South Africa

Country Profile 2004

South Africa

This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast.

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Copyright © 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-8153

Symbols for tables "n/a" means not available; "–" means not applicable

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Gross domestic product Gross domestic product per head US$ bn US$

South Africa 160.1 Mauritius

Angola Botswana

Tanzania South Africa

Botswana Namibia

Mauritius Swaziland

Zambia Angola

Zimbabwe Lesotho

Mozambique Zambia

Namibia Zimbabwe

Swaziland Tanzania

Malawi Mozambique

Lesotho Malawi

048121620 0 1,000 2,000 3,000 4,000 5,000 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices % change, year on year % change, year on year

Mozambique Zimbabwe 384.7

Tanzania Angola 98.2

Zambia Zambia

Mauritius Mozambique

Malawi Malawi

Botswana Botswana

Namibia Swaziland

Lesotho Namibia

Angola Lesotho

Swaziland South Africa

South Africa Tanzania

Zimbabwe -13.2 Mauritius

-4-202468 0 5 10 15 20 25 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 South Africa 1

Contents

South Africa

3 Basic data

4 Politics 4 Political background 7 Recent political developments 11 Constitution, institutions and administration 13 Political forces 17 International relations and defence

21 Resources and infrastructure 21 Population 24 Education 25 Health 28 Natural resources and the environment 29 Transport, communications and the Internet 32 Energy provision

34 The economy 34 Economic structure 35 Economic policy 42 Economic performance 44 Regional trends

46 Economic sectors 46 Agriculture 47 Mining and semi-processing 50 Manufacturing 52 Construction 52 Financial services 55 Other services

57 The external sector 57 Tra d e i n go od s 58 Invisibles and the current account 58 Capital flows and foreign debt 60 Foreign reserves and the exchange rate

63 Regional overview 63 Membership of organisations

71 Appendices 71 Sources of information 73 Reference tables 73 Population 73 Labour force 74 Government finances 74 Money supply and interest rates

74 Gross domestic product 75 Gross domestic product by expenditure 75 Gross domestic product by sector 75 Prices and earnings 76 Agricultural production 76 Manufacturing production 76 Construction statistics 77 Stockmarket indicators 77 Banking statistics 78 Main trading partners 78 Balance of payments, IMF estimates 79 Balance of payments, national estimates 79 External debt, national estimates 80 Net official development assistance 80 Foreign reserves 80 Exchange rates

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South Africa

Basic data

Land area 1,219,090 sq km (Cape Town: 169,580; Free State: 129,480; Gauteng: 17,010; KwaZulu-Natal: 92,100; Limpopo: 123,910; Mpumalanga: 79,490; Northern Cape: 361,830; North West: 116,320; and Western Cape: 116,320)

Population 44.8m (October 2001 census)

Main towns Population, '000 (1991 official estimates); metropolitan areas: Cape Peninsula 2,185 Pretoria (capital) 1,080 Johannesburg/Randburg 1,916 Port Elizabeth/Uitenhage 854 Durban/Pinetown 1,137 Bloemfontein 300

Climate Temperate, warm and sunny.

Weather in Johannesburg Hottest month, January, 14-26°C (average daily minimum and maximum); (altitude 1,769 metres) coldest month, July, 4-16°C; driest month, June, 6 mm average rainfall; wettest month, January, 150 mm

Weather in Cape Town Hottest month, February, 16-26°C (average daily minimum and maximum); (altitude 17 metres) coldest month, July, 7-17°C; driest month, February, 10 mm average rainfall; wettest month, July, 92 mm

Languages Official languages: Afrikaans, English, IsiNdebele, Northern Sotho (Sepedi), Sesotho, Swazi, Xitsonga, Setswana, Tshivenda, IsiXhosa and IsiZulu; other African, Asian and European languages are also spoken

Measures Metric system

Currency Rand (R)=100 cents; average exchange rate in 2003: R7.56:US$1; exchange rate on November 24th 2004: R6.5:US$1

Fiscal year April-March

Time 2 hours ahead of GMT

Public holidays January 1st (New Year's Day), March 21st (Human Rights Day), Good Friday, Easter Monday, April 27th (Freedom Day), May 1st (Workers' Day), June 16th-17th (Youth Days), August 9th (National Women's Day), September 24th (Heritage Day), December 16th (Day of Reconciliation), December 25th (Christmas Day), December 26th (Day of Goodwill). If any of these days falls on a Sunday, the following Monday becomes a public holiday

Politics

A new political era After centuries of white rule, South Africa held its first all-race election in April 1994, which was won by the African National Congress (ANC). The party's leader, Nelson Mandela, became president. The ANC increased its share of the vote in the second all-race election in June 1999. Thabo Mbeki, who had replaced Mr Mandela as ANC leader in December 1997, was chosen as the new president and formed a national government in partnership with the Zulu-based Inkatha Freedom Party. South Africa's third multiracial general election was held successfully in April 2004 and produced a landslide victory for the ANC, which now has the two-thirds majority in parliament that in theory enables it unilaterally to change the constitution. Some opposition is provided by the Democratic Alliance (DA), but the ANC basically has a free hand, meaning that the most significant policy debates are conducted within the party rather than at the broader level of parliament. This presents the country with an image problem abroad; however benevolent and democratic, one-party states are viewed with suspicion, particularly in Africa.

Political background

The end of apartheid F W de Klerk, who became president in 1989, set about trying to save Afrikaner interests while dismantling apartheid structures. In February 1990 he lifted the ban on the African National Congress (ANC) and other proscribed organisations and released political prisoners, most significantly the ANC leader, Nelson Mandela, who had spent 27 years in prison. In 1992 Mr de Klerk won a firm mandate for change in a whites-only referendum, although it was Mr Mandela's demanding but conciliatory style that dominated the negotiations, institutionalised in the Convention for a Democratic South Africa. The main challenge to the transition process came from the Inkatha Freedom Party (IFP), the ruling party in the defunct KwaZulu homeland, which had been engaged there in an unofficial war with the ANC since the mid-1980s. The war spread to the huge townships around Johannesburg and Pretoria, which were hit by violence during much of the early 1990s.

The 1994 election Despite threats to boycott the general election in 1994, the IFP did take part at the last minute. The election, held in April, did not bring the violence that had been widely feared; the turnout in most areas was high and the buoyant public mood carried the voting over a number of organisational hurdles. The final results gave the ANC nearly 63% of the vote, leaving slightly more than 20% to the National Party (NP) and just over 10% to the IFP. This appeared fair and, most significantly, ensured that the IFP had the 5% of the vote required to secure cabinet representation. The mainly white liberal Democratic Party (DP) and the Pan-Africanist Congress (one of the historical anti-apartheid movements) failed to win 5% of the votes; the white Conservative Party boycotted the election.

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The government of national Mr Mandela was elected president in May 1994 at the first sitting of the all-race unity National Assembly. A government of national unity (GNU) was formed, bringing together the ANC, the NP and the IFP, which was to govern South Africa through the first five years of its transition. Thabo Mbeki of the ANC and Mr de Klerk were made first and second deputy presidents respectively. Mr Mandela's commitment to national reconciliation resulted in a delicate truce with elements of the white right wing, and allowed the leader of the IFP, Chief Mangosuthu Buthelezi, to remain in his cabinet post despite controversial outbursts. The ANC's position was strengthened by local council elections in November 1995, at which it won 64% of the vote (it also strengthened its position in the local elections in KwaZulu-Natal by performing well in urban areas). The ANC quickly became the dominant partner in the GNU over the NP and the IFP, and Mr de Klerk led the NP out of the coalition in July 1996. The IFP also threatened to leave the GNU before the 1999 election, but did not carry out the threat and remained a partner in government with the ANC throughout its second term in office. Important recent events

April 1994 The African National Congress (ANC) wins a clear majority in the country's first fully democratic general election; the new National Assembly elects Nelson Mandela as president, and the three-party Government of National Unity (GNU) coalition is formed. November 1995 The ANC wins a majority in most local councils in the country's first fully democratic local elections. December 1997 The ANC congress elects Thabo Mbeki as head of the party, to replace Mr Mandela, and Jacob Zuma as deputy head. June 1999 South Africa's second multiracial general election is won easily by the ANC. The Democratic Party (DP) becomes the official opposition. Mr Mbeki is sworn in as president and the coalition with the Inkatha Freedom Party (IFP) is renewed. June 2000 The DP merges with the New National Party (NNP) and the Federal Alliance to form the Democratic Alliance (DA). The coalition is led by Tony Leon. However, in October 2001 the NNP withdraws from the DA and enters into a co-operative relationship with the ANC, giving the two parties control of one of the most important local authorities in the country, Cape Town. July 2001 The Organisation of African Unity (OAU) summit in Lusaka approves the presentation of Mr Mbeki's Millennium Africa Plan (backed by the presidents of Algeria and Nigeria and amalgamated with the Omega Plan of the Senegalese president, Abdoulaye Wade) to the G8 summit in Genoa, where it receives

overwhelming support. A high-level liaison officer is appointed to work with committed African leaders to develop a concrete plan of action, renamed the New Partnership for Africa's Development (Nepad). This is presented to the G8 summit in Canada in 2002, committing G8 countries to assisting Africa to achieve the goals set out by Nepad. June 2002 South Africa's parliament passes the controversial Mineral and Petroleum Resources Development Bill. The government—backed by black-empowerment groups, trade unions and various left-wing political lobbies—regards the legislation as a key part of its transformation and black empowerment policies. The legislation is designed to ensure that "good-quality ore currently in the hands of the big mining houses passes into black hands" within a decade. July 2002 Spearheaded by Mr Mbeki, the African Union (AU) is formally launched, replacing the OAU, which was founded in 1963. The AU will act as the umbrella institutional structure for Nepad. Nepad will become a cornerstone of the country's relations with the outside world, and Mr Mbeki has pinned his hopes on its success. Its success or failure will be increasingly tied to South Africa's ability to make things work in Africa, both politically and economically. However, South Africa's failure to tackle the debacle in neighbouring Zimbabwe is highly damaging to its efforts to project a self-help culture from Africa. August 2003 The government finally announces a plan to deal with the HIV/AIDS crisis. However, implementation remains deficient: by March 2004 only 2,700 sufferers were receiving anti-retroviral treatment, against a target of 53,000. September 2003 The director of public prosecutions decides to press corruption charges against the former financial adviser of the deputy president, Mr Zuma. Although Mr Zuma has not been charged directly, he is indirectly implicated in the charges. The police investigation is centred on whether Mr Zuma had solicited bribes from a French arms contractor, Thomson CSF (now called Thales), one of the main companies involved in a R43.8bn (US$7.2bn) arms deal in December 1999. March 2004 The government's policy towards black economic empowerment (BEE) moves ahead with the final version of the charter for the mining industry. Leading industry figures say that the initiative will reduce the sector's "total value" by 1.5% over the first five years because of the costs of compliance. April 2004 Elections for the National Assembly are held, attracting a higher than anticipated turnout among registered voters, of 76.7%. The ANC wins 279 seats, the DA takes 50 and the IFP captures 28. The IFP leader, Chief Mangosuthu Buthelezi, retires from cabinet and his previous post as home affairs minister.

