Country Report

South Africa

South Africa at a glance: 2006-07

OVERVIEW The ruling African National Congress (ANC) is expected to maintain its overwhelming hegemony during the forecast period. However, the party and its leadership will be preoccupied with maintaining party unity and an orderly process of electing a successor to as ANC president at the party’s national congress in December 2007. Economic policy will continue to focus on increasing economic growth and investment in order to create employment. Assuming a sound mix of fiscal and monetary policy combined with public- sector wage moderation, weaker administered prices and lower private-sector unit labour costs (owing to productivity gains), the Economist Intelligence Unit expects inflation to remain within the central bank’s target range of 3-6% in 2006-07. Over the forecast period the rand is expected to depreciate gently, owing to lower commodity prices and the rising deficit on the current account, to average R6.55:US$1 in 2006, before falling further, to R6.75:US$1, in 2007. Fairly strong global demand will help to boost exports, but higher imports will ensure that the current account remains in deficit of just under 4% of GDP in 2006, although this should narrow to 3.6% of GDP in 2007.

Key changes from last month Political outlook • The former deputy president of South Africa, , who was at one time expected to be the next leader of the country, has been charged with rape. Although Mr Zuma’s many supporters within the ANC and its allies stood by him as he was charged with corruption in June, his support has fallen rapidly since the rape allegations first emerged at the end of November. Economic policy outlook • There is no change in economic policy outlook from last month. Economic forecast • Revised real GDP figures indicate that the economy has grown more rapidly and is larger than had previously been estimated; growth for 2005 is now estimated to rise by 5%, from 4.5% in 2004—the best performance since 1984. Further growth in construction and continued expansion in total domestic demand is expected to drive real GDP growth of 4.8% in 2006 and a slightly higher 5.1% in 2007. December 2005

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South Africa 1

Contents

South Africa

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 10 Economic forecast

14 The political scene

21 Economic policy

26 The domestic economy 26 Economic trends 28 Agriculture 29 Mining 31 Manufacturing 32 Energy 33 Mining 33 Telecommunications

33 Foreign trade and payments

List of tables 10 International assumptions summary 10 Gross domestic product by expenditure 13 Forecast summary 19 Parliamentary parties: impact of floor-crossing 22 Revenue and expenditure: fiscal years (Apr-Mar) 25 Business environment 27 Gross domestic product 28 Inflation as measured by CPIX 34 Foreign direct investment inflows into Sub-Saharan Africa

List of figures 13 Gross domestic product 13 Consumer price inflation 24 Total land area, 2005 26 Real GDP growth

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

South Africa 3

South Africa December 2005 Summary

Outlook for 2006-07 The ruling African National Congress (ANC) is expected to maintain its overwhelming hegemony during the forecast period. However, the party and its leadership will be preoccupied with maintaining party unity and an orderly process of electing a successor to Thabo Mbeki as ANC president at the party’s national congress in December 2007. Economic policy will continue to focus on increasing economic growth and investment in order to create employment. Underpinned by fairly firm global demand and strong domestic demand, real GDP is forecast to rise by 4.8% in 2006 and 5.1% in 2007. Fairly strong global demand will help to boost exports, but higher imports will ensure that the current account remains in deficit of just under 4% of GDP in 2006, although this should narrow to 3.6% of GDP in 2007.

The political scene The former deputy president of South Africa, Jacob Zuma, who was at one time expected to be the country’s next leader, has been charged with rape. His support from within the ANC and its allies when charged with corruption in June has fallen rapidly since the rape allegations emerged. The amalgamation of South Africa’s three politically non-aligned trade union federations should take place by July 2006, resulting in the country’s second largest trade union.

Economic policy The revised medium-term expenditure framework has reinforced the government’s commitment to responsible fiscal management while increasing spending on infrastructure, social services and socio-economic “upliftment” programmes. The Treasury has also continued to loosen capital controls. Plans to accelerate the government’s land reform programme have been announced.

The domestic economy Revised real GDP figures indicate that the economy has grown more rapidly and is larger than had previously been estimated, and growth for 2005 is now estimated to rise by 5%, from 4.5% in 2004—the best performance since 1984. Inflation has eased somewhat owing to a gradual slowdown in the growth of consumer credit and a moderate reduction in consumer spending. The UK- based Vodafone Group has increased its stake in Venfin from 35% to 50%.

Foreign trade and payments Recent UN data indicate that foreign direct investment inflows to South Africa fell in 2004 but are expected to be boosted by a number of deals, including that of Vodafone and the Barclays-ABSA transaction. Pressure from the South African Textile Federation, as well as from unions, to invoke World Trade Organisation safeguards against cheap imports from China has increased. Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: December 8th 2005 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 South Africa

Political structure

Official name Republic of South Africa

Form of state A federal state, consisting of a national government and nine provincial governments

Legal system Based on Roman-Dutch law and the 1996 constitution, in force since February 4th 1997

National legislature Bicameral parliament elected every five years, comprising the 400-seat National Assembly and the 90-seat National Council of Provinces

Electoral system List system of proportional representation based on universal adult suffrage

National elections April 14th 2004; the next election is to be held in 2009

Head of state President, elected by the National Assembly; currently Thabo Mbeki; under the constitution, the president is permitted to serve a maximum of two five-year terms; Mr Mbeki is serving his second term

National government African National Congress

Main political parties The African National Congress (ANC) is the governing party with the support, in a tripartite alliance, of the smaller South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU); other parties include the Democratic Alliance (DA), the (Inkatha or IFP), the Independent Democrats (ID), the United Democratic Movement (UDM), the (FF+), the African Christian Democratic Party (ACDP), the Pan Africanist Congress (PAC) and the National Democratic Convention (Nadeco).

President Thabo Mbeki (ANC) Deputy president Phumzile Mlambo-Ngcuka (ANC)

Key ministers Agriculture & land affairs Thokozile Didiza (ANC) Communications Ivy Matsepe-Casaburri (ANC) Defence (ANC) Education (ANC) Finance (ANC) Foreign affairs Nkosazana Dlamini-Zuma (ANC) Health Manto Tshabalala-Msimang (ANC) Home affairs Nosiviwe Mapisa-Nqakula (ANC) Housing (ANC) Justice & constitutional development (ANC) Labour (ANC) Minerals & energy (ANC) Provincial & local government (ANC) Public enterprises (ANC) Safety & security (SACP) Trade & industry Mandisi Mpahlwa (ANC) Transport (ANC)

Central bank governor

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Economic structure

Annual indicators 2001a 2002a 2003a 2004a 2005b GDP at market prices (R bn) 1,019.9 1,168.8 1,257.0 1,386.7 1,514.2 GDP (US$ bn) 118,242 111,113 166,356 215,052 238,452 Real GDP growth (%) 2.7 3.7 3.0 4.5 5.0 Consumer price inflation (av; %) 6.6 9.3 6.8 4.3 4.0 Population (m)c 42.6 42.7 42.8 42.7 42.6 Exports of goods fob (US$ m) 31,064 31,771 38,581 48,431 51,587 Imports of goods fob (US$ m) -25,809 -27,015 -35,296 -48,545 -52,059 Current-account balance (US$ m) 153.0 731.0 -2,605.0 -6,982.0 -8,436.2 Foreign-exchange reserves excl gold (US$ m) 6,045.0 5,904.0 6,496.0 13,141.0 18,276.9 Total external debt (US$ bn) 24.0 25.0 27.8 28.7b 30.0 Debt-service ratio, paid (%) 11.3 12.1 8.7 7.2b 7.2 Exchange rate (av) R:US$ 8.63 10.52 7.56 6.45 6.35 a Actual. b Economist Intelligence Unit estimates. c UN estimates.

Origins of gross domestic product 2004a % of total Components of gross domestic product 2004 % of total Agriculture, forestry & fishing 3.6 Private consumption 63.3 Mining & quarrying 7.1 Public consumption 19.6 Manufacturing 20 Gross domestic fixed investment 17.7 Construction 2.5 Change in stocksa 1.2 Electricity, gas & water supplies 2.3 Exports of goods & services 26.6 Financial services 20.1 Imports of goods & services -28.4

Principal exports 1997 US$ bn Principal imports 1997 US$ bn Metals & metal products 6.3 Machinery & appliances 8.9 Gold 5.6 Mineral products 3.7 Diamonds 2.9 Chemicals 3.4 Machinery & transport equipment 2.6 Transport & equipment 1.7

Main destinations of exports 2004 % of total Main origins of imports 2004 % of total US 10.1 Germany 13.5 UK 9.1 US 8 Japan 8.8 UK 7.2 Germany 7 Japan 6.5 a Includes residual item.

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Quarterly indicators 2003 2004 2005 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Central government finance (R m) Revenue & grants 77,256 80,441 74,077 82,498 91,234 99,969 88,581 103,288 Expenditure 73,677 92,950 93,641 93,841 82,836 104,416 101,319 107,452 Balance 3,579 -12,509 -19,564 -11,343 8,398 -4,447 -12,738 4,164 Output GDP at constant 2000 prices (R bn) 258.47 250.72 264.41 268.13 273.52 264.48 277.35 281.23 Manufacturing index (2000=100)a 104.6 107.6 109.0 111.4 111.5 110.3 113.9 116.0 Durable goods 106.6 109.0 109.3 102.2 111.7 n/a n/a n/a Non-durable goods 102.7 105.5 108.8 110.4 110.0 n/a n/a n/a Employment & pricesa Employment, private (2000=100) Mining 104.8 108.7 110.1 110.1 109.5 108.6 n/a n/a Manufacturing 96.8 97.6 97.6 98.9 96.8 94.3 n/a n/a Construction 130.0 120.1 122.6 125.8 128.3 127.0 n/a n/a Consumer prices (2000=100) 125.8 128.1 129.5 130.1 131.3 132.5 134.3 136.0 Consumer prices (% change, year on year) 4.2 4.5 4.6 3.9 4.4 3.4 3.7 4.6 Production prices (2000=100) 124.7 124.9 127.0 127.6 127.4 126.8 129.7 132.8 Production prices (% change, year on year) -2.0 -1.2 0.8 1.1 2.1 1.5 2.2 4.1 Financial indicators Exchange rate R:US$ (av)b 6.74 6.77 6.60 6.38 6.05 6.00 6.40 6.51 Exchange rate R:US$ (end-period)b 6.70 6.32 6.23 6.48 5.65 6.22 6.67 6.35 M2 (end-period; R bn) 712.8 726.0 730.2 762.1 818.7 836.6 876.5 927.0 M2 (% change, year on year) 19.3 22.1 16.4 22.1 14.9 15.2 20.0 21.6 Deposit rate (av; %) 6.9 6.7 6.9 6.5 6.0 6.1 6.0 5.9 Lending rate (av; %) 11.8 11.5 11.5 11.2 11.0 11.0 10.5 10.5 Money market (av; %) 8.0 7.3 7.3 7.1 6.9 6.9 6.5 6.5 Long-term gov bond yield (av; %) 9.2 9.4 10.2 9.7 8.8 8.1 8.3 8.0 JSE, all items (Dec 1960=100) 10,387 10,693 10,109 11,761 12,657 13,299 14,155 16,433 JSE, all items (% change, year on year) 12.0 39.2 21.0 31.8 21.9 24.4 40.0 39.7 Gold mining share prices (2000=100) 257.8 260.3 202.3 195.4 206.7 177.9 173.9 199.1 Gold mining share prices (% change, year on year) -9.3 -5.9 -10.6 -22.4 -19.8 -31.6 -14.1 1.9 Sectoral trends (2000=100)a Gold mining (volume of production) 84.6 81.4 79.8 78.9 76.8 73.5 70.5 66.7 Other mining (volume of production) 118.0 119.9 119.1 126.1 119.8 130.1 131.1 130.9 Retail sales, volume 119.7 112.3 118.2 122.6 125.7 123.4 126.9 n/a Foreign trade (US$ m) Exports fob 9,765 10,047 11,121 11,683 13,357 11,768 13,726 13,293 Net gold exports 1,314 n/a n/a n/a n/a n/a n/a n/a Imports fob -9,691 -9,384 -11,965 -12,290 -13,862 -12,544 -13,870 -14,527 Trade balance 74 663 -844 -607 -505 -775 -144 -1,234 Balance of payments (US$ m) Merchandise trade balance fob 343 857 -109 -148 -714 -218 n/a n/a Services balance -68 18 -505 -339 -214 -37 n/a n/a Income balance -1,064 -878 -1,197 -1,112 -1,157 -1,092 n/a n/a Net transfer payments -177 -271 -426 -417 -372 -466 n/a n/a Current-account balance -966 -274 -2,237 -2,016 -2,457 -1,813 n/a n/a Reserves excl gold (end-period) 6,496 8,271 9,775 10,669 13,141 14,149 16,917 17,627 a Seasonally adjusted. Sources: South African Reserve Bank, Quarterly Bulletin; Statistics South Africa; IMF, International Financial Statistics.

