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Cablegate: Agoa Eligibility Review

DE RUEHSA #2091/01 2871246
R 141246Z OCT 09




E.O. 12958: N/A

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.

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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
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

- Many government departments and agencies suffer severe capacity
constraints, at times impeding or complicating program

- The economy is hampered by severe skills shortages in most

- 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

- 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

- 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

- 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

- 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

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

- 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

- 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

- Child labor remains a problem in the informal and agricultural
sectors, partly fueled by the impact of HIV/AIDS on adult wage

- 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

- 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

- 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

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- 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

- 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.


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