QUARTERLY REVIEW OF THE SOUTH AFRICAN ECONOMY WITH KEY

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 LA LIME