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June 2004 Mr Mbeki's claim to be able to broker a resumption of talks between the Zimbabwean government of Robert Mugabe and the opposition fails to produce results by the end of June. The ANC is under sustained pressure to help to end the political crisis in its neighbour, but Mr Mbeki remains reticent to put pressure on Mr Mugabe, despite international investor warnings that the situation is damaging to South Africa and the subregion. September 2004 The NNP, the much-mutated successor to the apartheid-era National Party, effectively collapses following the decision of its leader, Marthinus van Schalkwyk, to join the ANC. The move leaves the DA as the only significant independent opposition. Recent political developments

Mixed performance in the Under Mr Mbeki's second-term (1999-2004) the macroeconomic fundamentals second term improved even further and South Africa became increasingly seen as the premier credit risk on the continent. Progress has been made in tackling many of the structural defects that affect social delivery, in particular the financial management capacity of the lower tiers of government, and this will be a priority for the current administration, elected in April 2004, given its strategic shift to a more "Keynesian" policy stance favouring state spending to create jobs. The ANC is more than comfortable with private-sector enterprise and, indeed, many leading figures within the movement have become extremely wealthy from the opportunities on offer. However, its problem is that its macroeconomic policies in areas such as trade liberalisation and its justified decision not to use the exchange rate as a tool to gain passing competitive advantage have left it politically exposed to its core base of support, namely poor black unskilled labour, which is struggling to find work in a rapidly transforming economy. Despite its undoubted achievements—ten years ago a frequently espoused view was that the country would degenerate into racial civil war—the reputation of the Mbeki administration both at home and abroad is blighted by its failure to deal decisively with the country's HIV/AIDS epidemic and by Mr Mbeki's own highly controversial stance on the issue, which has in effect led him to withdraw from any debate on the problem. In the past he has questioned the link between HIV/AIDS and sexual activity, offering instead the view that the disease is fundamentally a manifestation of poverty. The high level of unemployment, variously estimated at between 30% and 60%, depending on how informal-sector work is counted, is another key domestic challenge for the government, which has moved to an economic policy that emphasises the state in job creation rather than the private sector.

A number of challenges Mr Mbeki's international reputation has also been damaged by his conciliatory remain stance towards the Zimbabwean president, Robert Mugabe. His leadership role in the New Partnership for Africa's Development (Nepad, the ambitious pan- African development initiative championed by Mr Mbeki) in 2002 has, nevertheless, made him a significant figure on the international stage. Foreign

policy is generally regarded as the president's favourite realm of operation and is likely to remain important in the coming years. At the same time, however, the lack of progress in resolving the conflict in Zimbabwe has dampened EU and US enthusiasm for Nepad, which has yet to really gather speed.

ANC wins two-thirds majority As expected by the Economist Intelligence Unit, the ANC overwhelmingly in 2004 defeated its opponents in the national election on April 14th 2004. The ANC managed to secure a two-thirds majority of the votes, upping its share from 66.4% in 1999 to 69.7%. Total votes cast as a proportion of total registered voters resulted in a 76.7% poll but, when the number of eligible voters is considered, only about 58% turned out. The election was generally considered "free and fair", with only a few isolated cases of intimidation and no violence, even in KwaZulu-Natal, which had been a problem province in the past with clashes between the ANC and the IFP. The votes received by both the ANC and the combined opposition have fallen since 1994—the ANC from 12.2m in 1994 to 10.9m in 2004 and the combined votes of other parties represented in parliament from 7.1m in 1994 to 4.5m in 2004. Opposition parties have, therefore, lost more ground than the ANC since 1994. However, between 1999 and 2004 the ANC gained 277,000 votes and the DA 404,000 votes, with the new Independent Democrats (ID) registering 270,000 votes (1.7% of the poll). Losers were the New National Party (NNP), the IFP and United Democratic Movement (UDM). The DA consolidated its position as the main opposition party, obtaining 12.4% of the votes as against 9.6% in 1999. The IFP lost ground, polling 7% as against 8.6% in 1999, while the NNP (the successor to the National Party, which ruled South Africa for 46 years from 1948-94) almost disappeared, its support falling from 6.9% in 1999 to 1.7%. The UDM slid to 2.3% from 3.4% in the previous election, but still claimed 9 seats.

National Assembly election results, 2004 Votes % Seats African National Congress 10,878,251 69.68 279 Democratic Alliance 1,931,201 12.37 50 Inkatha Freedom Party 1,088,664 6.97 28 United Democratic Movement 355,717 2.28 9 Independent Democrats 269,765 1.73 7 New National Party 257,824 1.65 7 African Christian Democratic Party 250,272 1.60 6 Freedom Front Plus 139,465 0.89 4 Pan-Africanist Congress of Azania 113,512 0.73 3 United Christian Democratic Party 117,792 0.75 3 Minority Front 55,267 0.35 2 Azanian People's Organisation 41,776 0.27 2 Others 113,161 0.73 0 Total 15,612,667 100.0 400 Spoilt papers 250,887 Total votes 15,863,554 Registered voters 20,674,926 % poll 76.7

Source: Economist Intelligence Unit.

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The ANC now controls all nine For the first time the ANC is in control, either singly or as the major coalition provinces partner, in all nine provinces. As expected, it easily retained the seven provinces that it had previously controlled, but emerged for the first time as the single strongest party in KwaZulu-Natal and the Western Cape. In KwaZulu-Natal the ANC won 38 of the 80 seats but, with the support of the Minority Front, the African Christian Democratic Party (ACDP) and the UDM, was able to lead a coalition with 43 seats as opposed to the 37 of the IFP-DA coalition. In the Western Cape the ANC won 19 seats but, in coalition with the NNP, was able to command 24 seats in the 42-seat legislature. The losers were the IFP in KwaZulu-Natal and the NNP in the Western Cape.

The ANC gains ground in a The ANC's strongest performances were in Limpopo (89.2%), Mpumalanga number of regions (86.3%), Free State (81.8%), North West (80.7%) and Eastern Cape (79.3%), and its weakest in the Western Cape (45.3%) and KwaZulu-Natal (47%). The DA performed best in the Western Cape (27.1%), Gauteng (20.9%) and Northern Cape (11.1%). The support base of other parties tended to be strongly regional— the IFP captured 36.9% of the vote in KwaZulu-Natal, the NNP 10.9% in the Western Cape and the UDM 9.2% in the Eastern Cape, where it is the official opposition. The United Christian Democratic Party (UCDP), a relic of Bantustan politics, contested the election only in North West Province, where it is the official opposition.

Provincial legislatures, seat allocation Party EC FS Gaut KZN Limp Mpum NC NW WC African National Congress 51 25 51 38 45 27 21 27 19 Democratic Alliance 5 3 15 7 2 2 3 2 12 Inkatha Freedom Party 0 0 2 30 0 0 0 0 0 United Democratic Movement 6 0 1 1 1 0 0 0 1 Independent Democrats 0 0 1 0 0 0 2 0 3 New National Party 0 0 0 0 0 0 2 0 5 African Christian Democratic Party 0 1 1 2 1 0 1 0 2 Freedom Front Plus 0 1 1 0 0 1 1 1 0 Pan Africanist Congress of Azania 1 0 1 0 0 0 0 0 0 United Christian Democratic Party 0 0 0 0 0 0 0 3 0 Minority Front 0 0 0 2 0 0 0 0 0 Total 63 30 73 80 49 30 30 33 42 Note. Eastern Cape (EC); Free State (FS); Gauteng (Gaut); KZN (KwaZulu-Natal); Limpopo (Limp); Mpumalanga (Mpum); Northern Cape (NC); North West (NW); Western Cape (WC).

The cabinet is appointed Mr Mbeki has increased the size of the cabinet by one ministry and eight deputies. Instead of a radical overhaul, the president opted to maintain the status quo in portfolios related to service delivery and poverty alleviation. The Ministry of Arts, Culture, Science and Technology has been split into two, and the cabinet now represents an unwieldy body of 30 people. The cabinet, like the ANC, is a broad church, and now also includes members from the NNP, the Azanian People's Organisation and the UDM. Notable, however, was the dropping of two members of the IFP, including that party's leader, Mr Buthelezi. The number of deputies has been increased from 13 to 21. Above all, Xhosas remain the dominant ethnic group in the cabinet, constituting 37% of ministers and deputy ministers. This is likely to continue to be unpopular with the ANC

in other regions that regard themselves as under-represented. Two ministers were appointed from outside the National Assembly—Mosibudi Mangena and Makhenkhesi Stofile. More than two-thirds of the previous cabinet were retained, 15 in their same portfolios, and this has led to some speculation that there will be further changes during the next five years, as some senior ministers are expected to leave for new jobs. These may include Trevor Manuel (the minister of finance) and, somewhat less likely, Alec Erwin (the minister of public enterprises). Mr Erwin's move from the Ministry of Trade and Industry is particularly significant, as economic policy is shifting towards emphasising parastatals as a major engine of economic growth and job creation. Also important is the move of Maria Ramos, the highly respected former deputy minister of finance, to head the sprawling state transportation company, Transnet, with a brief to radically improve its historically poor performance, particularly in terms of mass transit. In turn, Mr Manuel is frequently tipped for appointment to a major international position, possibly within either the IMF or the World Bank.

Opposition parties face an The "Coalition for Change", under which the DA and the IFP co-operated to uncertain future fight the 2004 election, is no longer in existence. This is not surprising, since the two parties have always had different perceptions about their role in South African politics. While the DA aims to form a strong opposition to the ANC, the IFP was prepared to oppose the ANC in KwaZulu-Natal in the hope of ruling the province, but to broadly co-operate with the ANC at national level. The ANC, by offering the IFP seats in the provincial cabinet, undermined the coalition, and now both the DA and the IFP lay claim to being the official opposition in KwaZulu-Natal. The DA's leader, Tony Leon, and senior politicians adopted an abrasive stance during the election, criticising not only the ANC but also other opposition parties, notably Patricia de Lille's ID, causing the DA to lose some support (both white and coloured) to the new party.

The NNP leader joins the ANC On August 7th 2004 the leader of the NNP, Marthinus van Schalkwyk, announced his intention of joining the ANC. The NNP fought the April election under a co-operation agreement with the ANC, and Mr van Schalkwyk's decision is no surprise, as he was rewarded with a cabinet position as minister of environmental affairs and tourism. He stated that he would advise other members of his party to do the same, effectively implying that the NNP should dissolve and be absorbed by the ANC. However, the constitution provides for elected representatives to change parties only during floor-crossing periods, which means that provincial and parliamentary representatives will have to wait until 2005. The ANC and the NNP have reached an agreement that joint membership may prevail in the meantime, but with dual members falling under the discipline of the ANC. The ANC and NNP leaderships are to embark on a national campaign to persuade elected members to join the ANC, but it remains to be seen whether other NNP representatives in the various levels of government will elect to preserve their positions by doing so or to remain in opposition. It is clear, though, that the party that ruled South Africa from 1948 to 1994, and that implemented apartheid, has come to the end of any significant role in South African politics.

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"Floor-crossing" by opposition members strengthens the ANC's position

In 2003 South Africa introduced legislation to allow elected politicians to "floor cross" to different parties during specified windows of time. In a Westminster-style political system such a concept is somewhat alien, but is one that clearly benefits the African National Congress (ANC), which is the dominant party by far. At the municipal level the window opened in September 2004, close on the heels of the decision of the New National Party (NNP) leadership to submit, in effect, to ANC control. The Independent Electoral Commission reported that three-quarters of NNP local councillors had defected in September 2004, most of them to the ANC, leaving only 60 out of the previous total of 351 still under the NNP umbrella. The Democratic Alliance (DA) has lost 44 councillors but gained 67, leaving it with a net gain of 23. While important, the shift in local government allegiances needs to be viewed at least partly as moves by municipal officials to ride the prevailing tide of politics. Much more important will be the opening of the window for parliamentary and provincial defections in September 2005. At that time, the NNP will almost certainly wither into insignificance at the national level, and may even formally dissolve.

Constitution, institutions and administration

A new era: the interim Before the 1994 general election, under the apartheid system, voting was constitution restricted largely to whites. With the dawn of a new political era, an interim constitution was drawn up in multiparty talks and enacted in December 1993 by the then white parliament. It provided for an elected Constituent Assembly (parliament) under the executive leadership of the state president, consisting of a 400-seat House of Assembly (the lower house) elected by proportional representation and a 90-seat Senate (the upper house) made up of representatives from the nine provinces, which incorporated the black "homelands" of the apartheid era.