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Outlook for 2006-07

Political outlook

Domestic politics The ruling African National Congress (ANC) is expected to maintain its overwhelming hegemony during the forecast period, but the party will battle to contain the fallout unleashed by the dismissal of Jacob Zuma as deputy president in June 2005 following a damning verdict in the fraud trial of Schabir Shaik, his financial adviser, with whom Mr Zuma was found to be in a “generally corrupt relationship”. The ANC and its leadership will be pre- occupied with maintaining party unity, the tripartite alliance with the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU), and an orderly process of electing a successor to Thabo Mbeki as ANC president at the party’s national congress in December 2007. With Mr Zuma no longer appearing as a credible candidate for the presidency, and Mr Mbeki’s ability to play a strong role in influencing the choice of his successor having been dented, there could be a major power struggle within the party between the supporters of Mr Mbeki and his technocratic approach to government and the populist faction on the left, the outcome of which could determine whether the SACP decides to contest the 2009 national and provincial elections in its own right. However, strenuous attempts are likely to be made to find a compromise candidate. Mr Mbeki (whose term of office as state president expires in 2009) nevertheless still has the power to influence the direction of South African democracy. In addition, the president’s decision on the future of the elite investigating unit, the Scorpions, following the completion in early 2006 of a report of a commission of inquiry, will be a significant pointer to future trends. Any decision to weaken the Scorpions would send negative signals to the international community, particularly to foreign investors, and damage South Africa’s credibility as the perceived leader in promoting clean and democratic government in Sub- Saharan Africa. Despite these tensions, the alliance is unlikely to fragment in the forecast period. However, the ANC could well accede to opposition requests to abolish the floor-crossing mechanism in an attempt to pre-empt defections and the formation of a new leftist party during the next floor-crossing period (possibly between September 2006 and April 2008), or else simply not activate the mechanism. The municipal elections in early 2006 will result in a comfortable victory for the ANC, although civic organisations might gain ground at the polls on the strength of widespread dissatisfaction with the government’s failure to provide services, particularly to poor urban areas. The ANC is likely to pay more attention to service delivery and poverty alleviation in an attempt to contain this dissatisfaction.

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The opposition parties will remain weak and fragmented. Because the ruling party is such a broad church, it has been difficult for opposition parties to establish an identity that is both credible and distinct from the ANC. Opportunism and personality clashes have also played into the hands of the ANC, increasing its electoral majority and leading increasingly to a virtual one- party state. The ANC will continue to ignore the opposition parties, thus emasculating the operation of multiparty democracy. Meanwhile, the playing- field will become increasingly uneven: as black economic empowerment (BEE) takes hold among major companies and in the press it will become increasingly difficult for opposition parties to obtain funding and coverage. In addition, the ANC will continue to conflate state and party, and state-owned media and public funds will be used to boost its electoral image. Although there are insignificant policy differences between the major opposition parties, only a credible new black leader could broker the formation of a larger unified opposition party. This is unlikely to occur in the forecast period.

The. International relations South Africa’s foreign policy will continue to be shaped by the objectives of the New Partnership for Africa’s Development (Nepad), an ambitious pan-African development initiative championed by Mr Mbeki. It will maintain a high level of commitment to any new round of global trade talks, in which it will ostensibly seek to champion the interests of poor African countries. In addition, Mr Mbeki will seek to strengthen and expand South Africa’s ties with Asia and the Middle East, as shown by the leading role that the country took in setting up the New Asian-African Strategic Partnership in April 2005. The crisis in Zimbabwe will continue to be the major foreign policy issue for South Africa. Mr Mbeki has used up a considerable amount of time and personal credibility in trying to solve Zimbabwe’s political crisis via “quiet diplomacy”—an approach that has proved to be a dismal failure. However, it now appears that Mr Mbeki has decided that the time is right to take a much firmer line towards the mounting problems of its northern neighbour. It is not clear why the South African government has shifted its position, but this may reflect growing international pressure on Mr Mbeki, notably at the summit in Scotland in July of the leaders of the world’s eight leading economies (G8), and the decision of Zimbabwe’s president, Robert Mugabe, to decline South Africa’s offer of a loan of up to US$500m to partially meet the country’s debt to the IMF in return for increased political dialogue and economic reform. Even if the country’s mounting economic crisis forces Mr Mugabe to accept some South African conditions in return for financial support, the possibility of rapid progress towards resolving the country’s political crisis is unlikely.

Economic policy outlook

Policy trends Economic policy over the forecast period will continue to focus on increasing economic growth and investment in order to create new employment. The government’s objectives in the revised medium-term economic programme, designed to halve unemployment, accelerate growth and substantially reduce poverty, remain essentially unchanged. The spotlight will remain in particular on the expansion of infrastructure, education, health, stronger economic

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growth, the reform of labour legislation and the promotion of BEE. The government will remain committed to the mixed economy and there will be no radical departure from its conservative fiscal stance of recent years. However, it will restrict full privatisation to non-core state assets while retaining majority shareholdings in the key parastatals concerned with transport, energy and defence, at least in the medium term. The government’s aim will be to boost the efficiency of state-owned enterprises through public-private partnerships and perhaps the partial listing of some parastatals, but implementation could be slow in the face of fierce trade union opposition.

Fiscal policy Budgetary revenue for the current fiscal year 2005/06 (April-March) is now estimated to be R30.2bn (US$4.5bn) higher than forecast in the February budget, at R400.1bn, owing largely to stronger than expected economic growth and further strong growth in domestic revenue. In contrast, the expenditure target for 2005/06 has been scaled back slightly from its original target of R417.8bn (an increase of 13.4% on the previous year) to R415.8bn (an increase of 12.8%), owing mainly to lower debt-service costs. This should result in a lower budget deficit of 1% of GDP, compared with the original target of 3.1% of GDP. According to the government’s forecasts, the fiscal deficit is expected to remain well below the psychological 3% of GDP over the next three years, increasing to 2.2% of GDP in 2006/07 before easing to 2% of GDP in 2008/09. Fiscal revenue is forecast to rise to R437bn in 2006/07, R479bn in 2007/08 and R527.2bn in 2008/09 as real GDP growth boosts domestic revenue. Expenditure is also projected to increase rapidly, to R474bn in 2006/07, with capital spending set to increase from 5.6% of GDP in 2005/06 to 6.7% of GDP in 2007/08, reflecting largely increased investment for the key infrastructure parastatals, Eskom, Telkom and Transnet. Higher social spending will include additional funding for new housing programmes, community infrastructure, education, health and welfare. Overall, the Economist Intelligence Unit now expects the fiscal deficit to edge up from an estimated 1% of GDP in 2005 to 2.1% of GDP in 2006 and to 2.2% of GDP in 2007 (calendar years). A budget deficit of this size will be easily funded through a mixture of foreign and domestic debt.

Monetary policy Monetary policy will remain focused on containing inflation, as measured by CPIX (consumer prices excluding mortgage costs), within the official target range of 3-6% per year set by the South African Reserve Bank (SARB, the central bank). The decision of the SARB’s Monetary Policy Committee (MPC) to leave the repurchase (repo) rate unchanged at 7% at its meeting on October 12th-13th was based mainly on the threat to inflation posed by rising oil prices. With inflation being lower than official expectations, the MPC is highly likely to leave rates unchanged when it meets on December 7th-8th. If oil prices rise and demand for consumer credit remains robust, the prospect of an interest-rate rise in the first half of 2006 will become increasingly likely. Signs of inflationary pressure arising from higher prices and recent wage increases (stemming from the recent spate of industrial action by services and industrial sectors) will remain key to the MPC’s future monetary policy response. The MPC is expected to pursue a tighter monetary policy in 2007.

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Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2004 2005 2006 2007 Real GDP growth World 5.0 4.3 4.0 3.9 OECD 3.3 2.5 2.3 2.4 EU25 2.4 1.6 1.9 2.2 Exchange rates ¥:US$ 108.1 110.1 113.8 104.5 US$:€ 1.244 1.242 1.245 1.338 SDR:US$ 0.675 0.677 0.682 0.653 Financial indicators € 3-month interbank rate 2.13 2.13 2.31 3.13 US$ 3-month Libor 1.62 3.64 5.27 5.02 Commodity prices Oil (Brent; US$/b) 38.5 56.0 56.0 46.8 Gold (US$/troy oz) 409.5 440.0 457.5 430.0 Food, feedstuffs & beverages (% change in US$ terms) 8.6 -1.0 -3.6 -0.7 Industrial raw materials (% change in US$ terms) 21.0 5.8 -6.3 -8.8 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

With estimated growth of a still respectable 4.3% in 2005, the world economy (measured at purchasing power parity) is expected to continue to slow, to 4% in 2006 and 3.9% in 2007. The US Federal Reserve will continue to tighten monetary policy by raising short-term interest rates into 2006. Modest growth in South Africa’s main trading partner, the EU25, of 1.9% in 2006 and 2.2% in 2007 will continue to support export volumes but make rapid growth difficult. Prices for the country’s key exports, gold and platinum, will remain high. The average price of Brent crude is now expected to ease slightly, from a high US$55.97/barrel in 2005 to US$56.0/b in 2006 and US$46.8/b in 2007 as global supply improves and demand slows.

