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09PRETORIA708 2009-04-09 12:58:00 UNCLASSIFIED Embassy Pretoria
Cable title:  

QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY

Tags:   ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF 
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VZCZCXRO3722
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0708/01 0991258
ZNR UUUUU ZZH
R 091258Z APR 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8065
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
					  UNCLAS SECTION 01 OF 07 PRETORIA 000708 

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: South Africa did not escape the negative
consequences of the international financial turmoil, despite the
fact that its domestic financial institutions had virtually no
direct exposure to the troubled assets that were central to the
deterioration of credit markets. Deteriorating consumer and
business confidence, declining global demand, and a relatively tight
domestic monetary policy were reflected in the contraction in real
GDP in the fourth courter of 2008. However, declining domestic
inflation together with weakening domestic and international demand
allowed the South African Reserve Bank's Monetary Policy Committee
(MPC) to reduce interest rates by 250 basis points since December


2008. To bolster confidence and combat the negative impact of the
slowdown, the SAG announced an expansionary budget which provides
for a deficit of 3.9 percent of GDP in FY2010. South Africa's
current account deficit narrowed to 5.3 percent of GDP in the fourth
quarter of 2008, as weaker merchandise exports were more than
countered by a contraction in the value of merchandise imports and
lower dividend payments to non-resident investors. A combination of
direct and other investment inflows financed the current account
deficit in the fourth quarter, while portfolio investment recorded a
record outflow. The outflow was due to the sell-off of domestic
securities following the uncertainty in global financial markets
surrounding the magnitude of credit losses in the developed
economies. The outflow of portfolio investments and the reduction
in commodity prices resulted in a significant depreciation in the
rand during the fourth quarter of 2008. The rand continued to
fluctuate at these lower levels during the first quarter of 2009.
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


--------------------------



--------------------------


Jan 6.99 May 7.62 Sep 8.05 Jan 9.90
Feb 7.64 Jun 7.92 Oct 9.67 Feb 10.01
Mar 7.98 Jul 7.64 Nov 10.12 Mar 10.00
Apr 7.79 Aug 7.66 Dec 9.95
Trade-Weighted Rand (monthly average; 2000 = 100)


--------------------------



--------------------------


2008 2009


--------------------------



--------------------------


Jan 74.68 May 66.29 Sep 66.11 Jan 57.07
Feb 67.98 Jun 63.85 Oct 5.32 Feb 57.66
Mar 63.13 Jul 65.69 Nov 56.61 Mar 58.11
Apr 64.31 Aug 67.66 Dec 56.38

Comment: 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. The sharp decline in the exchange rate was caused by
global financial turmoil, with investors rechanneling funds to
familiar, mature markets, as well as by the drop in international
commodity prices, which constitute a large percentage of South
Qcommodity prices, which constitute a large percentage of South
Africa's exports. The rand stabilized at around R10/$ on average
during the first quarter of 2009. End Comment.




3. INFLATION (year-on-year)


--------------------------


2008 2009
Oct Nov Dec Jan Feb


--------------------------

--
CPIX 12.4 12.1 11.8
CPI 8.1 8.6
PPI 14.5 12.6 11.0 9.2 7.3

Comment: The collapse in international commodity prices as well as
weak global and domestic demand started to slow the upward inflation
spiral. The Monetary Policy Committee's (MPC's) most recent central
inflation forecast projects that inflation will continue its
downward trajectory and return to within the 3-6 percent target
range in the third quarter of 2009. Inflation is then forecast to
increase again and to breach the upper end of the target range in
the first quarter of 2010, mainly as a result of technical base

PRETORIA 00000708 002 OF 007


effects. Thereafter, inflation is expected to return to within the
target range and remain there until the end of 2010. Inflation is
expected to average 6.5 percent and 5.3 percent in 2009 and 2010,
respectively. In January 2009, StatsSA introduced a new headline
consumer price index, the CPI for all urban areas, which replaced
CPIX as the inflation target measure. Four fundamental changes
encapsulate the new consumer price inflation measure. First, the
replacement of the International Trade Classification with the
Classification of Individual Consumption by Purpose (COICOP), which
is the international norm for the classification of goods and
services measured in the CPI. Second, the reweighting of the CPI
with new expenditure weights primarily based on the Income and
Expenditure Survey (IES) of 2005/06. Third, the rebasing of the CPI
to the 2008 calendar year. Fourth, the introduction of owners'
equivalent rent to estimate housing-related costs. End Comment.



