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Cablegate: Quarterly Review of the South African Economy with Key

VZCZCXRO9120
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1981/01 2741417
ZNR UUUUU ZZH
R 011417Z OCT 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9729
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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

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