The final constitution and The Constituent Assembly approved a revised version of South Africa's government structure constitution in October 1996, which came into force in February 1997. During the drafting, tension arose over federal powers: smaller parties, especially the IFP, were keen on securing their regional power base. The final constitution ultimately created nine provinces (see The economy: regional trends), which, for the first time in South African history, had not only administrative powers but also political control over a few, relatively unimportant, legislative areas. There are thus nine provincial legislatures, each with a premier and a ten- person executive council. The national parliament comprises a 400-member National Assembly (elected on a pure proportional representation system) and a 90-member National Council of Provinces that has significant powers only in areas of provincial competence. Local government is an autonomous sphere of government with responsibility for providing local services. The main innovation of the constitution was to introduce a Bill of Rights, guaranteeing a wide range of civil liberties. For the first time, South Africa now takes its legal cues from the constitution itself, turning away from the previous, British-influenced model in which parliament had supreme authority to shape the law. Nevertheless, most of the constitution can be altered by the

vote of two-thirds of both houses of parliament (except the Bill of Rights, which needs a three-quarters majority). This was one of the main issues in the 1999 election campaign. Parliament has, however, lost some of its authority and credibility, as the ANC's party bosses limit dissent and ensure support for executive policy and legislation. This has been most noticeable over the issues of Zimbabwe, HIV/AIDS and the arms purchase contracted in December 1999, which has attracted allegations of corruption and is still being investigated. Key institutions and ministries

Constitutional Court The Constitutional Court functions rather like the US Supreme Court, but with a brief that is limited to constitutional affairs. It has clearly demonstrated its independence from the government led by the African National Congress (ANC), as has the judiciary generally, even though a number of people with a background in the ANC have taken positions on the bench. National Economic, Development and Labour Council The National Economic, Development and Labour Council reflects the consensus- seeking approach to policymaking, which is an integral part of the political process, drawing business, labour and community organisations into interaction with the government (see Economic policy). Presidency The president's office is the centre of policymaking and co-ordination in government. It is headed by a former anti-apartheid cleric, Frank Chikane, and is dominated by the politically powerful minister without portfolio, Essop Pahad, a close confidant of the president, Thabo Mbeki. Ministry of Finance The minister of finance, Trevor Manuel, is credited with driving the politically contentious macroeconomic programme of the government (see Economic policy). His next move is probably to a senior international position rather than higher office within domestic politics, South Africa's shortage of skilled labour weakens the capacity of the bureaucracy at all levels of government. A further problem has been co- ordination and co-operation between different government departments and different tiers of government; attempts have been made through the presidency to tackle this. These problems are worse in provincial and local governments (outside the three main metropolitan areas).

Corruption is not the problem There is concern over ANC cronyism in connection with senior appointments that it is in the rest of Africa in the civil service and the awarding of government contracts. However, South Africa is generally amongst the least corrupt countries in Africa and is comparably ranked amongst its peers in terms of income elsewhere in the world. Most of the cases that the elite criminal investigation unit, the Scorpions, investigate—with an impressive conviction rate of 85%—concern low-ranking civil servants seeking to supplement low wages. South Africa's general commitment to fighting corruption and the lack of widespread corruption

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among senior politicians is also confirmed in many surveys of corruption. The latest corruption rankings from a Berlin-based non-governmental organisation, Transparency International (TI), released in mid-October, appear to give a fair representation of actual trends in South Africa, with the country edging up from a score of 4.4 in 2003 to 4.6 in 2004 (where zero represents maximum corruption and 10 complete freedom from graft). TI also ranks South Africa 44th out of 146 countries on its index of corruption. Encouragingly, there is little patience shown towards corrupt politicians by the leadership of the ruling ANC party if and when allegations are proven.

Corruption Perceptions Index 2004, selected countries in Sub-Saharan Africa Country 2004 rankinga 2004 scoreb 2003 score % changec Botswana 31 6.0 5.7 5.3 South Africa 44 4.6 4.4 4.5 Ghana 64 3.6 3.3 9.1 Tanzania 90 2.8 2.5 12.0 Ethiopia 114 2.3 2.5 -8.0 Zimbabwe 114 2.3 2.3 0.0 Uganda 102 2.6 2.2 18.2 Kenya 129 2.1 1.9 10.5 Nigeria 144 1.6 1.4 14.3 Sub-Saharan African average - 2.9d 2.8e 3.6 a Out of 146 countries. b Zero indicates totally corrupt; 10 indicates totally clean. c Between 2003 and 2004. d Based on 31 countries. e Based on 24 countries. Source: Transparency International.

Political forces

The African National Congress The dominant party in South Africa is the ANC, the main party of extra- parliamentary opposition to minority rule since it was founded in 1912. A defining feature of the ANC has been its commitment to non-racial democracy. However, it is a coalition of diverse interests. Differences are apparent between members associated with the movement in exile, such as Mr Mbeki, and those who worked in the underground movement and the United Democratic Front (UDF), which acted as a domestic political surrogate for the ANC in the late 1980s. The ANC has a long tradition of exceptional leaders. Most attention has focused on Nelson Mandela, who was imprisoned from 1963 to 1990, but many other members are also impressive. Mr Mandela's successor, Mr Mbeki, virtually ran the day-to-day business of government during the final year of Mr Mandela's presidency. He was one of the architects of the government's growth, employment and redistribution strategy in January 1997, and was elected unopposed to the ANC presidency at the party's national congress in December 1997. Since Mr Mbeki's assumption of the presidency, there has been more tension in the organisation around the leadership than there was during Mr Mandela's five years in office. There is a significant minority within the ANC and its alliance partners who feel that Mr Mbeki has shown poor judgment on a number of issues. These include, most recently, the handling of the Zimbabwe

situation, the HIV/AIDS epidemic, the controversial arms deal and racial reconciliation, on which Mr Mbeki has been more Africanist than Mr Mandela. However, Mr Mbeki's control over the ANC remains strong, as reflected by the fact that little critical open public debate or discussion takes place on controversial policy issues within parliament. This is a significant departure from the historical culture of the ANC. Moreover, it seems that Mr Mbeki's power in the ANC is unlikely to be challenged in his second and final term in office.

COSATU and SACP: part of a One of the most important non-party political forces in the country is the strained alliance Congress of South African Trade Unions (COSATU), which emerged in the mid- 1980s as a force of political opposition while the ANC was banned. Its most talented leaders have been absorbed into the government, leaving COSATU with a weak leadership. The South African Communist Party (SACP) has lost a significant proportion of its membership since the ban on the ANC was lifted in 1990, but it continues to provide intellectual arguments for the left. Both COSATU and the SACP have a number of ministers in the present government, who actively defend the conservative economic framework within which the government operates; this illustrates the complex relationship between and within the three organisations. Tensions between the ANC, the SACP and COSATU have been mounting in recent years as the ANC's partners have demanded a stronger voice in policymaking and criticised the ANC's policies on macroeconomic policy, labour reform and privatisation. However, to date, the issues keeping the alliance together are stronger than their differences, suggesting that the alliance will continue in its present form. This acts as a drag on the government's desire to reform the labour market, increase the pace of privatisation and keep South Africa open to international economic forces. However, the alliance has resulted in a much more stable labour environment than before 1994, and has enabled certain sector-specific accords to be put in place in the quest for global competitiveness.

Inkatha Freedom Party The IFP was the ruling party in the KwaZulu homeland from 1974, under the leadership of the unpredictable Mangosuthu Buthelezi. Improved relations between the IFP and the ANC, which have had a bloody history, became a critical factor in determining whether South Africa would successfully negotiate its way into the post-apartheid era. The IFP's strong support base in rural KwaZulu-Natal has allowed it to play a national role, and both Mr Mandela and Mr Mbeki have sought to cultivate Mr Buthelezi, who held the home affairs portfolio between 1994 and 2004. However, as the ANC now controls the KwaZulu provincial government, Mr Buthelezi has returned to the backbenches of the National Assembly, although he still heads the IFP. The future of the party when Mr Buthelezi goes (he is now in his 70s) is uncertain, not least because its hold on the votes of younger urbanised Zulus has weakened.

Democratic Alliance: the The DA is the official opposition party and was formed in June 2000. Until official opposition November 2001 the two main parties in the DA were the Democratic Party, which became the official opposition after the 1999 general election, and the

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New National Party. The partnership between the DP and the NNP followed a marked shift to the right by the DP in the 1999 election, when it attracted much of the NNP's conservative support base. The articulate leader of the DP, Tony Leon, led the new grouping. The DA will continue its efforts to develop support among the black population, although it is unlikely to have much success: largely whites and the middle classes, rather than poor blacks, have supported the party.

The white right and radical left The previously influential political groups of the white right (such as the are marginalised Conservative Party and the openly racist Afrikaner Weerstandsbeweging) have become completely marginalised. The Afrikaner cause, including the establishment of a volkstaat—a white homeland within South Africa—has been promoted since 1994 by the Vryheidsfront party. However, none of these groupings carries any significant political clout outside their narrowly based support bases. At the other end of the political spectrum, the radical Pan Africanist Congress and the Azanian People's Organisation performed dismally in the 1999 general election. Main political figures

Thabo Mbeki Beginning his second, and constitutionally his last, term of office Mr Mbeki remains in firm control of the African National Congress (ANC) and the government. Internal criticism was brushed aside at the ANC's consultative conference in December 2002, where Mr Mbeki was able to consolidate his power—a number of members of the South African Communist Party and the Congress of South African Trade Unions were removed from the ANC's National Executive Committee, leaving the "pragmatists" and Mbeki loyalists in a stronger position. Although Mr Mbeki is under pressure from marginalised elements of society to tackle the country's social ills, he will remain unyielding to the government's tripartite alliance partners. He will continue to exert South African influence in the region, and in Africa generally, through the mechanisms of the New Partnership for Africa's Development (Nepad). He will remain committed to the transformation of society and to Africanisation, and will focus more on bottom-up black economic empowerment during his second term in office. Nelson Mandela Although the former president has retired from politics, he is still a powerful figure in South African and international politics. Having played a key role in bringing about national reconciliation, he remains popular throughout the country among blacks as well as whites. Mr Mandela, the consummate politician, has combined sharp criticism of the government's approach to HIV/AIDS with support for Mr Mbeki's re- election as ANC president at the party's national congresses in December 2002 and April 2004. He has also publicly advanced a much more critical view of Zimbabwe's president, Robert Mugabe, than Mr Mbeki has done. Jacob Zuma An ANC loyalist elected party deputy president in December 1997, Mr Zuma was named as Mr Mbeki's deputy president in June 1999. The position has become largely ceremonial, indicating the growing strength of the president's office in policy

formulation. Mr Zuma was pivotal in bringing peace to KwaZulu-Natal, which suffered political violence in the late 1980s and early 1990s. He retained his position as deputy president of the ANC in the party elections in December 2002. However, his position as deputy president of the country following the 2004 general election hangs in the balance following allegations of corruption. A police investigation is centred on whether Mr Zuma had solicited bribes from a French arms contractor, Thomson CSF (now called Thales), one of the main companies involved in a December 1999 arms deal. Indeed, his former personal financial adviser, Schabir Shaik, is currently on trial for corruption, and during the hearings Mr Zuma is likely to be embarrassed, even if he is not formally charged. Trevor Manuel and Tito Mboweni The minister of finance and the first black governor of the South African Reserve Bank respectively have both established strong reputations for competency. Although they work well together on the economy, the two have seldom been on the same side in a political argument and their relationship is frosty. Both are fiercely independent thinkers who have proved to be fast and adept learners, and both would admit a tendency towards conservatism in fiscal and monetary matters. Mr Manuel has distinguished himself as one of South Africa's better finance ministers, and his fiscal discipline in the face of often heavy pressure from the ANC rank and file has won him the respect of the financial markets. Alec Erwin A former communist, he is now the minister for public enterprises, which is a key role given that economic policy has shifted towards emphasising state companies as a source of jobs. As minister of trade and industry Mr Erwin oversaw the successful liberalisation of South Africa's trading environment. He carried much of the responsibility for restructuring South Africa's manufacturing sector and diversifying and boosting export earnings. Astute and an eloquent speaker, he will need all his experience as a trade union leader to keep restive public employees under control. Cyril Ramaphosa A former trade unionist and the ANC's secretary-general from the lifting of the ban on the ANC until his departure from representative politics in 1997, Mr Ramaphosa was the ANC's chief negotiator in the constitutional negotiations and co-chairman of the Constituent Assembly that drafted South Africa's new constitution. Mr Ramaphosa remains one of the most popular members of the ANC's National Executive Committee. Now a successful businessman on the fringes of politics, he is still many people's favourite to succeed Mr Mbeki in 2009. Nkosazana Dlamini-Zuma Currently the minister of foreign affairs, Ms Dlamini-Zuma is considered by some to be one of the early contenders to succeed Mr Mbeki after his second term as president ends in 2009. Although she certainly has the ambition and drive for the job, she has alienated key elements of the ANC and its alliance partners. Her role as foreign minister has largely been played out in Africa and she is not well known beyond the continent. Ms Dlamini-Zuma is tough and uncompromising, traits that have served her well in forging peace accords on a continent not known for its acceptance of women in positions of authority, but she is no diplomat and lacks the