4. MONEY AGGREGATES (year-on-year)


--------------------------


2008 Q 2009
Oct Nov Dec Jan Feb


--------------------------



--------------------------


M1 4.67 2.61 2.07 -6.04 -5.12
M2 11.61 11.76 11.84 13.67 13.76
M3 15.59 16.26 14.79 13.92 13.17

Comment: The broadly defined money supply (M3) continued to
moderate, reflecting tighter credit conditions, a slowing economy
and significant negative wealth effects, resulting from the
precipitous decline in asset prices. End Comment.



5. DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (year-on-year)


--------------------------



--------------------------


2008 2009
Oct Nov Dec Jan Feb


--------------------------



--------------------------


16.42 15.37 13.60 11.85 11.05

Comment: Growth in private sector credit extension continued to
moderate amid tougher economic conditions and tighter credit
conditions as well as elevated debt-service ratio's which limit the
ability of consumers to take on new debt. End Comment.




6. KEY INTEREST RATES (at end of month)


--------------------------


2008 2009
Nov Dec Jan Feb Mar


--------------------------



--------------------------


SARB Repo Rate 12.00 11.50 11.50 10.50 9.50
Prime Overdraft 15.50 15.00 15.00 14.00 13.00
Rate

Comment: The South African Reserve Bank's Monetary Policy Committee
(MPC) reduced the key policy interest rate, the repo rate, by a
cumulative 250 basis points since December 2008. The rate cuts were
made possible by declining domestic inflation and weakening domestic
and international demand. Most analysts believe there will be
further interest rate cuts in 2009. End Comment.



7. MERCHANDISE TRADE ACCOUNT (R millions)


--------------------------


2008 EXPORTS IMPORTS TRADE BALANCE
Oct 65,652.6 75,445.3 -9,792.7
Nov 53,877.9 65,944.3 -12,066.4
Dec 48,541.1 50,176.8 -1,635.7
TOTAL (1) 663,100.0 727,632.2 -64,532.4

2009 EXPORTS IMPORTS TRADE BALANCE
Jan 36,251.7 53,631.5 -17,379.7
QJan 36,251.7 53,631.5 -17,379.7
Feb 44,061.8 44,632.4 -570.6
TOTAL (1) 80,294.0 98,331.1 -18,037.0

JAN - FEB 2008
TOTAL (1) 85,825.4 102,373.6 -16,548.3

(1) Total After Adjustments (year-to-date)

Comment: Weaker global demand coupled with declining international
commodity prices compressed the export earnings of South African
producers since the fourth quarter of 2008. The slowdown in foreign
demand caused the total volume of both mining and manufactured goods
exports to decrease. In addition to the general slowdown in global
demand, exports of South African goods were also affected by the
tightening of global lending criteria which, in some instances,

PRETORIA 00000708 003 OF 007


forced producers in the mining and manufacturing sectors to scale
down production, reschedule expansion projects and retrench
employees. However, exporters received some support from a weaker
rand, which improved their price competitiveness in international
markets. Merchandise imports were weighed down by the subdued
domestic demand for both capital and consumer goods. End Comment.



8. FOREIGN RESERVES ($ billions)


--------------------------


2008 2009
Nov Dec Jan Feb Mar


--------------------------



--------------------------


SARB Gross Gold and
Foreign Reserves 33.22 34.10 33.74 33.78 34.11
SARB Net Open Forward
Position 32.58 33.46 33.10 33.15 33.46

Comment: South Africa's gross gold and foreign reserves decreased
slightly in January, caused mainly by valuation changes rather than
outflows. In March, the SARB used the opportunity of a weaker rand,
in the second half of the month, to boost the reserves through its
foreign exchange operations. South Africa's net reserves have risen
over the past five years, after the SARB eliminated its loss-making
forward foreign exchange book in 2004. End Comment.



