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Cablegate: Quarterly Review of the South African Economy with Key

VZCZCXRO7909
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0160/01 0261109
ZNR UUUUU ZZH
R 261109Z JAN 10
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1009
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPARTMENT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 06 PRETORIA 000160

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: Following three consecutive quarters of
contraction, South Africa's GDP resumed positive growth in the third
quarter of 2009. South African exports edged higher in the second
half of 2009, following an improvement in the global economy. As a
result, the deficit on the current account narrowed to 3.2 percent
of GDP in the third quarter of 2009. This deficit was financed
through substantial capital inflows on the financial account, which
added to the increase in foreign reserves and resulted in a strong
rand appreciation. The stronger rand together with an economy
operating below capacity forced price inflation back to within the 3
- 6 percent target range. The response to the cumulative 500 basis
points interest rate reduction between December 2008 and August 2009
was still in the pipeline, outweighed by stricter lending standards
of commercial banks, and deleveraging of balance sheets by
households and companies. The continued deceleration in the growth
of the money supply (M3) and negative growth in domestic credit
extension to the private sector, illustrated the continued financial
pressure on households and companies. Almost 1 million jobs were
lost during the first three quarters of 2009. End Summary.

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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
--------------------------------------------- --------
Sep 8.05 Jan 9.90 May 8.37 Sep 7.52
Oct 9.67 Feb 10.01 Jun 8.05 Oct 7.48
Nov 10.12 Mar 10.00 Jul 7.95 Nov 7.52
Dec 9.95 Apr 9.02 Aug 7.94 Dec 7.50

Trade-Weighted Rand (monthly average; 2000 = 100)
--------------------------------------------- -------
2008 2009
--------------------------------------------- -------
Sep 66.11 Jan 57.07 May 66.49 Sep 70.83
Oct 57.32 Feb 57.66 Jun 67.84 Oct 70.45
Nov 56.61 Mar 57.81 Jul 68.48 Nov 69.63
Dec 56.38 Apr 63.36 Aug 68.52 Dec 69.68

Comment: In 2009, the rand regained most of its 2008 losses and
appreciated by 27 percent against the dollar and 24 percent against
the trade-weighted average exchange rate of the rand. The sharp
improvement in the exchange rate is largely attributable to the
improvement in South Africa's current account deficit, an increase
in the risk appetite of international investors and the subsequent
acquisition of domestic securities, a surge in commodity prices, and
the weakness of the U.S. dollar. The strengthening of the rand will
constrain the competitiveness of South African exporters in
international markets. Analysts believe the rand would remain
strong in the early part of 2010, due to a combination of dollar
weakness as well as an inflow of foreign currency in the run up to
the 2010 FIFA World Cup. End Comment.

3. INFLATION (year-on-year)
----------------------------
2009
Jul Aug Sep Oct Nov
Q Jul Aug Sep Oct Nov
--------------------------------------------- --
CPI 6.7 6.4 6.1 5.9 5.8
PPI -3.8 -4.0 -3.7 -3.3 -1.2

Comment: Inflation slowed against the background of an economy
operating below capacity and a significant appreciation of the rand.
In October 2009, consumer price inflation fell within the 3-6
percent target range for the first time in 30 months. Producer
price deflation contributed to the containment of consumer price
inflation. Analysts expect inflation to rise above six percent in
December 2009 due to base effects. The Monetary Policy Committee's
(MPC's) most recent central inflation forecast projects that
inflation will return to the 3-6 percent inflation target range, on
a sustained basis, by the second quarter of 2010. Inflation is
expected to average 5.7 percent and 5.8 percent in 2010 and 2011,
respectively. End Comment.

4. MONEY AGGREGATES (percentage change year-on-year)

PRETORIA 00000160 002 OF 006


--------------------------------------------- ------
2009
Jul Aug Sep Oct Nov
--------------------------------------------- ----
M1 3.82 4.86 1.15 1.53 2.52
M2 3.75 4.82 2.48 0.87 -1.04
M3 5.70 5.49 4.00 2.67 0.58

Comment: The slowdown in broadly defined money supply (M3) growth
continued to reflect the subdued level of aggregate income, the
relative low return on M3 deposits, lower inflation, and the
deterioration in corporate and household balance sheets. End
Comment.