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polish of a presidential candidate. More suitable women candidates are likely to emerge when the race for Mr Mbeki's succession begins in earnest, probably in 2007. To ny Leo n The leader of the Democratic Alliance (DA), Mr Leon remains by far the most effective opposition leader. Nonetheless, he will continue to struggle to shed the DA's image as a party mainly for non-black South Africans, despite some modest gains in more traditional black areas. His style is aggressive and confrontational, and often irritates friend and foe alike. Mr Leon will continue with his efforts to develop support among the black population, although they are unlikely to have much success. Patricia De Lille A firebrand politician who made the Pan Africanist Congress (PAC) more of a political force than it perhaps deserved to be, Ms De Lille started a new, one-person, party during the floor-crossing period of 2003. Her resignation from the PAC to form the Independent Democrats was a result of her frustration with attempting to navigate PAC politics while performing effectively in parliament. Her new party recorded a creditable outcome of seven seats in the 2004 election, and has some backing from big business, impressed with her tigerish style and determination to keep politics as free of corruption as possible. Ms de Lille is a determined, principled individual who always seemed out of place in the largely ineffective PAC, and she could make a political impact in coming years if she can gain financial and other support for her fledgling party. International relations and defence

Mr Mbeki's African The all-race general election in 1994 represented not just a transformation of Renaissance domestic politics but a shift in South Africa's position internationally. At the regional level, economic and political co-operation is driven by Mr Mbeki's vision of an "African Renaissance". South Africa actively engages with its African neighbours at both the political and commercial level, both bilaterally and as a member of regional bodies such as the African Union (AU; previously the Organisation of African Unity—OAU) and the Southern African Development Community (SADC). However, South Africa has to tread a fine line. There are mixed feelings among business people and politicians in Southern Africa about the country's dominant role in the region. These range from hopes that the neighbourhood giant will spark off a region-wide recovery, to fears that South Africa will steal a competitive march on the nascent industries of other countries. At the political level, South Africa has had to play a non-intrusive yet firm role to encourage the peaceful resolution of conflicts in Angola, the Democratic Republic of Congo (DRC), Mozambique, Rwanda and Burundi, and, most recently, Zimbabwe. Although neither Burundi nor the DRC has yet found a lasting political settlement, South Africa's efforts to date show that African-led negotiations can help to solve African problems—a point that the president will continue to make a central principle of foreign policy. However, South Africa's continuing failure to broker an end to the political and economic crisis in Zimbabwe has cost it dear in terms of the credibility of its foreign policies, as

well as its efforts to attract inflows of foreign direct investment because of concerns about the ANC's commitment to property rights.

New Partnership for Africa's The government won the approval of the OAU conference in Lusaka to present Development Mr Mbeki's Millennium Africa Plan (MAP) to the G8 summit in Genoa in July 2001. Although driven forward by Mr Mbeki, the MAP was strongly supported by the presidents of Algeria and Nigeria. The MAP was then merged with the Omega Plan—which was put forward by the Senegalese president, Abdoulaye Wade—and presented in Genoa. It was agreed there that a high-level liaison officer would be appointed to work with committed African leaders to develop a concrete plan of action to be presented to the G8 summit in Canada in 2002. The plan was renamed the New Partnership for Africa's Development (Nepad). It received overwhelming support at the G8 summit in 2002, where the group detailed an Africa Plan of Action that commits G8 countries to assisting the promotion of Nepad. Nepad argues that Africa needs to involve itself much more closely in the global economy. To do this it needs to implement a series of reforms, which will be supported by the G8 through a combination of external debt relief and improved trade access to the developed world. Increased financial aid is mentioned, but is deliberately downplayed to emphasise that the thinking behind the plan is that responsibility for the success of the plan lies with African leaders. The key reforms proposed by Nepad include: • the establishment of civil order and more democratic government; • the prevention and reduction of conflict throughout Sub-Saharan Africa; • greater respect for human rights; • increased investment in human resources through health and education; • policies aimed at diversifying African economies and boosting trade with the rest of the world; • measures to enable Africa to adopt new technologies; and • the combating of the range of diseases that afflict the continent, from AIDS to malaria. Mr Mbeki has constantly stressed that although his goals may be ambitious there is still a strong moral obligation to push such ideas forward and strive to promote African development. Moreover, although many African governments may be recalcitrant, if some countries do adopt Nepad's prescriptions and start to grow rapidly, they will serve as trailblazers for others to follow. African countries could then act in mutual support of each other, promote African issues on the global agenda and talk to other African leaders from a much stronger political and economic base. An encouraging development is that a number of countries have agreed to submit to Nepad's peer review process, which envisages the assessment of each government by a council of Africa's "wise men", including Chris Stals, a former governor of the South African Reserve Bank.

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South African National Since the end of apartheid the greatest challenge for South Africa's armed Defence Force forces has been the integration of former members of the ANC's armed wing, Umkhonto we Sizwe (MK). This began slowly and has generated some resentment among MK cadres. An estimated 35,000 members of MK and other South African resistance movements—as well as 11,500 members from former homeland forces—were to be absorbed into the South African National Defence Force (SANDF), but only 28,000 were taken in, of whom only about half remain. The SANDF has nevertheless undergone a substantial transformation since 1994, and 70% of its soldiers are now black (African, coloured and Indian). However, more than 60% of senior officers are white, and the apparent disorganisation of SANDF troops when they entered Lesotho in September 1998 was attributed to a lack of cohesion in the army. Although the services have received a controversial R30bn (US$3.6bn) new weapons package, they have warned that budget cuts may force the closure of three air force bases, and that most of their units are at less than 50% readiness. The issue of HIV/AIDS in the army is also an increasing source of concern. Moreover, the overstretched SANDF forces are under pressure to support, on the ground, with personnel, Mr Mbeki's desire to rely increasingly on African forces for peacekeeping on the continent.

Comparative military forces, 2004 South Africa Zimbabwe Nigeria Algeria Army 36,000 25,000 62,000 110,000 Air force 9,250 4,000 9,500 10,000 Navy 4,500 0 7,000 7,500 Total 55,750a 29,000 78,500 127,500 Paramilitary forces n/a 21,800 82,000 181,200 Defence spending (US$ bn) 2.5 0.9 0.4 2.2 a Includes 6,000 serving in military health service. Source: International Institute for Strategic Studies, The Military Balance 2003/04.

Security risk in South Africa

Armed conflict There is currently little prospect of an external threat to South Africa's security. The challenge for the South African National Defence Force (SANDF) in recent years has been to integrate the former liberation movements while reducing its own man- power. As there is no foreign threat to South Africa, the future role of the SANDF is likely to be restricted to regional peacekeeping and emergency relief operations. Violent crime Economic and social tensions are responsible for a high level of criminal violence in South Africa, particularly in urban Gauteng but also in the Western Cape. Crime in Gauteng has adversely affected businesses, which have steadily moved away from Johannesburg's central business district into well-to-do suburbs such as Sandton. Organised business funds a body called Business Against Crime, which monitors and assists in combating crime at the local level. The high level of crime is perceived to be one of the obstacles to economic growth; however, studies of foreign investors' attitudes to crime present a mixed picture.

Crime in the Western Cape has centred mainly in the poorer Cape Flats region, which has been plagued by organised and armed gangs. A study by the World Health Organisation in 1995 showed that South Africa had one of the highest murder rates in the world, although this has declined recently. According to the 2003 edition of the Small Arms Survey, a report by a Geneva-based organisation, about 30m small arms are in circulation in Sub-Saharan Africa (one weapon for every 20 people). Rates of rape, robbery, hijacking and burglary are also extremely high, although kidnapping and extortion are rare. A sign that the government is not being complacent about crime is the increase in real terms of budget allocations to the South African Police Service (a 11.7% nominal rise for the 2003/04 fiscal year and a projected increase of 10.5% in the following year) and the recruitment of 16,000 extra police personnel, at a cost of R5bn.

The rate of politically motivated murder has fallen from the peak in 1993. Part of South Africa's susceptibility to violence stems from the historical legacy of apartheid and the violent society that this created, as well as the high level of gun ownership. It also reflects the fact that crimes can be committed with a degree of impunity, as the chances of being caught are low. In addition, South Africa has one of the most unequal distributions of income in the world; on the one hand, it has the affluence and sophistication of gleaming shopping centres and, on the other, levels of poverty associated with developing countries.

Such inequality is an important factor behind crime in the new South Africa. So too are the rapid influx of people into urban areas since the early 1990s (including people from neighbouring countries), the high level of unemployment and the difficult transformation taking place in the police service and the criminal justice system. The challenges facing the 130,000-strong South African Police Service are formidable, and it is not uncommon for businesses and residents in more affluent suburbs to employ private armed security firms. Civil unrest Political violence has decreased sharply. Most of the political violence of recent years has been in KwaZulu-Natal and Gauteng, where conflict between the African National Congress and the Inkatha Freedom Party has claimed the lives of 14,000-20,000 people since 1984. There are still sporadic outbursts of political violence in KwaZulu-Natal, but these are quickly controlled. Organised crime The opening-up of South Africa to the global economy has caused an increase in the activities of domestic and international crime syndicates. South Africa came top in the category of organised crime and corruption in the World Economic Forum's Global Competitiveness Report. Even though elite special forces (the Scorpions) have been created and have operated successfully in areas such as the Western Cape, the underlying tensions and constraints are difficult to resolve and crime is unlikely to fall dramatically in the near future. There was a spate of bombings in Cape Town in 1999-2000, attributed to a vigilante group, People Against Gangsterism and Drugs (PAGAD), which was formed in response to the ineffectual policing of crime in the Cape Flats by the official authorities. However, PAGAD itself became involved in

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criminal activities and acts of criminal violence. The arrest of most of the leaders of the group put an end to its activities. Terrorism There are a number of militant Islamic groups in the Western Cape, including Qibla and an affiliate of PAGAD, Muslims against Illegitimate Leaders, some of which are reported to have links with Osama bin Laden's al-Qaida network. However, no incidents have occurred since the terrorist attacks in the US on September 11th 2001. Social unrest Civil society protests, including demonstrations by workers, have, in the main, been well organised and peaceful. At worst, there have been just a few skirmishes. Resources and infrastructure

Population

Population indicators, 2002 Population (mid-year; m) 45.5 Population growth rate (%) 2.0 Fertility rate (children per woman) 2.8 Life expectancy (years) 46.5 Urbanisation (%) 50.4

Sources: Statistics South Africa; World Bank, African Development Indicators.