Economic growth Gross domestic product by expenditure (R m at constant 2000 prices; % change year on year in brackets unless otherwise indicated) 2004 a 2005 b 2006 c 2007 c Private consumption 680 737 785 841 (6.1) (8.3) (6.5) (7.1) Public consumption 205 225 247 271 (7.2) (9.5) (9.8) (9.6) Gross fixed investment 179 198 211 227 (9.4) (10.9) (6.6) (7.6) Final domestic demandd 1,064 1,160 1,243 1,339 (6.8) (9.0) (7.2) (7.7) Stockbuilding 11 3 2 2 (0.2) e (-0.8) e (-0.1) e (0.0) e Total domestic demand 1,076 1,163 1,245 1,341 (7.0) (8.1) (7.1) (7.7)

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Gross domestic product by expenditure (R m at constant 2000 prices; % change year on year in brackets unless otherwise indicated) 2004 a 2005 b 2006 c 2007 c Exports of goods & services 268 280 289 300 (2.9) (4.5) (3.2) (3.8) Imports of goods & services 296 330 368 415 (12.9) (11.4) (11.6) (12.8) Foreign balance -28 -49 -78 -114 (-2.6) e (-2.0) e (-2.6) e (-3.1) e GDPf 1,057 1,110 1,163 1,222 (4.5) (5.0) (4.8) (5.1) a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Statistical discrepancy included in total domestic demand, as recorded in South African Reserve Bank, Quarterly Bulletin. The sum of components may not equal real domestic demand for all years. e Contribution to real GDP growth. f Statistical discrepancy included in total GDP, as recorded in South African Reserve Bank, Quarterly Bulletin. The sum of components may not equal real GDP.

Revised data released by Statistics South Africa indicate that real GDP growth since 2002 has been higher than previously estimated. The seasonally adjusted rate was 4.2% per year in the third quarter of this year, down from the revised 5.4% recorded in the second quarter. The performance has been better than had generally been expected, and was spurred mainly by a reversal of the decline in the manufacturing sector (which benefited from a weakening in the exchange rate) and high consumer spending. For the year, the growth rate is now estimated to rise by a higher 5%. Economic prospects are expected to remain favourable for the forecast period. Further growth in construction and continued expansion in total domestic demand is expected to drive real GDP growth of 4.8% in 2006 and a slightly higher 5.1% in 2007. In terms of domestic demand, private consumption in particular should benefit from structurally lower levels of inflation, a steady rise in employment opportunities and a more stable interest-rate environment, all of which will support growth in real disposable incomes. Real government consumption growth, which has until recently been held back by the authorities’ tight budgetary controls, will remain positive during the forecast period. Public spending (mainly on infrastructure and social services), combined with ambitious infrastructure investment in core state assets, will provide the stimulus for investment and boost the construction industry. Foreign direct investment is expected to continue to post positive growth rates over the forecast period, but this assumes tangible progress with the sale of state assets. Exports of goods and services are showing a rising trend, which is forecast to continue in 2006-07, underpinned by fairly firm global demand. Imports of goods and services are expected to continue to post positive growth as domestic demand achieves structurally higher levels.

Inflation Recent CPIX data for the year indicate a continuing downward trend in inflation, to 4.4% in October, largely due to a slowing in the growth of consumer credit and consumer spending. Inflation is estimated to remain within the target range set by the SARB, averaging an increase of 4.6% for the year. Assuming a sound mix of fiscal and monetary policy combined with public-sector wage moderation, weaker administered prices and lower private-

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sector unit labour costs (owing to productivity gains), we expect inflation to remain within the central bank’s target range of 3-6% in 2006-07. Rising wage demands, international oil price movements and currency volatility pose the greatest threats to price stability. The SARB is keen to limit inflationary pressures and has indicated that it will take action should second-round inflationary pressures arise. It has also continued to stress the need for moderation in wage demands to avoid giving rise to third-round inflationary effects. This should have a positive effect and, although not all labour organisations accept that lower and stable inflation has returned to South Africa, pay rises are likely to be only marginally above the inflation rate over the forecast period.

Exchange rates Having traded in the first quarter of 2005 at under R6.05:US$1, the rand depreciated in the second and third quarters, to average R6.42:US$1 and R6.50:US$1 respectively. The rand has traded in the region of R6.41-R6.77:US$1 in October and November, and is estimated to average R6.35:US$1 for the year. The exchange rate continues to be a disputed issue because of the effect of a strong rand on the competitiveness of South African exports and hence on economic growth. However, it has helped to dampen inflationary pressures. Although high international metal prices will help to boost foreign reserves, and the rand in the short term, over the forecast period the rand is expected to depreciate gently owing to lower commodity prices and the continuing deficit on the current account, to average R6.55:US$1 in 2006, before falling further, to R6.75:US$1, in 2007. A sharper fall is possible, however: the trigger could be a further spike in the price of crude oil, or a sharp upward move in US interest rates coupled with an increase in South Africa’s current-account deficit and the role of short-term speculative inflows in the capital account.

External sector Recent official data from for the first nine months of 2005 indicate that the value of merchandise exports rose by 17% (largely because of a rise in international commodity prices) and that of imports by 13.3% (because of higher crude oil volumes and increased demand for machinery and electrical equipment). On the services and income accounts increases in travel payments and dividends to non-resident investors were offset by an increase in dividends received by South Africans on offshore investments. For the year, we expect the weakening rand and consumer demand for imports to lead to a widening of the trade deficit, with the current-account deficit estimated to rise slightly, to 3.5% of GDP. Merchandise exports are expected to rise during the forecast period, supported by rising volumes and relatively strong commodity prices. Exports of mining products such as platinum, iron and coal will benefit from sustained strong demand in the Asian markets. Exports of high-value-added goods such as vehicles, automobiles, chemicals and mining machinery are also expected to rise. Imports in 2006-07 will continue to be boosted by the increased need for capital equipment by a number of parastatals. Although the growth in consumer demand for imports is slowing, demand remains robust and will help to sustain a high level of imports over the forecast period. The customary deficits on the services and income accounts will persist, the former being driven mainly by the increased need for imported services associated with the

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growth of merchandise trade and the latter by higher dividend payments abroad. The deficit on the net transfers account is expected to remain at around US$1.7bn per year in 2006 and 2007 owing to the large number of foreign workers employed in mining, farming and other sectors. Overall, the current- account deficit is forecast to increase slightly, to 3.9% of GDP in 2006, before declining to 3.6% of GDP in 2007 when GDP itself is expected to pick up. The deficit is expected to be financed easily by inflows on the financial account of the balance of payments, but such inflows are of a short-term nature and are less reliable than longer-term capital inflows, such as inflows of foreign direct investment. However, as the financial account cannot sustain such deficits indefinitely, the currency is likely to come under pressure.

Forecast summary (% unless otherwise indicated) 2004a 2005 b 2006c 2007c Real GDP growth 4.5 5.0 4.8 5.1 Manufacturing production growthd 4.2 4.5 6.5 6.5 Gross agricultural production growth -1.7 5.0 4.5 4.0 Consumer price inflation (av) 4.3 4.0 5.0 4.7 Consumer price inflation (year-end) 4.3 5.5 4.7 4.6 Lending rate (av) 11.3 10.0 11.5 12.5 Government balance (% of GDP)e -2.5 -1.0 -2.1 -2.2 Exports of goods fob (US$ bn) 48.4 51.6 53.2 55.6 Imports of goods fob (US$ bn) 48.5 52.1 53.8 56.0 Current-account balance (US$ bn) -7.0 -8.4 -9.7 -9.2 Current-account balance (% of GDP) -3.2 -3.5 -3.9 -3.6 External debt (year-end; US$ bn) 28.7b 30.0 31.0 32.8 Exchange rate R:US$ (av) 6.45 6.35 6.55 6.75 Exchange rate R:¥100 (av) 5.96 5.77 5.76 6.46 Exchange rate R:€ (year-end) 7.64 7.49 8.84 9.19 Exchange rate R:SDR (year-end) 8.77 9.07 10.17 10.65 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Based on index of manufacturing production only. e Government finance data are presented on a calendar year basis to allow comparisons with other macroeconomic data. The fiscal year in South Africa ends March 31st.

Gross domestic product Consumer price inflation (% change, year on year) (av; %)

South Africa South Africa Sub-Saharan Africa Sub-Saharan Africa 6.0 10

5.0 9 8 4.0 7 3.0 6 2.0 5

1.0 4 0.0 3 02 03 04 05 06 07 02 03 04 05 06 07 2001 2001

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The political scene

The pendulum swings in South African politics has continued to be dominated by the “Zuma affair,”

favour of Mr Mbeki stemming from a court judgement in June to the effect that Jacob Zuma, the then deputy state president, was in a “generally corrupt relationship” with his financial adviser, Schabir Shaik, and the subsequent dismissal of Mr Zuma by the president, Thabo Mbeki, later that month (September 2005, The political scene). The fortunes of Mr Mbeki and Mr Zuma within the ruling African National Congress (ANC) subsequently fluctuated, but the emergence of rape charges against the former deputy president on December 5th appear to have tipped the scales in favour of the president. By the end of November things were looking bleak for Mr Zuma. Both the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP) have declared that they had never intended their support for Mr Zuma to mean support for a presidential campaign, and in the ANC ranks there is now widespread agreement that his ambitions to succeed Mr Mbeki as party and state president have been damaged. Mr Zuma has denied the rape charges and has voluntarily withdrawn from the ANC’s party structures for the duration of the trial, but will retain the vice-presidency of the party. However, the national executive committee (NEC; the ANC’s top policy-making body) may decide to suspend him from the post while the case is being heard.