5. DOMESTIC CREDIT EXTENSION TO THE PRIVATE SECTOR (percentage
change year-on-year)
--------------------------------------------- ------
2009
Jul Aug Sep Oct Nov
--------------------------------------------- ------
3.31 2.34 1.49 -0.42 -1.59

Comment: During the third quarter of 2009, growth in banks' total
loans and advances extended to the private sector turned negative,
an occurrence last seen in the 1960s. Because of monetary lag,
lower interest rates have yet to have their full impact on credit
extension. Meanwhile, commercial banks are imposing stricter
lending standards, and households and companies continue to
deleverage. End Comment.

6. KEY INTEREST RATES (at end of month)
---------------------------------------
2009
Aug Sep Oct Nov Dec
--------------------------------------------- ---------
SARB Repo Rate 7.00 7.00 7.00 7.00 7.00
Prime Overdraft 10.50 10.50 10.50 10.50 10.50
Rate

Comment: The South African Reserve Bank's Monetary Policy Committee
(MPC) started reducing the repo rate in December 2008. By mid-2009,
it had reduced the policy rate by a cumulative total of 450 basis
points. In August 2009, the MPC, mindful of the large output gap,
reduced the repurchase rate by a further 50 basis points to 7
percent, the same level seen at the trough of the previous interest
rate cycle. The MPC left interest rates unchanged at its
September, October, and November meetings, based on its view that
the domestic economic growth should improve in the coming quarters,
while inflation continue its downward trend. Analysts expect
interest rates to remain unchanged until early 2011. 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
Aug 40,380.6 42,361.9 -1,981.2
Sep 45,535.4 41,664.3 3,871.1
Oct 44,088.9 50,797.6 -6,708.7
Nov 45,855.9 48,330.4 -2,474.6
TOTAL (1) 470,366.6 499,546.1 -29,179.4


JAN - NOV 2008
TOTAL (1) 614,558.7 677,455.4 -62,896.7

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

Comment: With the global economy showing signs of recovery, South
African export volumes edged higher while the upward trend in the
QAfrican export volumes edged higher while the upward trend in the
international prices of gold, platinum and other export commodities
gave further support to export revenues in the second half of 2009.
At the same time, the volume of merchandise imports declined
slightly as real GDP inched lower. While a substantially lower
volume of crude oil was imported in the third quarter, this was
partially offset by increases in other imports, including the
acquisition of military aircraft by the government. Analysts expect
export growth to exceed import growth in the first quarter of 2010,
as the global economy and commodity prices continue to recover,

PRETORIA 00000160 003 OF 006


while weak household spending and falling fixed investment activity
will cut into import demand. End Comment.

8. FOREIGN RESERVES ($ billions)
-------------------------------
2009
Jul Aug Sep Oct Nov
--------------------------------------------- ---------
SARB Gross Gold and
Foreign Reserves 35.7 38.0 39.1 39.8 40.5
SARB Net Open Forward
Position 34.7 36.9 37.9 38.8 39.6

Comment: South Africa's gross gold and foreign reserves continued
to rise, boosted mainly by the general allocation of Special Drawing
Rights (SDRs) by the International Monetary Fund (IMF) to its member
countries. The one-off SDR allocations made in August 2009 amounted
to $2.4 billion. [Note: The SDR is an international reserve asset
first created by the IMF in 1969 to supplement existing reserve
assets of IMF member countries. SDRs are mainly held by the
monetary authorities of the IMF member countries, and represent an
unconditional right of a member country to obtain foreign exchange
or other reserve assets from other IMF members in order to deal with
situations involving inadequate international liquidity. End Note].
The narrowing of the current account deficit alongside increasing
capital inflows also added to the increase in foreign reserves. End
Comment.