The 2001 census results show In July 2003 Statistics South Africa (SSA) formally released the main results of social progress the 2001 population census at a press conference in Pretoria; they contain positive news about the overall level of economic development in the country. Data from the census show that between 1996 and 2001 there have been significant improvements in the provision of housing, water, electricity and communications for the average South African. One of the early economic policies of the new African National Congress (ANC) government when it came to power in 1994 was the "million houses" scheme, and, as the census shows, the government has continued to build on this, with more than 2m houses—classified as formal structures built out of bricks and mortar—being built between the first post-apartheid census in 1996 and the current one, conducted in 2001. Moreover, and crucially for the government, the increase in houses was largely in black residential areas, where the number of households increased sharply, from 6.5m in 1996 to 8.7m in 2001. The census also revealed the following: • the number of households with electricity increased by 10% between 1996 and 2001, with just over 70% of households now using electricity for lighting and just over 50% also using it for cooking; • an even larger percentage of households, 85%, now have access to piped water within a 200-metre radius of their homes, although 15% use boreholes, rivers and rainwater tanks; • the proportion of people with access to a telephone increased from 29% in 1996 to 42% in 2001; and

• over 90% of households now have access to a toilet.

South Africa is urbanising The census also confirmed that South Africa is a rapidly urbanising nation. This rapidly state of affairs is unlikely to change and will continue to put huge strain on the country's municipal authorities, which are in charge of providing services in the cities. The two provinces that have seen the largest gains in population are, perhaps not surprisingly, Gauteng, which received 400,000 inward migrants between 1996 and 2001, and Western Cape, which received an additional 185,000 persons over the same period. Gauteng's population growth between 1996 and 2001 was double the national average, and that of Western Cape was 1.4 times the national average. Migrants were overwhelmingly from the smaller rural provinces, notably Eastern Cape and Limpopo. This type of data is of considerable importance to a government committed to improving the delivery of social services at the local level, as it will be used to determine how the government allocates financial resources to provinces—an issue that will be examined in detail by the financial and fiscal commission starting in late 2003. In a statement issued at the launch of the census results, the president, Thabo Mbeki, although welcoming the publication of the data, noted that South Africa's official statistical system needs strengthening, particularly through the building-up of a stronger base of skilled statisticians. Although the census is generally believed to be statistically sound, it has attracted criticism over the quality of certain aspects of its data, and there were some problems during its implementation. For example, the finance minister, Trevor Manuel, highlighted problems with paying enumerators, threats of strike action and a leaking roof at the processing centre. Questions have also been raised over the failure of SSA to publish mortality and fertility data along with the other main databank. Although the census does not provide long-term projections of the country's population, the US Population Reference Bureau (PRB) estimates that South Africa's population will fall from its current level of 45m to only 35.1m by 2025 and 32.5m by 2050, a 26% decline. This fall will be driven mainly by the impact of HIV/AIDS, which the PRB estimates now affects 20.1% of the population. Population by racial group, 2001 ('000 unless otherwise indicated; census results) Province African % White % Coloured % Asian % Totala % KwaZulu-Natal 8,002 84.9 483 5.1 141 1.5 798 8.5 9,426 21.0 Gauteng 6,522 73.8 1,758 19.9 337 3.8 218 2.5 8,837 19.7 Eastern Cape 5,635 87.5 304 4.7 478 7.4 18 0.3 6,436 14.4 Limpopo 5,128 97.2 126 2.4 10 0.2 8 0.2 5,273 11.8 Western Cape 1,207 26.7 832 18.4 2,438 53.9 45 1.0 4,524 10.1 North-West 3,358 91.5 244 6.7 56 1.6 9 0.3 3,669 8.2 Mpumalanga 2,886 92.4 203 6.5 22 0.7 11 0.4 3,122 7.0 Free State 2,381 88.0 238 8.8 83 3.1 3 0.1 2,706 6.0 Northern Cape 293 35.7 102 12.4 424 51.6 2 0.3 822 1.8 Total South Africa 35,416 79.0 4,293 9.6 3,994 8.9 1,115 2.5 44,819 100.0 a Includes unstated. Source: Statistics South Africa.

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Income distribution is highly South Africa is one of the most unequal societies in the world; almost two- unequal thirds of its labour force earns less than US$250 per month. This is because of South Africa's history of controlling access to education, the labour market and the ownership of assets. The high level of unemployment is also a key contributor to inequality. According to the UN Development Programme's Human Development Report, two-thirds of total income is concentrated in the hands of the richest 20% of the population, leaving the poorest with a mere 2%. The white population, which has the highest proportion of skilled and highly skilled labour, is concentrated in the economically dominant Gauteng and Western Cape provinces. Analysts argue that one of the critical structural problems of the labour market in South Africa is the excess of low-skilled and unskilled workers and the shortage of highly skilled workers, leading to a dual labour market. The main languages are IsiZulu (the first language of 23.8% of the population), IsiXhosa (17.6%) and Afrikaans (13.3%); English is the first language of only 8.2% of the population, but the second language of a large majority. All official documentation is, therefore, in English and at least one of the other official languages. Migration

A critical policy issue There is a long history of formal labour migration to South Africa, mainly to the mines—although it has lessened because of cutbacks in the mining sector. There is also a history of less formal migration to farms close to South Africa's borders. Migration into South Africa has increased sharply since the early 1990s, owing to the opening of borders and the relaxation of border controls. The number of official immigrants to South Africa is low (mainly from the UK, India and Zimbabwe), but there is a large and increasing flow of illegal, low-skilled migrants, mainly from neighbouring African countries, coming in search of employment. This has led to growing xenophobia: increasing crime is popularly attributed to immigrants. Although the 2001 census counted less than 500,000 foreigners in South Africa, estimates put the number of immigrants at anywhere between 2m and 8m. Worsening conditions elsewhere in Africa, particularly in Zimbabwe, will probably maintain the influx, although the government is undertaking vigorous repatriation programmes and has tightened border controls.

Paradoxically, outward migration also remains high, as whites (and also some coloureds and Indians) leave the country. Anecdotal evidence suggests that the increase is due to the feeling that the country's transformation will adversely affect future opportunities, and also to the high incidence of crime (the main destinations of emigrants are Australia, New Zealand, the UK and the US). A study by Haroon Bhorat, a labour economist at the University of Western Cape, found that, among the four racial groups, only white employees have seen their absolute numbers decline. The government estimates that in 2003 there was a net outward migration of whites of 21,250, fairly evenly split between males and females. This emigration has sharpened South Africa's skills shortage, which is a major obstacle to growth. The onerous immigration bureaucracy has worsened the problem by making it difficult for skilled foreigners to work in South Africa. A new Immigration Bill was passed in

2002 after considerable party political rivalry between the Inkatha Freedom Party, whose leader, Mangosuthu Buthelezi, was the minister overseeing the bill, and the ruling African National Congress. Education

Education and training—the Under apartheid, racially biased education policies undermined the skills single greatest hurdle resources of the country, with long-term implications for the labour market and South Africa's competitiveness. The potential impact of HIV/AIDS is likely to worsen the situation. The institutional issues are complex, and little headway was made until the late 1990s. The school curriculum, education-funding mechanisms, and the further and higher education system are to be restructured—with long-term implications for the country's skills base. After a fraught process revising the outdated schools curriculum, the final version of Curriculum 2005 will radically change what is taught in schools and how it is taught. The government's focus will be teacher training, education management and increasing the quantity of learning support materials provided to schools. In June 2002 the minister of education tabled detailed proposals for a new institutional landscape for higher education, based on an extensive consultative process begun in the early 1990s. The existing 21 universities and 15 "technikons" in the tertiary sector are to be consolidated, with the aim of developing a skills base that meets the human resource needs of the country. As considerable headway has been made in reforming the funding mechanisms for further and higher education, the government is now turning its attention to the reform of funding mechanisms to meet the educational needs of the poorest.

Comparative human development indicators, 2003a South Africa Zimbabwe Nigeria Kenya Human Development Index score 0.666 0.491 0.466 0.488 Real GDP per head (US$; in PPP terms) 10,070 2,400 860 1,020 Population below poverty line (1990-2003)b 7.1 36.0 70.2 23.0 Life expectancy at birth (years) 48.8 33.9 51.6 45.2 Infant mortality (per 1,000 live births) 52.0 76.0 110.0 78.0 Doctors (per 100,000; 1990-2003) 25.0 6.0 27.0 14.0 Public health expenditure (% of GDP; 2001) 3.6 2.8c 0.8 1.7 Private health expenditure (% of GDP; 2001) 5.1 3.4 2.6 1.7 Adult literacy rate (%) 86.0 90.0 66.8 84.3 Gross enrolment ratio (2001-2002)d 90.0 83 n/ae 70.0 Scientists & engineers in R&D (per m people; 1990-2001)f 992.0 n/a 15.0 n/a a Unless otherwise indicated. b US$1 per day. c 1999. d Combined primary, secondary and tertiary levels. e Data refer to the 1999/2000 school year.f Data refer to a year previous to 1996. Source: UN Development Programme, Human Development Report 2004.

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The universities South Africa's university system is the best in Africa, although the plethora of universities and technikons—36 in all—is to be rationalised into 21 institutions, according to proposals to restructure the higher education system. Since 1994 formerly white institutions, such as the University of the Witwatersrand in Johannesburg and the University of Cape Town, have taken increasing numbers of black students. The larger, wealthier universities are battling to transform themselves, and previously non-white institutions are struggling with poor resources and declining student numbers. Around 8.4% of the population has received higher education, according to the 2001 census, most of them whites (blacks in higher education now exceed whites by a small margin: 995,378 compared with 930,927). The numbers of non-white students and teaching staff at the larger universities (particularly Afrikaans universities) have increased vastly in the past few years. However, there are still problems in bridging the gap between university expectations and the poor schooling of many Africans, and this has resulted in the number of African students enrolled at some universities actually falling since 1994.

Health

Emphasis on primary South Africa's health profile reflects the legacy of apartheid. The infant healthcare mortality rate among the African population is high—on a par with that for Bangladesh—but the rate for whites is similar to that in OECD countries. The government is trying to redress the balance, and has already made considerable progress in expanding the now free primary healthcare system. Controversially, this has been at the expense of funding for teaching hospitals, which have historically produced cutting-edge research and medical skills. Funding is a critical issue and budgetary constraints have made the provision of adequate health services extremely difficult. Furthermore, capacity problems, particularly in rural areas, are an ongoing concern. The rapidly increasing incidence of HIV/AIDS is increasing the strain on the health system. As with many of South Africa's services, a parallel private system of state-of-the-art healthcare exists, although this too has been under strain as a result of problems in the medical insurance system. The system has three tiers. • High-quality and expensive private healthcare, which is financed mainly by users through private health insurance and is out of the reach of all but those in formal-sector employment. The system is also supported by facilities provided by many large employers, notably the mining companies, which often have company doctors and clinics that are available to blue collar employees and their immediate families. However, the cost of dealing with HIV/AIDS has increased the price of occupational cover, and many insurers are considering stepping back from the mass cover market. • The state system, which under apartheid was grossly under-funded and not a policy priority, consists mainly of the provision of hospitals and health centres. It is currently undergoing a major reform, which seeks to establish a national health system encompassing public, private and non-governmental providers of health services. The policy seeks to establish provincial health

authorities and, importantly, inspectorates of health facilities. In addition to this, it is to require the provinces to provide environmental, promotive and preventive health services in addition to the curative health services currently provided. For this, municipalities will need to be adequately funded, which could become a major source of contention and strain between central and provincial governments. • Traditional medicine, which has to meet the needs of those that cannot pay to go to a doctor and do not wish to queue to use a health centre or hospital. This area is expected to grow rapidly, creating a niche market for users of the private sector, and should not be underestimated. It is calculated that there are 300,000 traditional healers in South Africa and that 75% of the population has experimented with traditional medicines. Sales of traditional medicines are worth an estimated R3.2bn (US$386m) a year, compared with sales of Western drugs totalling R7bn a year. As with many unregulated industries, there are problems over the toxicity of medicines and the use of wild plants and animals that could cause their extinction. There is, therefore, a need to regulate the industry and bring it within the formal health sector. Pressure to form a unified health service in South Africa is expected to mount, largely because of the strain placed on all aspects of the country's health system by the growing impact of the HIV/AIDS pandemic and other related illnesses, for example tuberculosis and malaria. This will impose a huge cost on the system, which both the private and public sector will struggle to cope with. Most of the main multinational pharmaceutical companies either have production facilities in South Africa or have their products produced under licence. The country has very strong patent laws, which were significantly modified in 1997 with the passage of the Medicines Amendment Act. This was subject to a legal challenge by multinational pharmaceutical companies over allowing the parallel import of cheaper generic drugs, but escalated into an international issue as AIDS activists worldwide protested that a ruling in favour of the multinationals would cause thousands of deaths, since the price of anti- retroviral (ARV) drugs in South Africa was so high. The issue was taken up by the World Trade Organisation, which ruled that such imports were legal in the circumstances of a national emergency.