The press calls for Mr Zuma There have been growing calls in newspaper editorials for Mr Zuma to resign to resign from his current ANC position. The argument is that the faintest suggestion of rape should have prompted him to do this, even though he had failed to do so when charged with fraud and corruption. The rape complainant is an HIV/AIDS activist (who is HIV-positive), and Mr Zuma’s admission of a relationship with her is staggering given his former position as head of both the presidential task team on HIV/AIDS and the South African National AIDS Council. The papers therefore argue that his continued leadership position undermines the ANC’s commitment to the criminal justice system and women’s rights. Some commentators have also pointed out that Mr Zuma has exploited populist disaffection with Mr Mbeki, even at the cost of splitting the ANC and damaging the country. The NEC supports Mr Mbeki The NEC, at its meeting from November 19th-21st, strongly supported Mr Mbeki on key issues and made it clear that Mr Zuma had lost such significant support that he could no longer be a presidential candidate. Mr Zuma’s fortunes have changed with bewildering rapidity: on November 12th he was cheered at a rally outside the Durban court where he was appearing, but the following week he had lost the support of the NEC, with COSATU and the SACP hedging their bets. His position at the NEC meeting was greatly weakened, although he received an apology from the NEC for failing to support him after a report by the public prosecutor, Lawrence Mushwana, had acknowledged that the National Prosecuting Authority (NPA) had abused its power during an investigation of Mr Zuma. However, the NEC resolved that this treatment did not amount to a political conspiracy. The NEC has also:

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• rejected the existence in the party of contending factions led by Mr Mbeki and Mr Zuma, and agreed that future support for Mr Zuma would be co- ordinated by the ANC’s secretary-general, (in an attempt to stop raucous shows of support); • persuaded Mr Zuma to agree that he would never campaign for the presidency of the ANC or of the country, and that he would not encourage campaigning on his behalf; and • forced Mr Zuma to report the rape accusation, repeated its support for Mr Zuma’s dismissal as deputy state president and stated that there would be no political intervention to rescue Mr Zuma from the judicial process.

The provisional indictment is The provisional indictment on charges of fraud and corruption was formally presented to Mr Zuma presented to Mr Zuma on November 12th and contains a list of 102 people to testify against him. The trial has been set down in the Durban High Court from July 31st 2006. • Mr Zuma, Thint Holdings (Southern Africa) (Pty) Ltd and Thint (Pty) Ltd face four counts of corruption between October 1995 and August 18th 2005; • Payments to Mr Zuma from Mr Shaik continued to be made up to August 18th, despite the verdict delivered in the Shaik case in June. The indictment argues that these payments were part of a series of corrupt acts carried out by Mr Zuma and Mr Shaik; and • The final indictment will probably include charges of tax evasion and perjury for failing to declare the payments to parliament and the tax authorities that Mr Zuma received from Mr Shaik. Mr Zuma has given notice that he will appeal for the charges to be set aside on the basis that he will not receive a fair trial. In a related development, the Supreme Court on November 15th granted Mr Shaik leave to appeal against all three convictions of corruption and fraud, for which he was sentenced to 15 years imprisonment. Although some legal experts believe that an acquittal for Mr Shaik could have a major influence on Mr Zuma’s trial, others point out that the NPA has closed potential loopholes resulting from the Shaik trial in its indictment and will be able to further tighten the indictment before the final charge sheet is presented in March 2006. Meanwhile, the NPA itself is to appeal in the Supreme Court against the Johannesburg High Court’s order that it return the documents seized from Mr Zuma’s attorney. The appeal was granted in late October and, since it takes about eight months for a matter to be placed on the Appeal Court roll, the court hearings might not be completed before the Zuma trial starts on July 31st 2006. However, both the defence and the NPA want the appeal to be heard before then so that they can prepare for the Zuma trial.

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The fall-out from the Zuma affair

The “Zuma affair”—stemming from a court judgement in June to the effect that Jacob Zuma, the then deputy state president, was in a “generally corrupt relationship” with his financial adviser, Schabir Shaik, and the subsequent dismissal of Mr Zuma by the president, Thabo Mbeki, later that month—has had important implications for the individual leaders, the state institutions and the country’s overall political stability.

Thabo Mbeki: The president was forced to retain Mr Zuma as the deputy leader of the African National Congress (ANC) at the end of June, following strong support for the previous vice-president from the seven provinces, the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). It now appears, however, that the president’s position has strengthened, not only with Mr Zuma’s reputation having become increasingly tarnished by recent rape charges but also through the sound macroeconomic policies of his government together with renewed moves to improve service delivery and fight corruption.

Jacob Zuma: his unsuitability as vice-president of the ANC and of the country has been exposed and his erstwhile support base has been severely weakened in recent months. Although Mr Zuma’s many supporters within the ANC and its allies stood by him as he was charged with corruption in June, his support has fallen rapidly since the rape allegations first emerged at the end of November (and since he was charged in early December). Surveys show that support for Mr Zuma remains strong, mainly in KwaZulu-Natal and among Zulus. However, in the ANC ranks there is now widespread agreement that his ambitions to succeed Mr Mbeki as party and state president have been damaged.

State institutions: In recent months the existence of pro-Mbeki and pro-Zuma factions in the ANC has spilled over into state institutions. Mr Mbeki’s policy of appointing party members to senior civil service and parastatal jobs (including those in the security agencies) has resulted in party divisions being replicated within these institutions, leading to a deepening of the corruption crisis and a weakening of parliamentary institutions. Mr Zuma has compared his impending trial with his experiences under apartheid, thus implying that the courts are illegal institutions and denigrating the judicial system. The corruption case has caused the biggest internal crisis for the ANC since it was elected to power in 1994.

Political stability: the two-thirds electoral majority of the ANC, together with the centralisation of decision-making in the presidency, have given the impression that the party and Mr Mbeki have been impregnable. However, the rapid implement- ation of the transformation policy, which has led to the loss of experience and scarce skills, has made the ANC unable to deliver what it had promised. Nonetheless, Mr Mbeki realises the importance of delivery of social services and infrastructure, and will make this a priority for the rest of his term of office. This could help to overcome some of the disaffection and ensure continued political stability, partic- ularly if Mr Mbeki’s successor is able to follow the same set of economic policies.

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The Scorpions’ hearings The one-person commission of inquiry into the mandate and location of the are concluded directorate of special operations, the “Scorpions”, the investigative arm of the NPA, began its oral hearings in Pretoria on October 3rd. The judge, Sisi Khampepe, was appointed by Mr Mbeki in March as a result of pressure to have control of the Scorpions transferred from the NPA to the South African Police Service (SAPS; March 2005, The political scene). Tensions between the security agencies and within the government spilled into the open at the hearing. These tensions are related to the Zuma affair, with pro-Mbeki and pro- Zuma factions attempting to control the unit. The cabinet itself is divided and ministers disagree with senior officials. The main protagonists for keeping the Scorpions under the control of the NPA are , the minister of intelligence, and Vusi Pikoli, the head of the NPA. Ranged against them are Jackie Selebi, the police commissioner; Charles Nqakula, the minister of safety and security; Brigitte Mabandla, the minister of justice and constitutional development and Billy Masetlha, the director-general of the National Intelligence Agency (NIA). Thus, Mr Kasrils is pitted against his director-general and Mr Pikoli against his minister. Non-governmental organisations and opposition parties in their evidence have strongly opposed the incorporation of the Scorpions into the police. The oral evidence presented by the NIA appeared to favour the retention of the current status quo, but Mr Masetlha two days later issued a statement containing scathing criticism of the Scorpions and stating that the NIA wanted the unit to be given a new mandate under the control of the police. This earned him a strong rebuke from Mr Kasrils. Mrs Mabandla surprised everyone by stating that she no longer wished to have political control over the Scorpions. She argued that the lack of co-ordination and co-operation between the Scorpions and the police force could undermine law enforcement and security. Her arguments were largely dismissed in the press and also by opposition parties. Mr Pikoli denied that the Scorpions were a threat to national security, while the head of the Scorpions, Leonard McCarthy, blamed the SAPS for the breakdown in co-operation, arguing that the police had stalled efforts to draft appropriate guidelines.

The future of the Scorpions The case against the Scorpions is primarily political rather than operational.

is unclear Although the Scorpions have been criticised for some of the ways in which they operate, they have been strikingly successful in their prosecutions. However, this has earned them the enmity of prominent political and business figures whom they have prosecuted, including Mr Zuma, Tony Yengeni (the former ANC chief whip), Winnie Madikizela-Mandela (the former ANC Women’s League leader) and members of parliament (MPs) implicated in the Travelgate scandal (June 2005, The political scene). Both Mr Yengeni and Mrs Madikizela-Mandela were convicted of fraud. The anti-Mbeki faction in the ANC (which includes the ANC Youth League) supports relocation. However, if the Scorpions were to be disbanded or relocated this would be a blow to South Africa’s image, as it would mean the loss of an independent crime-fighting unit able to tackle corruption at the highest level of politics and business. The commission concluded its hearings on October 13th, with Mrs Khampepe chastising the SAPS for not providing suggestions on how to improve co-

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operation with the Scorpions. The cabinet is awaiting Mrs Khampepe’s report. It will be considered by Mr Mbeki, who is thought to want the Scorpions to remain in the NPA.

Mr Mbeki dismisses On October 17th Mr Kasrils suspended two senior officials of the NIA, including intelligence chief the director-general, Gibson Njenje, after allegations that they had placed Saki Macozoma, a former ANC MP and now a leading businessman, under illegal surveillance. The allegations had been investigated by the NIA’s inspector- general. The suspensions followed the stand-off between Mr Kasrils and the director-general, Mr Masetlha, over the latter’s support of the relocation of the Scorpions. On November 15th Mr Mbeki signed a presidential minute confirming the suspension, which had in fact been ordered by him. Thus, the Zuma affair continues to notch up casualties. Mr Njenje has subsequently resigned from the NIA. After the suspension of the three men, the existence of e-mails between senior state and ANC figures came to light. The messages were reported to be about tarnishing the image of Mr Zuma and Mr Motlanthe in an attempt to influence the presidential succession race. Mr Kasrils has described the e-mails as a hoax and rejected the notion that the suspensions were part of a purge of Mr Zuma’s supporters in state institutions. Nevertheless, the leaks to the press concerning the e-mails are regarded as having being engineered by the opposing Mbeki and Zuma factions in state institutions. The suspended men served under Mr Zuma in ANC intelligence pre-1994 and are regarded as being sympathetic towards him. Named in the e-mails were Mr Motlanthe; Mr Macozoma; the deputy president, Phumzile Mlambo-Ngcuka and her husband, Bulelani Ngcuka, the former Scorpions head; Mr Pikoli; the government spokesman, Joel Netshitenzhe; and the director-general in the presidency, Frank Chikane.

