - 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 Q- 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. PRETORIA 00002091 006.2 OF 006 - 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. -------------- - International Terrorism/U.S. National Security -------------- - ¶11. Major Strengths Identified: - South Africa is a party to 11 of the 12 UN counterterrorism conventions and protocols and has ratified nine of the 11 as well as the African Union Convention on the Prevention and Combating of Terrorism. - South Africa enacted comprehensive anti-terrorism legislation called the Protection of Constitutional Democracy Against Terrorist and Related Activities Act in May 2005. The Act 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 national identity documents and passports. LA LIME