--------------------------


II. QUARTERLY FIGURES


--------------------------





9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted
and annualized)


--------------------------

---
2008
Q1 Q2 Q3 Q4


--------------------------



--------------------------


PRIMARY SECTOR -12.4 18.3 3.3 5.9
Agriculture 25.0 16.7 31.6 16.7
Mining -25.8 19.2 -8.8 0.4

SECONDARY SECTOR 1.2 11.8 -4.6 -15.0
Manufacturing -0.6 14.3 -9.4 -21.8
Electricity -5.8 -2.1 3.0 -2.7
Construction 13.9 9.1 15.0 10.8

TERTIARY SECTOR 3.7 1.6 1.7 2.4
Trade & catering 4.1 -4.0 -6.9 -0.2
Transport & Comm. 3.4 4.3 4.5 1.8
Finance 2.6 3.3 3.2 3.0
Government 4.6 2.5 5.2 4.5


--------------------------



--------------------------


TOTAL 1.7 5.0 0.2 -1.8


--------------------------



--------------------------



Comment: Deteriorating consumer and business confidence, declining
global demand, and a relatively tight domestic monetary policy were
reflected in the contraction in real GDP in the fourth quarter of


2008. The decline could mainly be attributed to a pronounced
deterioration in real value in the secondary sector, particularly
manufacturing.

Primary sector: The strong growth in economic activity in the
primary sector in the fourth quarter was largely the result of
increased agricultural production. Output in the agricultural
sector benefited from an increase in the production of field crops,
particularly corn, where the crop harvested increased from 7.1
million tons in the 2006/07 production year to 12.7 million tons in
the 2007/08 production year. The mining sector showed positive
growth in the fourth quarter, following a decline in the third
quarter. This turnaround was underpinned by improved production at
the platinum and gold mines.

Secondary sector: Growth in the secondary sector turned negative
QSecondary sector: Growth in the secondary sector turned negative
since the third quarter, mainly due to a decline in manufacturing
output. The decline in manufacturing was mainly evident in the
subsectors that manufacture petroleum products, chemicals, rubber
and plastic products; basic iron and steel products; and motor
vehicles, parts and accessories. These developments were a
reflection of the strained export market for manufactured goods and
the concurrent impact of households' weaker demand for durable
consumer goods. The contraction in the real value added by the
electricity, gas and water sector in the fourth quarter was largely
due to a decline in the output of electricity, which reflected the
faltering domestic demand and the fact that energy-intensive smelter
operations were terminated on account of the weaker export demand

PRETORIA 00000708 004 OF 007


for South African commodities. The construction sector remained
buoyant in the fourth quarter, benefiting from the upgrading of
existing infrastructure and large projects such as the Gautrain,
power stations, roads, sport stadiums and related infrastructure
developments for the 2010 FIFA World Cup under construction.

Tertiary sector: The slower pace of growth in the tertiary sector
reflected a slowdown in the trade sector. This sector is in a
technical recession following negative growth in the second, third,
and fourth quarters, caused in part by the weakness in trade
volumes, exacerbated by the global crisis, subdued real income, and
higher interest rates that consequently dampened demand. Some of
the fiercest headwinds were faced by the motor trade subsector,
where total new vehicle sales declined by roughly 143,000 units, or
21.1 percent, in 2008. This was the lowest level of annual sales
since 2004. The slower growth in the transport and communication
sector in the fourth quarter was the result of decreasing volumes of
merchandise imports and exports. End Comment.



10. BALANCE ON CURRENT ACCOUNT (R millions)


--------------------------



--------------------------


2008
Q1 Q2 Q3 Q4


--------------------------



--------------------------


Merchandise Exp. 138,082 172,201 178,975 166,501

Net Gold Exports 11,516 11,877 12,351 12,790

Merchandise Imp. 161,474 188,411 204,626 185,341

Income Payments 31,548 29,506 34,270 26,774

Service payment 30,579 36,642 36,438 34,971


--------------------------



--------------------------


Current Account -42,655 -40,375 -52,816 -33,304


--------------------------



--------------------------


Current Account
Deficit/GDP -8.8 -7.3 -7.8 -5.3
(percentage)

Comment: South Africa's current account deficit narrowed to 5.3
percent of GDP in the fourth quarter of 2008, influenced by
developments in the global economy. With global demand waning, the
volume of merchandise exports contracted noticeably in the fourth
quarter of 2008, while at the same time the prices of most export
commodities declined. The weakening of the export performance was
more than countered by a contraction in the value of imports due to
a substantial drop in the international price of crude oil and a
moderation in the domestic demand for imported manufactured goods.
The current account was further supported by lower dividend payments
accruing to non-resident investors on their investments in domestic
securities. Some key South African companies have already announced
no dividend payments in 2009, which could lead to a further decline
in income payments on the balance of payments, and a further
narrowing of the current account deficit. End Comment.