Floor-crossing strengthens The results of the September “floor-crossing” window were finalised on the ANC October 4th, when the High Court dismissed an application from the Democratic Alliance (DA) to declare the actions of five MPs in defecting from the party illegal. The DA’s case rested on the rather flimsy argument that, since the defectors switched allegiances at different times during the 15-day period, their actions did not meet the required 10% quota stipulated in the legislation to make floor-crossing from any single party valid. The court ruled that the intention of the legislature in providing a window of opportunity was to freeze party membership for the entire 15-day period. The DA was the main loser in the September exercise and, ironically, has been adversely affected by its original enthusiastic support for the legislation. The 10% rule operated progressively in favour of larger parties, but the DA was not large enough to be immune. By contrast, the ANC has become even more impregnable by the legislation, and it gained 14 seats, bringing its total to 293 out of 400 seats in the National Assembly. The DA was hit particularly hard by the defection of three black MPs, which reduces its black representation drastically and lends strength to ANC propaganda claiming that the DA is a racist white party in which blacks cannot be comfortable. In the provincial legislatures the ANC now has an absolute majority in the Western Cape for the first time and 50% of the seats in KwaZulu-Natal, where it can count on the support of the Minority Front. The United Democratic Movement (UDM) lost representatives in the Eastern Cape,

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where the DA is now the official opposition. The DA lost five seats in both Gauteng and KwaZulu-Natal, and the IFP three in KwaZulu-Natal The New National Party (NNP) finally disappeared from parliament, while the DA lost three seats overall and the Inkatha Freedom Party (IFP) five. The IFP’s loss was mainly to a new party, the National Democratic Convention (Nadeco), which now appears in parliament for the first time and with four seats without ever having contested an election. The democratic principle of proportional representation has been made a mockery of by the floor-crossing legislation. However, the legislation might be repealed, as both the ANC and the DA are apparently in favour of its elimination.

Parliamentary parties: impact of floor-crossing Party Before After Net effect African National Congress (ANC) 279 293 +14 Democratic Alliance (DA) 50 47 -3 Inkatha Freedom Party (IFP) 28 23 -5 United Democratic Movement (UDM) 9 6 -3 Independent Democrats (ID) 7 5 -2 African Christian Democratic Party (ACDP) 7 4 -3 New National Party (NNP)a 7 0 -7 National Democratic Convention (Nadeco) 0 4 +4 Freedom Front Plus (FF+) 4 4 0 United Christian Democratic Party (UCDP) 3 3 0 Pan Africanist Congress of Azania (PAC) 3 3 0 Minority Front (MF) 2 2 0 United Independent Front (UIF) 0 2 +2 Azanian People’s Organisation (Azapo) 1 1 0 United Party of South Africa (UPSA)b 0 1 +1 Federation of Democrats (FD)b 0 1 +1 Progressive Independent Movement (PIM)b 0 1 +1 Total 400 400 - a Disbanded in 2005. b Established in 2005. Source: Parliamentary Monitoring Group

Non-aligned labour unions are The decision of South Africa’s three politically non-aligned trade union to unite federations to unite will see the emergence of the second largest trade union federation after COSATU; the amalgamation should be completed by July 2006. The participating federations are the Federation of Unions of South Africa (Fedusa); the National Council of Trade Unions (Nactu); and the Confederation of Workers’ Union (Consawu). These have a combined membership of 1.1m but could attract a number of other independent unions as well as some COSATU unions, which are dissatisfied with COSATU’s overall service and political stance. COSATU claims 1.8m members, although this figure is unaudited. COSATU’s goal has been to establish a single trade union in South Africa, and it has unsuccessfully tried to enter into a merger with Nactu, Fedusa and Consawu. The three organisations are dissatisfied with COSATU’s participation in the tripartite alliance with the ANC and the SACP, and will remain supportive of policies rather than parties. This difference in approach will continue to stand in the way of the expressed desire of all labour unions to have a single umbrella organisation. COSATU has warned that the

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establishment of a second “super federation” of labour would allow employers and the government to weaken the union movement as a whole by adopting a “divide and rule” strategy. COSATU believes that Mr Mbeki is already conducting such a strategy by sidelining it in favour of closer ties with the three merging federations, which have more conservative economic policies.

ANC-linked companies are In October the final report of an independent commission of inquiry into named in a recent UN report corruption in the UN-approved “oil for food” programme in Iraq was published. The report names six South African companies as paying kickbacks or peddling political influence during the last days of Saddam Hussein’s reign. Two of these companies, Imvume Management and Montega Trading, are owned by Sandi Majali and were implicated in the Oilgate scandal (June 2005, The political scene). Mr Majali and his companies enjoy a close relationship with the ANC. He was accompanied on a trip to Iraq by the ANC’s secretary- general, Mr Motlanthe; its treasurer, Mendi Msimang; and the head of the presidency, Smuts Ngonyama. Subsequently, he was accompanied by senior South African state oil officials, and the delegation was involved in discussions on strengthening trade ties between the ANC and Mr Hussein’s then ruling Arab Ba’ath Socialist Party. The UN report states that Mr Majali promised Iraq a kickback of US$464,000, and that an amount of US$60,000 (called a “surcharge”) was subsequently paid on behalf of Imvume. Mr Majali and Imvume have denied that they paid this money, but both Mr Majali and the ANC have admitted that the company’s business activities in Iraq were promoted by the ANC in the usual way as political support in international trading activities and for the promotion of a black economic empowerment company. According to the UN report, Imvume and Montega bought millions of barrels of oil from Iraq under the programme and the Iraqi government used the programme as a tool to influence South Africa’s foreign policy, something that is strongly denied by the ANC. Mr Majali was introduced to the Iraqis as an official adviser to Mr Mbeki, and questions have been raised as to the lack of transparency in the involvement by South African companies in the oil-for-food programme. The UN report also states that Mr Majali offered political support in return for oil contracts and assured Iraq that the contracts would be used for the benefit of both ruling parties in order to build financial resources to support political programmes. It is highly unlikely that South Africa’s foreign policy was influenced by the programme, given its prior opposition to sanctions against Iraq. The deputy president, Mrs Mlambo-Ngcuka, denied in parliament on November 16th that Mr Majali acted as an adviser to Mr Mbeki or that the country’s foreign policy had been influenced. However, two opposition parties, the DA and the Freedom Front Plus (FF+), have called for a judicial inquiry into the matter. The cabinet has commissioned the minister of justice, Mrs Mabandla, to study the UN report and to assess whether, and, if so, what, steps need to be taken. Continued inaction on the part of the government to appoint a commission of inquiry will tarnish the credibility of Mr Mbeki’s anti-corruption drive.

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Economic policy

Fiscal policy supports higher The minister of finance, Trevor Manuel, delivered his medium-term budget economic growth policy (MTBP) statement on October 25th. He stressed that the fiscal stance of the government would be to continue to aim at boosting economic growth, despite revising the budget deficit for the 2005/06 fiscal year downwards to 1% of GDP, from its original target of 3.1% of GDP. Budgetary revenue for the current fiscal year 2005/06 (April-March) is now estimated to be R30.2bn (US$4.5bn) higher than forecast in the February budget, at R400.1bn, owing largely to stronger than expected economic growth and further strong growth in domestic revenue. In contrast, the expenditure target for 2005/06 has been scaled back slightly from its original target of R417.8bn (an increase of 13.4% on the previous year) to R415.8bn (an increase of 12.8%), owing mainly to lower debt-service costs. The Treasury forecasts an average budget deficit over the next three years of about 2.1% of GDP per year. The Treasury has also revised the real GDP growth rate upwards from the 4.3% predicted in the February budget to 4.4% for 2005/06, and from 3.8% to 4.2% for 2006/07. However, these estimates are now too low given the November 2005 figures released by Statistics South Africa, which show that recent and current economic growth rates are higher than previous figures (see The domestic economy: Economic trends). Mr Manuel also highlighted the ongoing problem of capacity constraints, which affect the rate at which the government can increase expenditure. He pointed particularly to a shortage of civil engineers and stressed that particular attention would be paid to ensuring that the education system produced the skills required for South Africa to attain the 6% per year GDP growth target by 2010. Nevertheless, he announced an intensified programme of government capital spending, which is forecast to reach 6.7% of GDP over the next three years. Infrastructure expenditure is forecast to increase from R86.3bn in 2005/06 to R135.7bn in 2008/09. The emphasis of government spending will shift towards economic services and the built environment, particularly infrastructure, housing and transport. This will enable the government to deal with rapid urbanisation and the upgrading of informal settlements. Government spending on road, rail and port infrastructure is forecast to increase, partly in preparation for the 2010 World Cup soccer tournament. Mr Manuel announced substantial increases in spending for combating crime and improving housing, education and health. However, he stated that these plans would all be at risk unless there were improvements in public administration. Another policy to improve state capacity will be through partnerships with the private sector and non- governmental organisations. Mr Manuel stated that the 2006/07 budget would include concessions on personal tax rates and the monetary thresholds applied to individual taxpayers, but dampened expectations that there could be a cut in corporate tax rates as a result of the higher revenue collections. Mr Manuel will crack down on tax benefits associated with travel allowances and company cars, but will provide relief for lower-income taxpayers with regard to medical scheme contributions.

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Revenue and expenditure: fiscal years (Apr-Mar) (R bn unless otherwise indicated) 2004/05a 2005/06b 2006/07c 2007/08c 2008/09c Revenue 347.9 400.1 437.0 479.0 527.2 Expenditure 368.5 415.8 474.0 518.3 568.7 Deficit -20.6 -15.7 -37.0 -39.3 -41.5 % of GDP Revenue 24.8 25.9 25.8 25.8 25.9 Expenditure 26.2 27.0 28.0 27.9 28.0 Deficit -1.5 -1.0 -2.2 -2.1 -2.0 a Actual. b Revised estimate. c Budget forecasts. Source: Ministry of Finance, Medium-Term Budget Policy Statement, 2005.

The economic growth strategy The government’s strategy, the Accelerated and Shared Growth Initiative (ASGI), takes shape developed by the presidential task team (appointed in July) under the deputy president, Phumzile Mlambo-Ngcuka, to investigate how to boost the real GDP growth rate to 6% by 2010 in order to reduce the high levels of unemployment and poverty, was discussed at a cabinet meeting in October (September 2005, Economic policy). Mrs Mlambo-Ngcuka has stated that specific areas of intervention have been identified, including infrastructure, human resources, closing the gap between the formal and informal economies, and the small business sector. The team has also identified a number of constraints that need to be overcome if the 6% growth target is to be attained, and is formulating plans to tackle them. The constraints include currency volatility, infrastructure backlogs, the regulatory environment, delivery of services, the skills shortage and import-parity pricing. Mrs Mlambo-Ngcuka has emphasised that progress towards the growth target will be incremental and that there will be no “quick fix”. The three key elements of the plan are: • a programme of accelerated investment in port, rail and road infrastructure; • the establishment of a dedicated fund for providing seed money to small and medium-sized enterprises; and • a review of the effect of the regulatory and governance environments on growth, including a review of labour legislation and black economic empowerment (BEE)—an independent review of the labour market will also be undertaken to assess the unintended consequences of labour legislation. The IMF has welcomed ASGI and has urged that the labour market be liberalised in order to boost economic growth, while the government’s tenacity in persisting with a review of the labour market despite opposition from the Congress of South African Trade Unions (COSATU) has been welcomed by the business sector. The task team is expected to present its detailed ASGI proposals to the cabinet in January, with the strategy to be explained to members of parliament and the public in Mr Mbeki’s address at the opening of parliament and to be further elaborated on in the budget speech on February 15th 2006.

