Economy and Trade
South Africa is the superpower on the African continent. It has by far the largest economy in Africa, with strong financial and manufacturing sectors, and an abundant supply of resources (such as platinum, gold, and coal). The country has a large agricultural sector, and is a net exporter of food products. South Africa is a popular tourist destination, and tourism is a key source of foreign exchange. The country also has an advanced infrastructure, and one of the world’s leading stock exchanges. But there are sharp disparities in wealth, which appear to be worsening. The proportion of the population living in severe poverty doubled in the decade to 2007. Unemployment is high, and the crime rate is one of the worst in the world—an average of 50 murders take place per day. South Africa also has the second-highest number of HIV/Aids patients in the world. Around one in seven of its citizens is infected with HIV. The United States, Europe, and Japan account for around 60% of the country’s exports.
Economic Policy over 12 Months
The South African government’s main economic objectives are to accelerate growth, and reduce unemployment and poverty within a stable macroeconomic environment. Within this overall goal, the government’s Accelerated and Shared Growth Initiative for South Africa (ASGISA) seeks to overcome constraints on growth, and aims to achieve average growth rates of at least 4.5% between 2005 and 2009, and 6% between 2010 and 2014, with the aim of halving the unemployment and poverty rates from 2004 levels by 2014.
The government has pursued trade liberalization and privatization as part of its attempts to overcome constraints on growth. The government is also planning to increase spending on infrastructure projects, as a means of eliminating bottlenecks and speeding growth. Fiscal policy aims to stabilize the budget balance around a chosen structural target; the government has generally achieved a budget close to balance in recent years, and has used any surpluses to pay down the public debt. South Africa’s public debt stood at 23% of GDP at the end of 2008, down from 48% in 1996.
The government recorded a budget surplus of 0.9% of GDP in 2007–2008, the second surplus in a row, reflecting a large increase in tax revenue, owing to strong economic activity over most of the period, and continued collection efforts. However, the country is expected to record a surplus of just 0.1% of GDP in 2008–2009, according to independent economists, reflecting the slowdown in growth and revenues.
Overall, the government is well placed to adopt countercyclical fiscal measures to offset the impact of the global slowdown on the economy, a policy it adopted for the 2009–2010 budget, when it expects the deficit to increase to 3.8% of GDP. The government plans to reduce the shortfall to 1.9% by 2011–2012. Much of the increased spending in 2009–2010 will be focused upon a US$81 billion investment package to build infrastructure, create jobs, and prepare to host the 2010 football World Cup. But with tax revenues falling, the government will be obliged to borrow, and it may have difficulty raising all the funds it needs, given the turbulence in global financial markets.
In 2008, the government announced plans to reform the social-security regime, with the introduction of a mandatory multi-pillar scheme covering old-age pensions, unemployment insurance, and death and disability benefits. The scheme, to be introduced in 2010, will be funded by a payroll tax, while the budget will separately provide a wage subsidy for low earners, to partly offset the associated increase in labor cost.
The central bank began loosening monetary policy in December 2008, in response to an improved inflation outlook, and weakening growth. By March 2009, the main interest rate had fallen by 150 basis points. Yet for much of 2008, the government was focused on reducing inflation to within its 3–6% target. Annual inflation reached 13% in July 2008, driven by rising global food and fuel prices, and demand pressures.
The central bank raised its policy interest rate by 300 basis points between June 2007 and June 2008, to 12%. However, rates remained on hold until the December cut as the economy weakened, and inflation subsided. By March 2009, the policy rate stood at 10.5%, with further cuts anticipated unless the rand depreciates significantly. The central bank maintains a flexible exchange rate, with a publicly announced policy of purchasing foreign exchange on the market only to bolster its reserve position.
Economic Performance over 12 Months
Up until the second half of 2008, the South African economy had enjoyed healthy economic growth over the past decade. Growth had accelerated from 2003 onwards, supported by buoyant prices for key commodity exports. During the four years ending in 2007, economic growth averaged more than 5%. However, the slump in global growth and commodity prices in the second half of 2008 has affected the economy. Growth fell to 0.2% in the third quarter, from 5% in the second quarter, and the economy contracted by 1.8% in the final three months of the year. Overall, the economy expanded by 3.1% in 2008, down from 5.1% in the previous year.
The economy deteriorated further in 2009. Bloomberg reported in March 2009 that manufacturing had “probably” fallen at its steepest rate in more than 16 years in January, as export demand plummeted, forcing factories to scale back and lay off workers. Manufacturing production had dropped by 8% in January from the previous year, after contracting by 7% in the previous month, according to the median estimate of six economists surveyed by Bloomberg. In a further sign of the weakness of the economy, vehicle sales plunged 36% in February 2009 from a year earlier, the biggest decline seen in 25 years. All the data suggest that, in 2009, South Africa will experience its first recession in 17 years.
In February 2009, finance minister Trevor Manuel said that the government expected growth to improve in 2010, supported by public infrastructure spending, lower interest rates, the 2010 FIFA World Cup, and a recovery in the world economy. “But trading conditions are tough, and are likely to deteriorate further in the short term,” said Manuel, who, according to The Economist (February 12, 2009), “has gained an almost mythical status for competence and integrity among foreign investors.”
The strong economic growth of recent years has had a positive impact on employment levels. The official jobless rate fell to 21.9% in the fourth quarter of 2008, from 23.2% in the previous quarter. However, unemployment is likely to rise in 2009, as manufacturers and mining firms lay off workers in response to weak demand.
The economic slowdown is having a positive impact on inflation, which fell to an annual rate of 8.1% in January 2009, from 9.5% in December 2008. Inflation would have fallen by more but for rising import prices, reflecting the 22% fall in the value of the rand against the dollar in the preceding six months, according to the statistics office.
The current account should also improve in 2009 on the back of lower economic growth, according to the National Treasury. It anticipates that the current account deficit will narrow to around 6% of GDP, from 8.1% in 2008, as import growth slows, and international investors receive smaller dividend payments.
Support for Inward Investment and Imports
South Africa has made great progress in dismantling its old economic system, which was based on import substitution, high tariffs and subsidies, anticompetitive behavior, and extensive government intervention in the economy, according to a US State Department report published in January 2009. The government’s role in the economy has been reduced, and the authorities have sought to promote private-sector investment, and competition. The government has significantly reduced tariffs and export subsidies, loosened exchange controls, cut the secondary tax on corporate dividends, and improved enforcement of intellectual-property laws.
The Department of Trade and Industry provides a one-stop shop for investors, offering a variety of services to those interested in conducting business in South Africa, including investing, and importing goods into the country.
Tax Exemptions
The Tax Exemption Unit of the South African Revenue Service can provide information on all the exemptions the country offers.
Statistics
GDP growth: 3.1% (2008, government figures)
GDP per capita: US$10,400 (2008, est.)
CPI: 8.1% (January 2009, government figures)
Key interest rate: 10.5% (March 2009)
Exchange rate versus dollar: rand per US dollar—7.9576 (2008, est.)
Unemployment: 21.9% (Q4 2008)
FDI: US$99.61 billion (2008, est.)
Current-account deficit/surplus −US$21.67 billion (2008, est.)
Population: 48,782,756
Source: CIA World Factbook except where stated
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