11. BALANCE ON FINANCIAL ACCOUNT (R millions)


--------------------------



--------------------------


2008
Q1 Q2 Q3 Q4


--------------------------



--------------------------


Direct Investment 35,432 3,372 10,765 53,928

Portfolio Investment -21,953 10,733 -11,924 -180,368

Other Investment 38,775 10,198 27,616 54,923


--------------------------



--------------------------


Financial Account 52,254 24,503 26,457 483
QFinancial Account 52,254 24,503 26,457 483


--------------------------



--------------------------



Comment: The inflow of foreign direct investment in the fourth
quarter can mainly be attributed to the acquisition of equity in
South African companies by non-resident investors, which more than
offset a reduction of South African subsidiaries' long-and
short-term loan liabilities against overseas parent companies.
Foreign portfolio investment registered a record quarterly outflow
of capital in the fourth quarter as non-resident investors continued
to reduce their holdings of South African equity and debt
securities. The sell-off of domestic securities followed the
uncertainty in global financial markets surrounding the magnitude of
credit losses in the developed economies. Other investment flows
consisted mainly of short-term foreign loans drawn upon by South
African banks, as well as non-resident investors' foreign-currency
denominated deposits with these banks. End Comment.

PRETORIA 00000708 005 OF 007





12. KEY LABOR MARKET VARIABLES (thousand)


--------------------------



--------------------------


2008
Q1 Q2 Q3 Q4


--------------------------



--------------------------


Employed 13,623 13,729 13,655 13,844
Unemployed 4,191 4,114 4,122 3,873
Total Labor Force 17,814 17,844 17,777 17,718
Not Econ. Active 12,794 12,861 13,024 13,176
Population 15-64 30,608 30,705 30,801 30,894


--------------------------



--------------------------


Unemployment rate 23.5 23.1 23.2 21.9
(percentage)

Absorption rate 44.5 44.7 44.3 44.8
(Employed/population ratio)

Comment: Unemployment in South Africa decreased from 23.5 percent in
the first quarter of 2008 to 21.9 percent in the fourth quarter.
The number of employed persons increased by 221,000 to 13.8 million
during this period. The prospect of slower economic growth 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 0.5 and 1 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)


PRETORIA 00000708 006 OF 007


Comment: The national savings ratio, measured by expressing gross
saving as a percentage of GDP, increased further in 2008. This was
due to an improved saving performance of the corporate sector, while
households' gross savings underpinned the national savings ratio
further. 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 saving 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


--------------------------



--------------------------


Total Revenue 411.2 482.7 559.8 611.1
Total Expenditure 416.8 470.2 541.5 633.9
Budget Balance -5.6 12.5 18.3 -22.8


--------------------------



--------------------------



Budget Balance/GDP -0.4 0.7 0.9 -1.0

Comment: The impact of the weak domestic demand and the global
economic crisis on tax revenues are primarily to blame for the
change in fiscal stance in 2009. However, analysts warned that the
effect of the global crisis on company profits has not yet been
fully reflected in the 2009 revenue numbers. Analysts expect
corporate tax payments to deteriorate further in the 2010 fiscal
year, especially since sectors such as manufacturing and mining,
which have been savaged by the global downturn, loom large in
corporate tax take. The fiscal deficit is expected to increase to
3.9 percent of GDP in 2010. End Comment.



16. GOVERNMENT DEBT (R billions)


--------------------------


Fiscal Year Ending 31 March:
2006 2007 2008 2009


--------------------------



--------------------------


Total Debt 528.3 553.7 577.0 628.7
of Which:
-- Domestic 461.2 470.8 480.6 533.3
-- Foreign 66.8 82.6 96.2 95.2
-- Other debt 0.3 0.3 0.2 0.2


Debt Service Cost 50.9 52.2 52.8 54.3


--------------------------



--------------------------


Government Debt/GDP 33.3 30.6 27.9 27.3
(percentage)

Debt Service Cost/GDP 3.2 2.9 2.6 2.4
(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
Qservice 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 finance
social priorities. 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


PRETORIA 00000708 007 OF 007


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