---------------------
II. QUARTERLY FIGURES
---------------------

9. REAL GROSS DOMESTIC PRODUCT (percent change, seasonally adjusted
and annualized)
--------------------------------------------- ---
2008 2009
Q4 Q1 Q2 Q3
--------------------------------------------- ----
PRIMARY SECTOR 1.7 -23.4 6.0 -7.0
Agriculture 5.6 -3.7 -13.1 -9.8
Mining 0.1 -30.7 15.8 -5.8

SECONDARY SECTOR -12.9 -19.4 -6.9 7.0
Manufacturing -17.4 -25.5 -11.1 7.6
Electricity -0.1 -8.1 1.9 4.2
Construction 6.3 10.7 8.7 6.1

TERTIARY SECTOR 4.2 -0.9 -1.7 0.8
Trade & catering -0.3 -2.4 -5.9 -1.1
Transport & Comm. 1.6 -2.1 -1.0 1.2
Finance 7.5 -2.3 -3.8 -1.5
Government 6.2 2.1 3.1 4.9
--------------------------------------------- ----
TOTAL -0.7 -7.4 -2.8 0.9
--------------------------------------------- ----

Comment: Following three consecutive quarters of contraction, South
Africa's GDP resumed positive growth in the third quarter of 2009.
This improvement was attributable to a decisive recovery in the
secondary sector and a less prominent turnaround in the tertiary
sector. Output in the primary sector declined over the period, but
it was more than offset by the expansion in the other two main
sectors. Analysts expect economic conditions to improve further in
the final quarter of 2009 and throughout 2010.

Primary sector: Agricultural production declined further in the
third quarter, reflecting somewhat smaller field crops, while mining
output also receded as the production of platinum and gold
contracted. Platinum production was strongly affected by strikes
and mine accidents. Apart from the strengthening of the rand, which
Qand mine accidents. Apart from the strengthening of the rand, which
adversely affected the mining sector in general, the gold-mining
sector was also affected by an increase in intermediate expenditure
which more than neutralized the potential benefits of the higher
dollar-dominated gold price. Mining output, however, benefited from
increased output of coal and iron ore in the third quarter. Growing
demand from Eskom contributed to the increase in the production of
coal, while the production of iron ore was largely underpinned by
strong demand from China.

Secondary sector: The turnaround in the secondary sector was led by
improved performance of the manufacturing sector. This was mainly
driven by higher production of basic iron and steel products, motor
vehicles, food, chemicals, and plastic products. Despite the growth
in manufacturing production in the third quarter, output levels

PRETORIA 00000160 004 OF 006


remained repressed and production capacity utilization registered an
average of 77.8 percent in the first three quarters of 2009, having
averaged 83.8 percent in 2008. The increase in electricity, gas and
water production reflected the recovery in the production activities
of electricity intensive mining and manufacturing industries. The
construction sector remained buoyant in the third 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 turnaround in the tertiary sector can mainly
be attributed to increased value added in the transport and
communication and general government subsectors. Output in the
transport sector edged higher, consistent with the higher volume of
exports during the third quarter, while output in the communication
sector increased moderately. The increase in general government
output was due to rising employment levels as part of
countercyclical efforts alongside structural efforts to improve
service delivery. Consistent with the lower disposable income of
households, output of the trade sector remained subdued. The
continued weak levels of credit extension to the private sector and
the residential property market were symptomatic of the weak output
performance in the financial service sector. End Comment.

10. BALANCE ON CURRENT ACCOUNT (R millions)
--------------------------------------------- -------
2008 2009
Q4 Q1 Q2 Q3
--------------------------------------------- -------
Merchandise Exp. 166,501 130,149 120,311 122,426

Net Gold Exports 12,790 12,744 11,871 13,355

Merchandise Imp. 185,341 153,485 124,539 132,126

Income Payments 26,775 24,425 22,209 23,571

Service payment 34,820 31,121 31,443 30,840
--------------------------------------------- -------
Current Account -30,827 -33,068 -20,824 -24,238
--------------------------------------------- -------
Current Account
Deficit/GDP -5.4 -6.7 -3.4 -3.2
(percentage)