The expected impact of AIDS 1998 2010 With AIDS Without AIDS Difference With AIDS Without AIDS Difference Population ('000) 42,835 43,692a 857 47,503 54,628a 7,125 Population growth rate (%) 1.4 1.9 0.5 0.4 1.4 1.0 Life expectancy at birth (years) 39.2 64.9 25.7 48.0 68.2 20.2 Crude death rateb 12.3 7.8 4.5 17.8 7.1 10.7 Infant mortality ratec 52.0 43.3 8.7 50.7 32.3 18.4 Child mortalityd 95.5 69.7 25.8 99.5 48.5 51.0 a Economist Intelligence Unit estimate. b Per 1,000 of the population. c Under one year old per 1,000 live births. d Under five years old per 1,000 live births. Source: US Bureau of the Census, World Population Profile, 1998.

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HIV/AIDS: a political and Combating HIV/AIDS is South Africa's chief social and economic challenge, as economic minefield the disease is already having an impact on the health, welfare and education systems, as well as the economy. It has also become a major political issue, both domestically and in the international arena, particularly since Mr Mbeki espoused the dissident view that HIV and AIDS are not linked. Prominent political figures, including Nelson Mandela, have been critical of the government's approach. The Constitutional Court has ruled that an ARV drug, Nevirapine, must be made available to pregnant woman with HIV/AIDS throughout South Africa to prevent mother-to-child transmission of the virus— not just in the 18 test areas, as had been the government's policy. This decision came a year after the South African lobby group, Treatment Action Campaign (TAC), began its High Court action against the government's policy on ARV provision—and after successive appeals by the government against a High Court judgement in favour of the TAC. The exodus of skills is a severe problem

The South African Health Review estimates that in 1999 73% of all general practitioners were working in the private sector, with many others electing to emigrate rather than face public-sector employment. According to the Review, 6.3% of the UK's and 10% of Canada's hospital doctors are South African, while New Zealand has 600 practising doctors from South Africa. The loss of skills is attributed to declining conditions in the public healthcare sector and the alienation of doctors by provisions introduced six years ago requiring mandatory community service, which has been extended to many related fields, from dentists to dieticians and environmental health practitioners. A new nursing bill will soon require one year of mandatory community service from all newly qualified nurses. The survey revealed that between 20% and 45% of all public-service practitioners hoped to emigrate after completing their public-service contracts. While the number of public-sector posts has been cut from around 268,000 in 2001 to approximately 169,000 in 2003, nationally 31% of posts still remain vacant. Mpumalanga province, being the hardest hit by AIDS, has fared worst, with more than two-thirds of its posts vacant. Efforts to tackle HIV/AIDS are In its latest review of progress in fighting HIV/AIDS, the UN praised the South becoming evident African government's commitment to fighting the scourge. It notes that more than 15% of state spending goes towards health, and welcomes the decision in 2003 to allocate US$1.7bn over three years to the effort. In the same year, the authorities published a comprehensive national HIV/AIDS strategy, with one crucial element being the promise to provide ARV treatment to 1.4m sufferers by 2008. However, as is often the case in South Africa, the implementation capacity of the government is proving to be a problem. As at March 2004 only 2,700 patients were receiving ARV drugs, against a planned level of 53,000, and the level of support for victims of rape—which is depressingly prevalent in the country—remains wholly inadequate. Indeed, according to a study by an international non-governmental organisation, Human Rights Watch, women in South Africa are more likely to be raped than to learn how to read. In response, a number of large domestic companies, particularly in the hard-hit mining sector, have introduced their own treatment programmes for their employees. This, however, only helps those in formal employment, and by increasing the cost of hiring, further accentuates the existing trend in industry to substitute

capital for labour. Government policy is moving in the right direction, but HIV/AIDS is still far from conquered.

HIV prevalence (% of population aged 15-49) 1999 2000 2001 2002 KwaZulu-Natal 32.5 36.2 33.5 36.5 Mpumalanga 27.3 29.7 29.2 28.6 Gauteng 23.9 29.4 29.8 31.6 Free State 27.9 27.9 30.1 28.8 North-West 23.0 22.9 25.2 26.2 Eastern Cape 18.0 20.2 21.7 23.6 Limpopo 11.4 13.2 14.5 15.6 Northern Cape 10.1 11.2 15.9 15.1 Western Cape 7.1 8.7 8.6 12.4 National average 22.4 24.5 24.8 26.5

Source: Department of Health.

Natural resources and the environment

A country rich in resources South Africa's climate explains the pattern of much of the country's early (and significant) European settlement. The western and southern seaboards are temperate, whereas the eastern coast is subtropical. There are large swathes of arid interior, the Karoo in the Cape provinces, which is part of the African plateau that extends up to the Kalahari basin, before turning into the Highveld at an elevation of 1,500-2,000 metres. The other main geographical feature is the Great Escarpment that curves around the eastern flank of the plateau, rising to its most dramatic peak in the Drakensberg mountain range. Because of the diversity of climate and soil types, a wide range of crops can be grown. Although rain-fed maize farming dominates in the Highveld, the potential for growing a number of tropical and temperate fruit and vegetable crops is increasingly being exploited. Vineyards predominate in the Western Cape. About 13% of the land is put to arable use and 67% is meadow and pasture. Forestry is a small but growing sector. Fishing is not significant. The country's mineral wealth has long been the cornerstone of the economy: gold accounts for a significant share of total exports (see Economic sectors: mining and semi-processing). The main minerals are gold, diamonds, iron, platinum, and coal. There is large electricity-generating capacity, based on coal supplemented by hydroelectricity and one nuclear plant.

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Transport, communications and the Internet

A first-world/developing- The transport infrastructure for mainstream business is well developed and world infrastructure certainly the best in Africa. There are sizeable and efficient ports, a road network that is in parts excellent, and good air links, particularly to Europe and the US, and increasingly to Asia and the rest of Africa. However, because of apartheid, the transport network was almost exclusively designed to connect white cities and areas. As a result, the network of rural secondary roads is poor, as are road and rail links with African townships and homelands. The informal taxi system in urban areas has been a focus for crime and violence, much of it in-fighting within the trade—the government is in the difficult process of regulating the industry. More broadly, it is encouraging private-sector involvement in new infrastructure projects, known as spatial development initiatives, with a particular emphasis on black empowerment.

South Africa's main ports are South Africa's two main ports, Cape Town and Durban, have been coming now under pressure under tremendous pressure in recent years. In 2002 more than 25m containers passed through South Africa's ports, an increase of 19% on 1998. Bottlenecks in the ports are attributable not only to labour issues, but also to a number of years of underinvestment, which can only be remedied with the involvement of the private sector. The development of the new port of Coega, near Port Elizabeth, is making progress and is on course to be completed by September 2005. However, the deepwater port, the construction costs of which are estimated at R3.2bn, may in fact have to be expanded if plans to export iron ore through the harbour come to fruition. Additional dredging to deepen the harbour so that it can accommodate a fully laden iron ore vessel of 150,000 tonnes will be necessary. Moreover, the existing railway line from the iron ore mines at Sishen in the Northern Cape to Coega would need to be upgraded. The possibility of bulk mineral exports has been welcomed by the business sector, as the government's efforts to attract an anchor tenant for Coega have not yielded anything positive to date. The proposed US$2.2bn aluminium smelter at the Coega Industrial Development Zone is being negotiated with a Canadian company, Alcan, which has delayed its decision on participation to the end of 2004. Alcan has also indicated that it will take a stake in a new smelter in Oman. This was interpreted as implying that Alcan had lost interest in Coega, but the company has denied this. No investors have been attracted to the industrial development zone, and many economists remain unconvinced by the economic viability of the Coega project, believing that political considerations to develop a large project in the Eastern Cape—an ANC stronghold and one of the poorest provinces in the country—were behind the government's decision. If bulk mineral exports can be channelled through Coega, however, this would at least provide sufficient traffic to make the harbour viable.

A well-developed The South African telecommunications and technology markets are well telecommunications market developed for an African country. The sector is dominated by Telkom, which enjoys its monopoly of the fixed-line market after partial privatisation in 2003 and ownership of half of Vodacom, a mobile-phone provider. There has been a major shift in the voice telephony market, from fixed-line to mobile sub- scriptions; the current mobile base is three times the size of the fixed-line market. Although the country's fixed-line penetration rate in the region is 10.9%, the rate falls to around 3% in South Africa's non-white households, just above the regional average of 2.6%. South Africa ranks first in Africa and 17th in the world in terms of the number of mobile-phone users. In addition, the use of mobile phones has enabled a greater service to rural areas at a lower cost than that of installing fixed lines. Telkom call costs are very high: a recent study by NUS Consulting found that, of 14 countries investigated, Telkom charged the highest international call rates, 63% higher than Finland, which was the next most expensive country. The demand for mobile telephony (South Africa has

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by far the largest number of mobile-phone subscribers on the continent) is booming. At 34.2 mobile subscribers per 100 population in 2003, South Africa has one of the highest penetration rates in developing countries. This growth in mobile telephony has yielded over 14m mobile-phone users, compared with 5m fixed-line subscribers, and generates around US$2.4bn in revenue per year. As at June 2004 the number of mobile-phone users had increased to 18.7m.

Internet service is rising Computer literacy in South Africa is low but is an area of growth. Internet slowly availability and usage is rising painfully slowly. Figures published by the South African Advertising Research Foundation for 2003 show that only one in 13 South Africans access the Internet, up marginally from one in 15 during 2001. However, this is the highest level of penetration on the African continent (with Egypt, Morocco and Kenya following). South Africa also has many Internet service providers (ISPs); however, as ISPs simply resell connectivity from the recently privatised Telkom, they have struggled to remain competitive. A second network operator is expected to become operational in 2005, which should create some competition and lead to lower connectivity costs. According to the Goldstuck Report: Internet Access in South Africa 2004, the number of ISP subscribers passed the 1m mark in 2000. A study by BMI-TechKnowledge Group, a South African market analyst, showed that, with a stronger rand and consequently cheaper computer imports, laptop sales increased by more than 50% in 2003. Between 1998 and 2001 the number of personal computers (PCs) per 1,000 people increased from 49.8 to 68.5. However, recent data from Pyramid Research, a UK-based telecoms consultancy, for the number of PCs per 1,000 people indicate much stronger growth, from 50 in 1998 to 90 in 2001.

Postal services The Post Office, a public company since 1991, has suffered considerable financial and service problems, leading to the emergence of a number of private operators such as Post Net and the usual international courier services. A New Zealand company, Transend, which runs New Zealand Post's operations, was appointed in 1999 to help to manage the company, but the contract was cancelled in 2002 amidst allegations of corruption. Mail in South Africa is widely regarded as being highly unreliable and susceptible to fraud and theft. It is being replaced increasingly by electronic forms of communication.