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Capital controls are loosened An adherence to strong macroeconomic fundamentals, coupled with recent ratings upgrades by the international ratings agencies, has led to stronger inflows of long-term foreign direct investment. Consequently, with the release of the MTBP at the end of October, the Treasury has continued to loosen capital controls. The proportion of overseas assets that fund managers may hold has risen by 10 percentage points, to 25%. Banks are now allowed to hold up to 40% of their domestic regulatory capital in foreign assets; a maximum of 20% of their capital can be held in non-African states, but the entire 40% may be held in Africa in order to encourage more investment in the region in line with the New Partnership for Africa’s Development (Nepad). A remaining control that exporters would like to see dismantled is the requirement that foreign earnings be repatriated within 90 days. However, the R750,000 (US$118,763) limit on private foreign currency holdings remains and is attracting criticism of the Treasury. Analysts are critical of the remaining controls, saying that they signals to the market a lack of confidence that will prove much more costly than any money that a private domestic investor would choose to move. Even the governor of the South African Reserve Bank, Tito Mboweni, has expressed the view that the remaining foreign-exchange controls should be removed. However, Mr Manuel maintains that the amnesty unit must conclude the amnesty process with those persons who have holdings in excess of R750,000 before the limit can be removed.

Import-parity pricing The cabinet has reviewed proposals by the department of trade and industry

is reviewed (DTI) on how to deal with the issue of import-parity pricing (September 2005, Economic policy). A statement is expected soon. So far, the DTI’s approach to import-parity pricing has been to compel discussions between producers and customers with a view to negotiating a compromise. While import-parity pricing is already practised in some sectors, the primary focus will be on the carbon steel, stainless steel, aluminium and chemical sectors. Consumers are unhappy about domestic prices that include high notional shipping costs, rail tariffs and a 5% import duty. A major point of contention is the import-parity pricing practised by Mittal Steel, the major steel producer, particularly since the government condoned Mittal’s takeover of Iscor on the condition that it introduce a pricing policy that was more favourable for downstream industries. Domestic steel prices are an estimated 25% above prices prevailing in Europe, although some analysts claim that they are as high as 50% above international prices. Two major downstream manufacturers, Harmony and Durban Roodepoort Deep, have complained about Mittal to the competition authorities, and hearings are due to commence in March in 2006.

A BEE code is drafted BEE deals have increasingly been criticised for enriching a small enclave of politically connected individuals, as well as for overemphasising the race issue to the neglect of women, the disabled and other previously disadvantaged groups. In an effort to correct this, the DTI has now developed a code of practice for affirmative action, and the first draft of the DTI’s code has received mixed reactions. The code carries renewed incentives for women, new empowerment participants and broad-based schemes. It also provides for the establishment of regulatory bodies to verify empowerment claims and for the

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formulation of a final set of quantifiable standards. This will prevent firms from “fronting”, that is, using deceptive practices in order to appear to be empowered, and ensure that black ownership is not overstated through elaborate financial engineering. It is anticipated that the second draft of the codes will contain provisions for foreign-owned businesses. While the codes have been lauded for addressing many of the grey areas in empowerment legislation and for placing a renewed emphasis on broad-based empowerment, there has been criticism to the effect that the emphasis on broad-based deals will prevent many black entrepreneurs from accessing and accumulating meaningful levels of capital. Although there are also concerns that many existing BEE deals will have to be reworked, it is unlikely that any deals will have to be reversed. These codes could be in practice as early as 2006 and may be instituted as an amendment to the Employment Equity Act.

Farm expropriations are Land reform is becoming an increasingly contentious issue as the government to begin takes steps to speed up the process. The government’s target is that 30% of white-owned land should be transferred to black farmers by 2014 (extended from the initial target date of 1999), but to date only 3% has been transferred. At a government-convened land summit in July there were calls for expropriation, and in November the Land Claims Commission announced that it had plans to begin expropriation proceedings against 50-60 farms. This has upset farmers, who claim that there are many willing sellers, but that government inefficiency is stalling land redistribution. While the government concedes that it underestimated the magnitude of the task, it counters that many farmers are ideologically opposed to selling their land or are asking above market prices. Wary of scaring off foreign investment, the government points out that the expropriations will follow the letter of the law, with farmers being compensated at market prices; farmers are free to oppose the expropriations in court without affecting their compensation should the court find in favour of the state. The government further points out that it will not resort to extensive expropriation, as this is not feasible owing to the legal and administrative burden involved.

The Sasol-Engen hearings The Competition Tribunal concluded its hearings on the proposed merger are concluded between Sasol Oil and Engen after hearing closing arguments from the opposing parties on November 11th. Prospects for the merger appear to have deteriorated over the course of the hearings, particularly once the Competition Commission, which had recommended to the tribunal that the merger be approved, changed its mind and stated that it could no longer support the merger. In another blow to Sasol and Engen, the chairman of the Competition Tribunal, David Lewis, has questioned the capacity of the government to prove and act against anti-competitive behaviour by the merged entity, Uhambo Oil. The tribunal will study remedies proposed by the merging parties over the next two months. The main concern of the oil companies opposing the merger was that Uhambo would restrict sales to them in the inland areas where they do not themselves have refining capacity. Sasol and Engen proposed a range of remedies, which included selling part of Uhambo’s inland refining capacity, selling petrol stations, capping lay-offs at 453 for two years after the merger and agreeing to sell a minimum of 4bn litres of fuel per year to other oil companies.

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The Competition Commission argued that no remedies could alter its anti- competitive concerns. If the merger were to be approved, Uhambo would control over 50% of total refining capacity and 38% of the retail market for petroleum products.

The lack of skills endangers A former managing director of the World Bank and current co-chairman of the economic progress Global Commission of International Migration, Mamphela Ramphele, delivered a scathing attack on the government in a lecture in September, criticising political patronage that led to party loyalists being promoted into civil service positions for which they were not qualified. This was the main reason for the deterioration in service provision in the public sector. Many skilled professionals were denied job opportunities in the public sector for political reasons, and the position could be rectified if the criterion of strict professional competency were to be applied. Standards in the teaching, nursing and police services had deteriorated, and so too had the attitude of civil servants generally. Ms Ramphele’s views resonate because of her role as a pre-1994 political activist, and the deputy president, Mrs Mlambo-Ngcuka, has now warned that the gains of the post-1994 period in the economy would be threatened unless the country tackled the skills shortages at all levels. Mrs Mlambo-Ngcuka stated that the government would recruit skilled professionals, many of whom had been forced into retirement by affirmative action policies, to help to ease the skills crisis in municipalities. She also stated that the government was attempting to recruit South African professionals who are working overseas, and that skilled individuals from other African countries working outside the continent would also be recruited. The recognition by the government of the damage done by the rapid implementation of affirmative action and transformation has been welcomed by the professions, which face severe shortages. These are particularly acute at local government level and in engineering and accountancy, and companies such as Eskom and Transnet have expressed concern about their capacity to deliver new and upgraded infrastructure in which the government is to invest in the medium term.

South Africa ranks favourably The 2006 edition of the now annual World Bank report, Doing Business In,

in Africa for doing business published in September, ranked South Africa a high 28th out of a total of 155 surveyed countries, and second in Africa for overall ease of doing business. South Africa’s high ranking means that laws, regulations and institutions are in place to protect the rights of investors, creditors, and businesspeople. However, the rankings are not a complete guide to doing business in a particular country, as they do not take into account such vital aspects as the country’s political risk, macroeconomic problems, security and crime, and the state of the infrastructure.

Business environment Mauritius South Africa Namibia Botswana Zimbabwe Starting a business No. of procedures 6 9 10 11 10 Time (days) 46 38 95 108 96 Dealing with licences No. of procedures 21 18 11 42 21 Time (days) 132 176 169 160 481

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Business environment Mauritius South Africa Namibia Botswana Zimbabwe Registering property Time (days) 210 23 28 69 30 Protecting investors Investor protection index (0–10) 8 8 7 4 4 Paying taxes Taxation of gross profits (%) 38 44 44 53 49 Trading across borders Time for export (days) 16 31 32 37 52 Time for import (days) 16 34 25 42 66 Overall rank Worldwide (out of 155) 23 28 33 40 126 Africa (out of 36) 1 2 3 4 15

Source: World Bank, Doing Business in 2006.

The domestic economy

Economic trends

Real GDP growth is once again At the end of November Statistics South Africa released revised real GDP

revised upwards figures, compiled after new surveys had been conducted. The new figures show that the economy has grown more rapidly and is also larger than had previously been estimated. The real GDP growth rate for 2002 was revised from 3.6% to 3.7%, for 2003 from 2.8% to 3%, and for 2004 from 3.7% to 4.5% (the best performance since 1984). The growth rates for the first and second quarters of 2005 were also revised upwards—from 3.5% to 4.6% for the first quarter and from 4.8% to 5.4% for the second quarter. In the third quarter the growth rate declined to 4.2% as a result of the strong rand and the countrywide strike on the gold mines, but was still the 28th consecutive quarter of GDP growth. Real GDP growth for the first nine months of 2005 was estimated at 5.1%.

Real GDP growth (% change)

5 4 3 2 1 0 -1 -2 -3 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06

Source: National Treasury Budget Review.

Seasonally adjusted annualised growth rates for the various sectors show that manufacturing growth declined from 7.9% in the second quarter to 5.6% in the third quarter, while mining contracted by 0.7% in the third quarter (after posting

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growth of 3.9% in the second quarter). The strongest growth in the third quarter came from agriculture and construction. The slowdown in consumer demand is also evident between the second and third quarters, as construction, wholesale and retail trade, and transport and communication all recorded lower growth rates. For the year, in line with revised data, real GDP growth is now estimated to rise by a higher 5%, against the Economist Intelligence Unit’s earlier estimate of 4.4%.

Gross domestic product (% real annualised change from previous quarter; seasonally adjusted unless otherwise indicated) 2004 2005 1 Qtr 2 Qtr 3 Qtr Agriculture, forestry & fishing -1.7 6.4 2.9 10.2 Mining & quarrying 2.8 9.6 3.9 -0.7 Manufacturing 4.6 -2.3 7.9 5.6 Electricity, gas & water 2.4 0.3 0.3 -1.7 Construction 10.7 11.2 12.7 9.5 Wholesale & retail trade, hotels & restaurants 5.7 5.8 6.9 6.3 Transport & communications 4.6 5.1 6.3 6.1 Finance, real estate & business services 7.5 10.6 4.2 4.5 Personal services 1.4 1.9 1.2 0.9 Central government services 1.1 2.2 2.6 3.1 Total value added 4.4 4.7 5.1 4.3 Taxes less subsidies on products 4.8 3.3 9.1 3.3 GDP 4.5 4.6 5.4 4.2

Source: Statistics South Africa.