Comment: The moderate pick-up in international trade following
strong contractions since the final quarter of 2008 led to an
increase in the value of merchandise exports and had a positive
impact on South Africa's trade account. However, the larger trade
surplus was partly neutralized by an increase in service, income and
current transfer payments to the rest of the world, causing the
deficit on the current account as a percentage of GDP to narrow only
slightly from 3.4 percent in the second quarter to 3.2 percent in
the third quarter. The current account deficit is now at its
lowest level since the second quarter of 2005. The smaller
shortfall on the current account makes South Africa less dependent
on capital inflows and reduces the rand's vulnerability to swings in
global risk appetite. Analysts foresee the current account to stay
at its current levels in the near future. Although the current
account deficit might deteriorate lightly from the second quarter of
2010 as imports start to pick up on the back of a domestic spending
recovery, increased service receipts from the influx of tourists
Qrecovery, increased service receipts from the influx of tourists
related to 2010 FIFA World Cup should help to limit the damage. End
Comment.

11. BALANCE ON FINANCIAL ACCOUNT (R millions)
--------------------------------------------- ---------
2008 2009
Q4 Q1 Q2 Q3
--------------------------------------------- ---------
Direct Investment 45,941 13,642 21,222 4,785

Portfolio Investment-111,675 9,054 29,259 22,644

Other Investment 60,881 -9,044 -22,930 13,280
--------------------------------------------- ---------
Financial Account -4,853 13,652 27,551 40,709


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

Comment: The deficit on the current account was financed through
increased capital inflows on the financial account of the balance of

PRETORIA 00000160 005 OF 006


payments. The surplus on the financial account was mainly due to a
significant raise in portfolio investor's holdings of South African
equities due to improved international appetite for investment in
emerging-market economies. The cumulative inflow of portfolio
investment during the first three quarters of 2009 was R66.0
billion, compared with an outflow of R71.5 billion recorded in 2008
as a whole. End Comment.

12. KEY LABOR MARKET VARIABLES (thousand)
--------------------------------------------- --------
2008 2009
Q4 Q1 Q2 Q3
--------------------------------------------- --------
Employed 13,844 13,636 13,369 12,885
Unemployed 3,873 4,184 4,125 4,192
Total Labor Force 17,718 17,820 17,495 17,077
Not Econ. Active 13,176 13,166 13,585 14,095
Population 15-64 30,894 30,987 31,080 31,172
--------------------------------------------- --------
Unemployment rate 21.9 23.5 23.6 24.5
(percentage)

Absorption rate 44.8 44.0 43.0 41.3
(Employed/population ratio)

Comment: The unemployment rate in South Africa increased from 23.6
percent in the second quarter of 2009 to 24.5 percent in the third
quarter of 2009. The number of jobs lost in the first three
quarters of 2009 totals 959,000. Job losses were broad-based and
occurred in both the formal and the informal sectors of the economy.
Analysts expect more job shedding until the first quarter of 2010.
End Comment.

-------------------
III. ANNUAL FIGURES
-------------------

13. NATIONAL BUDGET (R billions)
---------------------------------
Fiscal Year Ending 31 March:
2006 2007 2008 2009
--------------------------------------------- -------
Total Revenue 411.2 482.7 559.8 608.8
Total Expenditure 416.8 470.2 541.4 635.8
Budget Balance -5.6 12.5 18.3 -27.0
--------------------------------------------- -------

Budget Balance/GDP -0.3 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 FY2009. 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 about 8.0 percent of GDP in FY2010.
End Comment.

14. 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 32.6 28.6 24.0 22.4
(percentage)

Debt Service Cost/GDP 3.2 2.8 2.5 2.3
(percentage)

Comment: The SAG continued to finance its borrowing needs mostly
QComment: The SAG continued to finance its borrowing needs mostly
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 41.0 percent of GDP in
FY2013 to finance the projected budget deficits over the next three
years. Debt service costs have shown a steadily declining trend

PRETORIA 00000160 006 OF 006


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 run a large deficit in FY2010 and maintain infrastructure
spending to counteract the effects of the economic crisis. National
Treasury expects debt service cost to increase from R54 billion (2.3
percent of GDP) in FY2009 to almost R100 billion (3.2 percent of
GDP) in FY2013. 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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