A lively and independent press There is a wide array of newspapers. The most widely read dailies are the Sowetan and The Star (in Gauteng province). The highest-selling newspaper is the weekly Sunday Times. The weekly Mail & Guardian remains influential in political circles, and the daily Business Day and the weekly Financial Mail are widely read in the business community. The ANC has its own daily Internet newspaper, ANC Today. In the past few years there have been occasional rumblings from the ANC about press responsibility, raising fears that press freedom may be under threat. Journalists have stood up to the criticism, however, and it is clear that the media are taking an increasingly independent line. In 2002 control of the Mail & Guardian was assumed by Trevor Ncube, the ex-editor of Zimbabwe's Independent. The London-based Guardian Newspapers still owns 10% of the paper, and the UK's Pearson Group (publishers of the Financial Times) has an interest in Business Day.

Television The South African Broadcasting Corporation (SABC) is nominally independent, but there are signs that the ANC is increasing its control over the corporation. The three SABC channels provide adequate but undistinguished programmes; SABC3 broadcasts almost entirely in English. There is also a very popular encoded subscription service, M-Net, which has expanded into other parts of Africa. Satellite television has been launched successfully, and South Africa's first commercially-owned terrestrial channel, e-TV, started broadcasting in 1997; it provides the most independent news service on television in South Africa.

Energy provision

Africa's electricity giant Eskom is the leading company in the South African electricity market, supplying more than 95% of electricity needs and more than 60% of the entire continent's requirements. It is among the most advanced and cheapest electricity providers in the world, although this may have less to do with efficient management and more to do with tax concessions from the government. Around 74% of South Africa's electricity supply comes from coal-fired power stations (proven coal reserves will last more than 150 years). Since 1994 Eskom has connected 2.5m new households to electricity. Annual growth in electricity consumption increased steadily from 1993, to peak at 8.3% in 1995, before slowing to an annual average of 2-3% in 1999-2001, broadly in line with real GDP growth over that period. Eskom's supply of energy to the region— through transmission links to Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zimbabwe—also continued to rise.

Electricity shortages are set The long-awaited restructuring of Eskom has been plagued by delays, many of to rise which are labour-related, leaving the prospect of privatisation very much on the backburner. Eskom operates the only nuclear plant in South Africa, at Koeberg near Cape Town. Some gold mines continue to produce uranium as a by-product, mainly for export, but production figures are kept secret, making the importance of this product difficult to assess. The establishment of the gas pipeline from Mozambique and the discovery of local reserves will propel a slight shift towards the use of natural gas.

Maintained at current levels, official forecasts indicate that South Africa's generating capacity will be insufficient to meet rising domestic demand by 2007. A spate of recent power cuts in Johannesburg, South Africa's largest city, has been attributed to redundant infrastructure, highlighting the fact that not only will generating capacity in South Africa have to be expanded, but the upgrading and replacement of infrastructure will also have to be budgeted for. The current generating capacity of Eskom is in the region of 36,000 mw. With domestic demand in 2003 estimated at approximately 32,000 mw, and growing at a rate of 1,000 mw every year, there is an urgent need to increase domestic generating capacity. According to Eskom, South Africa needs to spend R200bn (US$28.6bn) over 20 years on power stations to ensure adequate supplies. Foreign direct investment of approximately R15bn will fund three new power stations aimed at producing an independent power supplier. The plants are planned for completion by 2010, and should add an approximate 1,000 mw to

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South Africa's generating capacity. The new plants play a key role in the government's objective of having 30% of power-generating capacity provided by the private sector, 10% of which is earmarked for black empowerment investors. The government believes that South Africa will have to rely on nuclear power in future, and is considering the construction of further nuclear plants. At present, Eskom is recommissioning three coal-fired power stations that have been closed since the 1980s. These plants should collectively contribute 3,600 mw per year. Plans are under way to introduce a wholesale market for the trading of electricity between generators and distributors. There are plans to merge the distribution facilities of Eskom and 187 municipal distributors to form six competing regional distributors. The Electricity Distribution Industry Holdings Company has been established to manage this process, and it is anticipated that the regional distributors should be operational by mid-2005. India's Tata Power Company has indicated that it will be bidding for the electricity- generating tender at the end of the year.

Coal dominates the energy Coal dominates South Africa's energy supply, reflecting the country's sector 49.52bn tonnes of proven reserves at end-2002. Only a few countries, notably the US, Russia and China, have more substantial reserves. South Africa produced 134.6m tonnes oil equivalent of coal in 2003, up by 8.4% on the previous year. This accounted for 5.3% of the world's total and placed South Africa as the fifth-largest coal producer in the world. Moreover, the country is the world's second-largest net exporter of coal after Australia. Three companies in South Africa dominate the domestic market, accounting for more than 80% of the country's coal production: Ingwe, Anglo Coal and Sasol. Sasol, the world's sixth-largest private coal-mining company and the largest manufacturer of oil from coal, was set up by the government in the 1950s to help to reduce the country's dependence on imported oil. South Africa is lacking in significant commercially exploitable crude oil, with just 29.4m barrels of proven oil reserves in 2002. The country therefore has to import its crude petroleum, most of which comes from the Middle East (Iran and Saudi Arabia) and Nigeria. There is a drive towards increased reliance on gas, with the recent completion of a gas pipeline from Mozambique. In addition, it is estimated that the discovery of 13trn cu ft of natural gas in the offshore Ibhubese field on the west coast will provide enough gas for the establishment of three new power stations. This reserve is equivalent to almost half that contained in the North Sea. The country has significant oil-refining capacity, second only to that of Egypt on the African continent. In 2002 South Africa's total refining capacity was close to 470,000 barrels/day, not including synthetic fuel facilities. Historically, to counter its lack of oil, South Africa has developed a sophisticated synthetic- fuels sector. The country's largest petrochemicals company, Sasol, produces synthetic crude oil from coal. Mossgas, created by the government in 1993, converts natural gas and condensate to petroleum products such as motor gasoline, kerosene and alcohols. In 2002 Mossgas was merged with Soekor Exploration & Production and parts of the Strategic Fuel Fund, and was

renamed The Petroleum Oil and Gas Corporation of South Africa (PetroSA). In addition to producing synthetic fuels, PetroSA is involved in conventional oil exploration, primarily on the western and southern coasts of South Africa.

The economy

Economic structure

Main economic indicators, 2003 Real GDP growth (%) 1.9 Consumer price inflation (av; %) 7.9 Current-account balance (US$ m) -1,456 External debt (US$ bn)a 37,138 Exchange rate (av; R:US$) 7.56 a Economist Intelligence Unit estimate. Sources: South African Reserve Bank, Quarterly Bulletin, June 2004; Economist Intelligence Unit, CountryData.

A manufacturing- and The distribution of income in South Africa is one of the most unequal in the services-based economy world: South Africa encompasses displays of affluence the equal of any in the developed world and levels of poverty associated with developing countries. The pattern of inequality is changing, however. Whites still control most of the capital in the country, but boardrooms are increasingly populated by black businessmen. There is also a growing black middle class, which embraces all the consumption patterns of its counterparts in the West and commands premium salaries in companies. At the other end, the poor and unskilled continue to struggle, particularly given the structural changes in the economy, and there is increasing pressure on the government to deal with the widening income gap between the black and white populations. South Africa, best known for its precious metals, fruit, and wine, has in fact moved from an economy historically dominated by mining and agriculture to one where manufacturing and financial services contribute the larger share of GDP. Mining, nevertheless, remains an important foreign-exchange earner: gold accounts for over one-third of exports. The main mined products include manganese, chrome, platinum, gold, coal and diamonds. Agriculture, together with mining, continues to be an important provider of both direct and indirect employment. The most important crop is maize, but export production is being nurtured in niche markets such as wine, high-value fruit and ostrich meat. Manufacturing accounts for around one-fifth of total GDP, but has faced significant challenges since the opening up of the economy to global competition. Metals and engineering, especially steel-related products and the automotive industry, drive the sector. Services are the most important contributor to GDP: the financial sector is advanced; the tourism sector, which has significant employment potential, is developing; and there is an active retail sector.

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Employment by sector, Sep 2003 (%; estimates) Formal Informal Domestic Total Agriculture 10.0 23.4 – 12.2 Mining 6.0 0.2 – 4.5 Manufacturing 17.3 8.2 – 14.8 Electricity 1.0 0.0 – 0.7 Construction 4.3 10.2 – 5.2 Trade 18.5 36.0 – 19.7 Transport 5.3 4.6 – 5.0 Business services 12.1 2.6 – 9.3 Community services 23.8 7.7 – 18.6 Private households 0.2 6.7 100.0 9.4 Unspecified 0.7 0.4 – 0.6 Total employed 100.0 100.0 100.0 100.0 Sources: Statistics South Africa; Department of Trade and Industry. Economic activity is concentrated mainly in Gauteng province, which produces over one-third of total GDP, followed by the Western Cape, which produces about 15% of GDP. Unemployment is a worrying structural feature of the economy. With the official unemployment rate at 29.4%, creating sufficient jobs for the estimated 4.7m currently without jobs remains the most critical economic challenge in South Africa. The high unemployment rate has contributed to South Africa's ranking as one of the most unequal countries in the world judged by distribution of income (amongst those countries having reliable labour-force data). The true level of unemployment is difficult to establish because of the large informal economy, the sizeable presence of illegal immigrants from neighbouring countries, and the difficulty of collecting reliable data. There is, however, no doubt that unemployment is a major political issue.

Comparative economic indicators, 2003 South Africa Zimbabwe Botswana Namibia GDP (US$ bn) 160.1 4.7 7.8 4.3 GDP growth (%) 1.9 -13.2 4.0 3.7 GDP per head (US$) 3,503 359 4,353 2,149 Consumer price inflation (av; %) 5.9 384.7 9.2 7.2 Current-account balance (US$ m) -1,456 -385 388 271 Merchandise exports fob (US$ bn) 38.7 1.2 2.9 1.3 Merchandise imports fob (US$ bn) 35.0 1.6 2.2 1.7 Total external debt (US$ bn) 25.8 4.1 2.9 1.0 Source: Economist Intelligence Unit, CountryData.

Economic policy

A well-run economy The Ministry of Finance is the centre of economic policymaking, with support from relevant ministries. Since coming to power in 1994, the African National Congress (ANC) has embraced investor-friendly economic policies. As far as fiscal policy is concerned, the government's medium-term expenditure framework seeks to make fiscal policy more credible and predictable by mapping out the government's spending plans on a rolling multi-year basis. The

government has set up an advisory panel on investment and economic policy, composed of top international businessmen. One of the most important economic policy changes under the ANC government has been the introduction of progressive labour legislation that, among other things, encourages companies to develop a racially representative workforce and skills development programmes. The South African Reserve Bank (SARB, the central bank) is officially independent of government and has as it main task the maintenance of domestic price stability. Tensions between the SARB and the Ministry of Finance do exist but in the main do not disrupt policy-making.

Economic policy changes Before the election in 1994, the ANC government-in-waiting was actively direction involved in developing a new economic policy framework through involvement in the National Economic Forum, a tripartite consensus-seeking body made up of government (the apartheid-era National Party), business organisations and organised labour, whose delegation included the ANC and the South African Communist Party (SACP). This consensus-seeking approach to policymaking would later be institutionalised. It was a ground-breaking forum made up of radical left-wing thinkers, the conservative right, old apartheid-era bureaucrats and the new policy-shapers, some just out of prison. Debate on macro- and microeconomic models was both intellectually broad and pragmatic in nature, and expertise was drawn from all over the world, including the IMF, the World Bank and the International Labour Organisation. The thinking of key players in government today was crystallised during this period. However, for much of its first decade in power the ANC has been obliged to concentrate on dispelling the notion that it would be just another reckless Afro-socialist government. The fiscal position, in particular, was fragile in 1994 and the country was engaged in difficult debt-rescheduling negotiations with its international bank creditors. Many analysts spoke of a meltdown in the country.