Inflation trends lower High global oil prices pushed the CPIX (consumer inflation less mortgage costs) to unexpectedly high levels in July, and subsequent petrol price increases of 27c/litre in August, 29c/litre in September and 12c/litre in October had the effect of sustaining the CPIX in its upwards trend. The CPIX increased by 4.8% in August, and the market was concerned that if the trajectory was sustained the South African Reserve Bank (SARB, the central bank) might raise rates as early as December. However, September’s modest inflation figure of 4.7% was a relief, and inflation has continued its downward trend, registering 4.4% in October. The petrol price has since fallen by 31c/litre in November, and is due for a further 30c/litre cut in December. The relief from inflationary pressures has been attributed to a number of factors, notably the gradual slowing in the growth of consumer credit and a moderate reduction in consumer spending. The strengthening of the rand has also played a role, by mitigating the increases in the oil price. However, one of the most significant factors continues to be the drop in food-price inflation, as overproduction of maize has led to a significant decrease in the price of the staple diet and lowered input costs for farmers raising livestock and poultry. For the year, inflation is estimated to rise by 4.0%, although this is well within the official target of 3-6%.

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Inflation as measured by CPIXa 2004 2005 Average Apr May Jun Jul Aug Sep Oct Index (2000=100) 122.2 134.2 134.5 134.2 135.6 136.1 136.4 136.7 % change, year on year 4.3 3.8 3.9 3.5 4.2 4.8 4.7 4.4 a CPIX is the consumer price index excluding interest rates of mortgage bonds. Source: Statistics South Africa.

The rand’s volatility continues The rand depreciated in the second quarter, to reach an eight-month low of R6.96:US$1 on June 1st. The fall in the value of the currency followed a 50-basis- point cut in interest rates by the SARB in April. The rand also partially tracks the euro (the currency of the country’s major trading partner, the EU). The rand has performed poorly against the US dollar in the past year, having lost 15.3% of its value to date. The rand strengthened in August and September, when it traded in the range of R6.23-R6.45:US$1. This strengthening was mainly due to the US dollar weakening on the back of low US foreign reserves and concerns about the growth- and interest-rate outlook in the US. The rand then weakened, to range between R6.41:US$1 and R6.77:US$1 in October, but had strengthened to a two-month high of R6.45:US$1 by the end of November. By early December the rand was trading in the region of R6.50:US$1, and it is estimated to average R6.35:US$1 for the year.

Agriculture

Sugar prospects improve According to the South African Sugar Association, prospects for the industry in the 2006/07 season are expected to improve. The world price of sugar has reached a five-year high that will boost the industry, which exports 50% of its production. Global demand for sugar is stable, and the world market has rallied following reforms in the EU sugar regime that could be implemented in July 2006 and remain in force until September 2015. This will create certainty about the EU market, the agreement significantly reducing sugar production in Europe and eliminating subsidies on exports. The short-term outlook for the South African sugar industry is for a marginal improvement in dollar-based export proceeds as a result of higher market prices. Climatic conditions are also expected to improve as good rains in spring and early summer in KwaZulu- Natal will benefit growers who have been suffering from drought. Illovo Sugar Limited, a South African-based multinational, believes that the improved world and EU market outlook will enable it to expand export volumes. The com- pany’s headline earnings for the half-year ending September 30th improved by 194%, owing significantly to the higher world prices.

A draft bill on genetically In October the government released the draft genetically modified organisms modified foods is released amendment bill to ensure safe and responsible development, production and use of such organisms in line with the Cartagena Protocol on Biosafety, to which South Africa is a signatory. A small, rich elite of South Africa’s consumers is belatedly following the international trend away from genetically modified (GM) crops in favour of organically grown foods. Of the major retail chains, Woolworth’s has found consumer demand for organic foods to be growing at

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over 50% per year in the last two years, while Pick ‘n Pay estimates that organically grown foods will constitute as much as 20% of total produce sales in the long term. Since organic farming is more costly and unpredictable than conventional farming, the produce can be 20-30% more expensive. Despite the resistance by consumers to GM foods, the government is in favour of using such crops to lower the costs of farming and produce higher yields, and main- tains that these foods are safe to eat. South Africa is the only African country that farms GM crops extensively. Some commentators contend that South Africa risks being barred entry, particularly in European countries, if it begins to produce a large amount of GM crops. The fact that labelling laws are becoming increasingly stringent is giving consumers more power to discriminate against GM products. In future this could also extend to meat and dairy products from animals that have been raised on feedstocks derived from GM crops.

New black farmers lack An important aspect of the debate on land reform is whether black farmers are

government support making good use of the farms that are being allocated to them. The department of agriculture concedes that too many new farming projects are failing, often because of a lack of skills, capital and technical support. A report released by parliament’s portfolio committee on land and agriculture in November, based on a study by the University of Pretoria involving 177 land reform projects in the North West Province, found that 27% of farms were not producing any output and 44% were either not producing or were in decline. This is hardly surprising, considering that as many as 86% of the farms had beneficiaries with no commercial farming experience. On a positive note, 42% of farms were found to be producing above subsistence needs, although not necessarily turning a profit. Although these figures make a strong case for increased skills development and support services from the government, it has also been pointed out that many beneficiaries take over ruined farms, as owners stop maintaining and investing in properties once a deed of sale has been signed and it may take years for the paperwork to be processed.

Mining

Controversial bills are passed As expected, the diamonds amendment bill was passed by parliament on November 1st and should be operational early in 2006 (September 2005, The domestic economy: Mining). The bill forms an important part of the govern- ment’s strategy to promote local beneficiation, leading to higher value exports, enhancing skills and generating jobs. The private sector points out, however, that the situation is more complex, critics of the bill forecasting that, while the export duty could promote local beneficiation and provide up to 400 jobs, the resulting closure of small-scale diamond mines could cost 8,550 jobs, with a total potential loss of 11,000 jobs. There is already pressure on domestic diamond producers, and it is not inconceivable that the implementation of this legislation could see prompt mine closures. South Africa has far higher costs than its main competitors: labour costs are between US$65 and US$100 per carat, while in India they are only US$7-8 per carat. There is also dissatisfaction over the creation of a State Diamond Trader that will be entitled to purchase an

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unspecified percentage of every diamond company’s output at prices to be determined by a government evaluator. The bill was passed despite objections and with minimum concessions, the most notable of which was a possible reduction of the proposed export duty from 15% to 10%. The precious metals bill, which is aimed at encouraging the local processing of metals to create high-value exports, was also passed on November 1st. The bill proposes that exporters will have to apply for a licence of ten years’ duration to export metal products. The bill does not give any information on what conditions a firm needs to fulfil in order to obtain such a licence. Industry members are dissatisfied over this lack of information as well as the fact that manufacturers generally enter into contracts of 20 years or longer in order to guarantee a consistent supply. This legislation has had negative effects on the market’s confidence in the sector, as the licensing issue may affect the ability of producers to honour their commitments. According to the Chamber of Mines, neither bill is likely to encourage increased bene- ficiation in South Africa. The mining sector is not competitive globally, and the bills will create unnecessary bureaucracy, which will impede beneficiation. De Beers, South Africa’s largest diamond producer, is still hoping to win some con- cessions from the government before the diamond bill becomes law in 2006.

Anglo-American will On October 26th South Africa’s largest company, Anglo American, announced restructure to focus on mining plans for a comprehensive overhaul of its operations. In essence, Anglo American will cut back its interest in gold mining, refocus on other mining and possibly shed its non-core businesses. The chief executive officer, Tony Trahar, announced that Anglo American could cut its present shareholding of 51% of AngloGold Ashanti to below 50%; sell its 79% shareholding of Highveld Steel & Vanadium; consider establishing Mondi, the paper company that it wholly owns, as an independent business; and assess the future of the construction company, Tarmac, that it wholly owns. It has also requested that the manage- ment of Tongaat-Hulett, the sugar, aluminium, starch and glucose, and property company in which it has a 53% stake, examine ideas on unlocking value. Mr Trahar emphasised that this was merely a strategic “road map”, and no time schedules were given. Analysts believe that Mondi, Tongaat-Hulett and Tarmac will be disposed of in due course as Anglo American concentrates on shedding its non-mining assets and streamlining its mining assets, particularly platinum, diamonds, coal, base metals and iron ore. Anglo American stated that it would continue investing in Mondi in the medium term, and this may allow it to establish Mondi as an independent business with a separate market listing. Tongaat-Hulett could be broken up into three components—sugar and property; aluminium; and starch and glucose. By focusing on its non-gold mining interests, Anglo American could strengthen its global competitive position in relation to Australia’s BHP Billiton and the UK’s Rio Tinto. Mittal Steel SA immediately reacted to Anglo American’s announcement by saying that it might consider buying the 79% stake in Highveld Steel & Vanadium. However, an Indian manufacturer, Tata, has also indicated interest, and commentators in the market have expressed hopes that Tata could reduce Mittal’s dominance in the steel market.

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Gold output declines as According to the Chamber of Mines, South Africa’s gold output fell by 15.4%, to price rises 72.4 tonnes, in the third quarter of 2005—its largest year-on-year fall since 1996— and production fell by 13.9%, to 222.2 tonnes in the first nine months of the year. However, by early December gold prices had reached their highest level, of US$490 per troy oz, in almost 18 years. The fall in output has been attributed to restructuring and shaft closures. Total output for 2005 is estimated to be around 300 tonnes, compared with 346 tonnes in 2004, and is the lowest level since 1931. Future output is expected to stabilise at around 300 tonnes per year, supported by a number of new projects, offsetting further closures of marginal mines. The decline of gold mining has been offset by the expansion of the platinum group metals, as well as coal, chrome and copper. Between 1980 and 2004 gold’s share of South Africa’s visible exports fell from 51% to 9.4% and employment from 476,000 to 175,000, while the share of the platinum group metals in total visible exports increased from 5% to 9%, with employment numbers rising from 77,000 to 151,000.

Manufacturing

The automotive sector The automotive sector is continuing to perform strongly. The National expands Association of Automobile Manufacturers of South Africa expects production to increase from 455,052 units in 2004 to an estimated 530,400 units in 2005, and for total vehicle sales to rise by 26% in 2005, to exceed 610,000 units. Lower interest rates and stable car prices have stimulated sales, although the rate of sales growth has slowed over the last few months. Exports of vehicles are expected to reach a record high of 143,400 units, up by 29% on 2004, with new export programmes offsetting the negative influence of the strong currency. Employment in the industry averaged 312,800 per month in the first half of 2005, as against 306,300 in 2004. Investment for the year in the vehicle industry is expected to reach almost R6bn (US$900m), compared with R2.2bn in 2004. Although the sector is in the process of rapid expansion, with most assembly plants operating at close to 85% of capacity, the growth in demand for new vehicles is expected to slow in 2006. This is due mainly to high base effects, the anticipated increase in interest rates and the slowdown in consumer spending.

New investments are made A German industrial group, MAN Ferrostaal, announced in October that it would make two major investments in South Africa in fulfilment of its offset obligations under the government arms procurement deal. International contractors benefiting from this deal are expected to invest about US$4bn in various projects, but to date only US$1.5bn has been invested. Ferrostaal announced that it would invest R1.6bn in a stainless steel precision strip mill in the industrial development zone at the new port of Coega near Port Elizabeth and R200m in an oil rig manufacturing plant at the port of Saldanha Bay. Work on these projects is expected to commence in March 2006. The Coega project requires the approval of Ferrostaal’s partner, the Industrial Development Corporation, but this is expected to be a formality. The oil rig plant will receive its steel from Mittal Steel, which will extend its plant at Vanderbijlpark for this purpose. There is a growing global demand for oil rigs, and Ferrostaal will export rigs to oil exploration projects in West Africa and elsewhere. Another

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development at Coega, also announced in October, concerns a R1.1bn invest- ment in a chlorine refinery and water desalination plant by Straits Chemicals, a consortium of South African, Malaysian, Singaporean and British investors. Al- though this project will require environmental approval, it could be operational within two years.

Energy

The National Energy regulator The National Energy Regulator of South Africa (NERSA) was finally launched is launched on November 22nd after being mooted five years before. NERSA will oversee the electricity, gas and petroleum pipeline industries. According to the minister of minerals and energy, Lindiwe Hendricks, this is expected to open the way for greater private-sector participation in the sector. NERSA will regulate prices charged by companies distributing gas and petroleum by pipeline. The govern- ment believes that this will improve competition and prevent monopolistic abuse. NERSA will replace the National Electricity Regulator, which will, however, continue to function until early 2006, when it finalises a three-year price determination for Eskom that will come into operation on April 1st 2006. This three-year model is aimed at providing Eskom with predictable prices during a period of investment (of about R84bn) in new power generating capacity. Eskom has been forced by the regulator to keep its tariffs within the government’s 3-6% inflation target range, but the regulator, as well as the depart- ment of public enterprises, has now agreed that the multi-year increases will be at a fixed margin above inflation. The reason for this is that Eskom is required to build 70% of the country’s future power-generating capacity, and it needs an above-inflation increase to help to fund the capital-expenditure programme.

Eskom announces power Eskom Holdings has announced plans to spend almost R103bn on expanding expansion plans its electricity-generating ability by 2009. Of this, R61.9bn will be spent on power-generation projects; R10bn on transmission; R23.4bn on distribution; and R7.4bn on corporate costs and new business. Eskom will provide R84bn of the funding, with R8bn being contributed by independent power producers and R9.8bn by the government. Of its R84bn capital investment, Eskom will provide R28bn from its cash flows and borrow R56bn from local and foreign financial institutions. Eskom will bring back into service three mothballed power stations at a total cost of R12bn; construct two new gas-fired power stations at a cost of R3.5bn; upgrade its transmission lines and distribution networks; pursue a mixture of new coal-fired power stations, nuclear and renewable energy; and consider constructing a hydroelectric power plant at Cahora Bassa Dam in Mozambique and a gas-fired power plant in Namibia. In addition, Eskom has a 30% stake in the R14.5bn Pebble Bed Modular Reactor (PBMR) project, and an announcement on the future of the PBMR is expected in early 2006, following discussions with international and local consortiums. The construction of a demonstration reactor at the Koeburg nuclear power station near Cape Town is due to begin in 2007. The demonstration plant using the technology is expected to be completed in 2011, and therefore nuclear power will not begin to flow into the system before 2014. In the meantime, large corporate users of electricity are concerned about the prospect of power

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shortages over the next few years. Blackouts have become increasingly common in the Johannesburg area, and Eskom has warned that blackouts or selective power cuts could be common in the Western Cape and Eastern Cape until the upgrading of feeder lines from Mpumalanga and the KwaZulu-Natal system are completed. The upgrading of the feeder lines to the Cape Town area is expected to be completed in the first half of 2007.

Mining

Richards Bay Coal terminal Richards Bay Coal Terminal (RBCT), a company owned by Anglo Coal, will be world’s largest BHP Billiton, Xstrata, Sasol, Total Coal and a number of smaller shareholders, announced in November that it would spend about R1bn on expanding annual capacity from its current 67m tonnes to 92m tonnes by 2008. This would make it the biggest coal terminal in the world. The expansion is planned for com- pletion by July 2008, and it is expected to earn about R6bn per year in foreign- exchange revenue and about R1bn per year for Spoornet, the state-owned railway operator. RBCT will fund the cost of the expansion, and the additional tonnage will be allocated mainly to black economic empowerment coal mining companies. The investment is in addition to the R430m (US$68m) to be spent by the National Ports Authority on a berth at the terminal and the R3.8bn to be spent by Spoornet over the next five years on upgrading the specialist coal line between Witbank (in Mpumalanga Province) and Richards Bay.

Telecommunications

Vodafone obtains 50% of On November 25th the British-based Vodafone Group increased its stake in Vodacom Venfin, a company owned by the Rembrandt Trust (Pty) Ltd, by acquiring 35.5m shares at R47.25 per share (US$7.47 per share). Venfin holds a 15% stake in Vodacom, South Africa’s second largest cellular operator, and the deal will enable Vodafone to increase its shareholding in Vodacom from 35% to 50%, the other 50% being owned by Telkom, the fixed-line operator. The deal represents the second-largest inflow of foreign direct investment into South Africa after the Barclays-ABSA deal (September 2005, The domestic economy: Financial and other services). However, it is unlikely to result in job creation, although it is expected to enhance the acquisition of foreign skills and improved technology, both of which are important in terms of meeting the goals of the government’s accelerated growth programme.

Foreign trade and payments

The current-account deficit The latest Quarterly Bulletin of the South African Reserve Bank (SARB, the has narrowed central bank), for September, shows that South Africa’s current-account deficit narrowed in the second quarter to 3.4% of GDP, down from 3.8% of GDP in the first quarter of 2005, and a marked improvement on the 4% of GDP posted at the end of 2004. The improvement was due to a 17% increase in the value of merchandise exports, which outstripped the 13.3% growth in the value of merchandise imports. On the services and income accounts increases in travel

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 34 South Africa

payments and dividends to non-resident investors were more than offset by a sizeable reduction in interest payments on the government’s foreign debt and lower payments for transportation (the latter as a result of falling import volumes). For the year, the Economist Intelligence Unit expects the weakening rand and higher demand for imports to lead to a modest increase in the trade deficit, with the current-account deficit estimated to rise to 3.5% of GDP.

The outlook for foreign direct According to the 2005 edition of the World Investment Report, issued by the investment is improving UN Conference on Trade and Development (UNCTAD), inflows of foreign direct investment (FDI) into Sub-Saharan Africa reached US$12.8bn in 2004, marginally higher than the US$12.7bn recorded the year before. For South Africa, FDI inflows fell from US$720m in 2003 to US$585m in 2004. For this year FDI inflows will be boosted by the Goldfields-Norilsk and Metcash-Metzo deals and the takeover of Amalgamated Banks of South Africa (ABSA)—one of the country’s “big four” banks—by Barclays of the UK, and the purchase by Vodafone of a further 15% stake in the mobile-phone operator, Vodacom. The Barclays-ABSA transaction is estimated to have boosted FDI inflows by about US$5bn in the third quarter of 2005, and Vodafone’s purchase of the additional shares in Vodacom by US$2.4bn. Barclays’ purchase is the largest single FDI inflow into South Africa since the transition to multiparty rule in 1994—easily eclipsing the US$1.6bn partial sale of Telkom, the telecoms utility, to a foreign- owned consortium in 1997. The governor of the SARB, Tito Mboweni, has stated that a number of FDI transactions are in the pipeline, and analysts believe that South Africa, as a commodity producer, will be able to take advantage of the world commodity boom in order to attract FDI. The inflows from both Barclays and Vodafone have stimulated foreign interest in South Africa and signal a vote of confidence for the country’s political and economic prospects for the medium and long term. Nevertheless, FDI inflows into new greenfield projects will continue to be adversely affected by the country’s high start-up and input costs, stringent labour regulations, skills shortages, infrastructural limitations and the govern- ment’s failure to create a single-window, direct investment facility to encourage overseas interest and reduce red tape.

Foreign direct investment inflows into Sub-Saharan Africa (US$ m) 2000 2001 2002 2003 2004 Total FDI into Sub-Saharan Africa 5,810 14,126 9,122 12,743 12,821 FDI into South Africa 888 6,789 757 720 585 Flows into selected countriesa Angola 879 2,146 1,672 3,505 2,048 Equatorial Guinea 109 931 323 1,431 1,664 Namibia 181 149 286 Nigeria 930 1,104 2,040 2,171 2,127 Uganda 275 229 203 211 237 Tanzania 282 467 430 527 470 Zambia 122 72 82 172 334 a Only countries that received more than US$100m in foreign direct investment in 2004 are listed. Source: UN Conference on Trade and Development, World Investment Report 2005.

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 South Africa 35

South Africa looks to a The government has been under strong pressure from both the South African bilateral deal with China Textile Federation and unions to invoke World Trade Organisation safeguards against cheap clothing, textile and footwear imports from China. The govern- ment could impose either quotas or safeguards because of the surge in imports from China, which have grown rapidly since 2001-02 and have led to the loss of 55,000 jobs in the clothing and textile sector in the past two years. However, the minister of trade and industry, Mandisi Mpahlwa, has stated that the government is not convinced that the imposition of quotas or safeguards is desirable in the context of overall trade with China. It appears that the govern- ment is concerned about possible Chinese retaliation against South African exports such as iron ore, steel and chemicals. Instead, the government is investigating a bilateral trade deal with China to help to limit the damage being inflicted by rapidly growing imports from China. However, a bilateral deal will not be able to allow for reciprocal preferential trade unless it has the support of South Africa’s partners in the Southern African Customs Union (SACU). Although China has spoken optimistically about concluding a free-trade agreement with SACU by the end of 2006, South Africa’s chief negotiator in the department of trade and industry, Xavier Carim, stated in late November that there had been no formal negotiations between SACU and China, and that it was unclear when such negotiations would commence.

SACU-US trade talks After a one-year lapse, negotiations between SACU and the US on a proposed are resumed free-trade agreement were resumed in late September. The plan now is to meet approximately every eight weeks and to conclude the negotiations towards the end of 2006—two years later than the original schedule. The discussions will now deal with one issue at a time, the first meeting being confined to industrial tariffs. Negotiators believe that the hardest part of the talks are still to come, difficult issues relating in particular to “new-generation issues” such as intellectual property and government procurement. These aspects have not formed part of conventional free-trade agreements in the past, the content of such agreements being confined to merchandise trade. The SACU negotiators are confident that agreement on trade in goods will not involve insuperable obstacles.

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005