The ANC is facing a number of The situation is very different today. South Africa is one of only a handful of challenges African countries with an "investment grade" rating by the international credit agencies, which means that global investment funds can invest in the country. Indeed, in October 2004 Moody's Investor Services indicated that it was considering upgrading the country's rating from Baa2, and other ratings agencies have followed suit, all of them citing fiscal and monetary stability as well as improvements in the external liquidity position. Despite the proven track record of economic orthodoxy, the domestic problem for the ANC is that financial rectitude has done little for its core support base, namely poor blacks. Significant advances have been made in extending the reach of public services such as water; real state expenditure on social services has grown on average by about 4% annually over the past ten years and the proportion of the population now receiving free primary healthcare has risen to above 75%. Jobs for the poor remain scarce, however, and as a result, since about 2002, the ANC has been gradually changing its economic policy direction, having concluded that although the private sector was successfully driving the economy to a higher level, it would not be able to provide enough employment for the lower skilled to resolve the political dilemma.

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Black economic empowerment Black economic empowerment (BEE)—the achievement of significant participation in key industries in South Africa for people disadvantaged by racial discrimination under apartheid—has become a major policy issue. As expected, there were initial concerns on the part of both domestic and foreign investors that BEE would damage the business environment. At first the government took a rather heavy-handed approach, but under advice from entrepreneurs soon moved to a more consultative approach in sectors such as mining and banking that, broadly speaking, seems to be generally accepted as fair. The overall BEE strategy contains broadly defined policy objectives without specific numerical targets. Instead, the goal stated throughout the policy document is of a "significant increase" in black participation. The government is more than aware that political considerations such as BEE must be balanced with economic realities and the need to develop South Africa as an emerging market capable of competing with other developing nations for global investment capital. In an effort to distance itself from the approach of Zimbabwe, the government has emphasised that BEE policy in South Africa would be conducted in a considered, legal and transparent manner and any transfer of assets would be fully negotiated. As expected, the strategy document gives no quantitative targets, so the government plans to make use of "a balanced scorecard" to measure progress in achieving BEE by enterprises and across various economic sectors. The scoring system is based on the three core elements of BEE: • efforts by enterprises to foster direct empowerment, for example the level of ownership of an enterprise; • the efforts of companies to promote BEE through their human resource development and equity of employment; and • companies' efforts at indirect empowerment through purchases from black economic enterprises or through help in developing other black enterprises. These three elements will account for 90% of the total score. The other 10% of the score is left to sectors and enterprises to establish. Finally, the government outlines how it plans to use both the restructuring of state-owned enterprises and preferential procurement policies to boost BEE. White-controlled businesses have mostly embraced BEE, realising that it is a fact of life in the new South Africa. On the other hand, it is creating resentment within the ANC-led alliance. The reason is that most of the benefits seem to be accruing to a small number of influential figures, mostly with close political connections to the ANC. The first attempt at BEE involved such figures as Cyril Ramaphosa taking highly leveraged stakes in existing businesses, which not long after collapsed under the weight of their debt. The programme is now more broadly based, particularly on the procurement side, but BEE has become, politically, as much a problem for the government as a success. There have also been a number of reports of disquiet expressed by foreign investors in connection with the government's BEE programme. For instance, in mid-2004 a tender to develop prime coastal land near Cape Town was awarded to an empowerment consortium headed by Tokyo Sexwale, a former premier of

Gauteng and leading ANC figure, despite the fact that its bid of R115m (US$17.2m) was substantially lower than those of an Irish company, Earthquake, (R137m) and an Italian company, Immobilfin Immobiliare Finanzaria, (R151m). The foreign firms stated that the decision would discourage foreign investment, as the perception would arise that the policy was one of awarding the tender to a local company no matter what the differential was compared with foreign tenders. Nonetheless, BEE is certainly gaining momentum. In 2002, 104 deals, to the value of R12.4bn (US$1.18bn), were concluded, but in 2003 this figure rose to 189 new deals, with a total value of R42.2bn. This increase has not been without incident, however, as cases have been discovered in which companies use fronting to give the appearance of compliance with BEE requirements. Steps are being taken to establish a BEE advisory council to monitor deals and ensure compliance with the requirements.

The BEE scorecard Core component of BEE Indicators Weighting (%) Equity ownership Black share of economic benefits 20 Management Proportion of black persons in executive management 10 Employment equity Weighted employment equity analysis 10 Skills development Skills development expenditure as a proportion of payroll 20 Procurement from black-owned and –empowered enterprises as Preferential procurement a proportion of total procurement budget 20 Investment in black-owned and -empowered enterprises as a Enterprise development proportion of total assets 10 Residual 10% – 10 Source: Department of Trade and Industry, South Africa's Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment.

A growing black middle class

Efforts to raise the poorer end of society seem to be bearing fruit. According to a recent study by the University of Stellenbosch, low-income households—defined as those with incomes of less than R4,500 (US$692) a month—are becoming increasingly important as consumers, as is the expanding black middle class. Across the population social grants have risen, to account for 7% of personal disposable income in 2003, compared with 5% in 1990, while, for the better-off, investment income has increased its share from 27% to 35% over the same period.

The university estimates that blacks account for 70% of the 390,000 South Africans who have graduated into the "middle class" since 1990, and expects the trend to continue. This is boosting the market for services and durable goods such as cars and furniture. The poor continue to dominate the demand for non-durable goods such as food, spending an estimated R13.7bn (US$1.8bn) on this category in 2003.

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Fiscal policy Stabilising the state finances has been a key policy objective of ANC governments. The minister of finance, Trevor Manuel, has promoted a conservative fiscal policy, bringing down the budget deficit dramatically and reducing government debt to provide a sustainable platform for development expenditure. Revenue collection has consistently outperformed targets owing to the successful restructuring of the South African Revenue Service and an expanded tax base. Expenditure has been managed through the medium-term expenditure framework (MTEF), a rolling three-year budgetary process intended to facilitate forward planning by departments and to bring more stability to the pattern of expenditure. Following an impressive seven years of consolidating public finances and fiscal constraint, the government's fiscal policy stance shifted, beginning with the 2001/02 fiscal year (March-April), to a moderately expansionary stance. Although the Ministry of Finance is committed to increasing expenditure on infrastructure, social services and socio-economic "upliftment" programmes, the fiscal loosening will be moderate. This is because, despite increased spending on infrastructure at the national level, the government will struggle to increase expenditure and improve the provision of services at the provincial and municipal levels. Mr Manuel will also restrict government borrowing in the coming years. Meanwhile, the South African Revenue Service will continue to improve its collection rates and widen the tax base. This will keep revenue collection above the levels targeted by the government and allow the finance minister to continue reducing the fiscal burden on those currently paying tax within lower income groups. The latest MTEF, published in October 2004, reinforced the overall thrust of fiscal policy. Tax intake for the current fiscal year 2004/05 is running ahead of expectations, despite a weak performance on the company side. The government has managed to find savings of R1.1bn by cutting wasteful spending, which will partially fund an extra R2.8bn of expenditure above the original budget figure of R368.9bn. One of the main beneficiaries will be provincial and local governments, which are to receive real increases in transfers from central government of around 40% per annum over the next two fiscal years. Most of this will be earmarked for social spending and increases in benefits. The MTEF does not significantly alter our outlook for the public finances for the period under review; essentially, the forecasted budget deficits are reasonable and should be financed easily. The MTEF figures are based on rather optimistic real GDP growth forecasts of 3.9% in calendar year 2005, 3.7% in 2006, and 4.2% in 2007. Any failure to achieve these levels would have a negative impact on fiscal revenue.

Government finances (R m) 2002/03a 2003/04a 2004/05b 2005/06c 2006/07c Revenue 278.4 299.4 328.2 363.0 399.1 Expenditure & lending 291.8 328.7 371.7 413.6 449.7 Budget balance -13.4 -29.3 -43.5 -50.6 -50.6 % of GDP -1.2 -2.4 -3.2 -3.5 -3.2 a Outcome. b Revised budget. c Projected. Source: National Treasury, Medium-term budget policy statement, 2004.

Monetary policy The SARB is independent of government and has a high degree of autonomy in determining monetary policy. In 1999 a former labour minister, Tito Mboweni, became the governor of the SARB. Fears that this ANC stalwart would be more susceptible to political influence have been allayed over the course of his tenure. Mr Mboweni has been single-minded about achieving the set inflation target. The SARB put in place an inflation target framework in February 2000, where the variable to be set would be CPIX (overall consumer price inflation for metropolitan and other urban areas, excluding changes in mortgage bond rates). An average CPIX target range had been set at 3-6% for 2002-03 and 2004-06. The central bank is adamant that its focus is on guaranteeing price stability and that it is only concerned with the exchange rate in that context. It also says that the level of GDP growth is not a primary concern, but in reality this is an important factor that is taken into account when it debates interest- rate policy. As at November 2004, CPIX had remained within the target range for 13 consecutive months. Are South Africa's policymakers putting the currency at risk?

There has been much controversy in recent months as investors and analysts attempt to reconcile the decisions of the South African Reserve Bank (SARB, the central bank) with the many diverse opinions and theories on what the "correct" level of the rand should be. The decision taken by the SARB on August 12th to cut the repurchase (repo) rate by 50 basis points came as a surprise to the majority of economic commentators, leading to widespread concern that the monetary authority had bowed to public, media and political pressure to weaken the rand. Financial markets saw a weakening of the rand to a two-month low of R6.47:US$1 as investors moved to alternative currencies and commodities such as gold.

Following the Monetary Policy Committee meeting in June, at which the central bank governor, Tito Mboweni, had announced an end to the rate-cutting cycle, the announcement of a rate cut in August was wholly unexpected, although vindicated by the publication of more recent statistics. Recent inflation figures show that the rate cut in fact constitutes very little threat to the inflation target, as July's producer price inflation (PPI) reflects only a 0.7% rise year on year, undercutting market expectations of a 1.3% increase, and was significantly down from June's recorded PPI of 1.2% year on year. The CPIX (consumer prices excluding mortgage costs) for July performed similarly well, at a level of 4.2% year on year, well within the target range. Further declines in inflation are expected in the coming months as the effects of PPI carry through to exert downward pressure on consumer prices, and are giving rise to expectations of further interest-rate cuts in October. The release of these results has justified the SARB's rate cut in mid-August, reassuring many analysts that it was not merely in response to political pressure. Although the rate cut was unexpected, economists and analysts are in agreement that there is no evidence that the SARB is compromising its stance on inflation.

The government has created a joint technical committee composed of central bank officials and representatives of the National Treasury to augment the bilateral meetings on inflation targeting between Mr Mboweni and the minister of finance, Trevor Manuel. This will not mitigate the powers of the SARB, but will rather

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formalise co-ordination between the two bodies and enhance the efficiency and coherence of the inflation-targeting mechanism. In his budget speech in February Mr Manuel indicated that the Treasury may take further steps to liberalise South Africa's exchange controls this year. Although many advocate liberalisation as a way of weakening the rand in order to stimulate domestic production and provide jobs, independent studies carried out by a US investment bank, Goldman Sachs, estimate that the equilibrium value of the rand, currently estimated at R6.50:US$1, could increase by up to 20% in the space of two years. In countries that have liberalised exchange controls the prevailing trend has shown a strengthening of the currency. It is expected that this may come in the form of an increase of the 15% limit on institutional investors' offshore asset holdings. Any announcements by the Treasury relating to the liberalisation are expected to be made at the finance minister's medium-term budget policy statement in the final quarter of 2004.

Privatisation uncertainties The need to privatise—both for the effective provision of services and to raise fiscal funds—has been accepted by government. The slow pace of privatisation has affected investor confidence. Political resistance to privatisation has exacer- bated the privatisation challenges facing the government. However, the government has had good reason to move cautiously. The process of establishing the legal status of state-owned companies had to contend with opaque apartheid systems. In addition, significant restructuring of inefficiently run companies, some with complicated debt profiles, has been required. The time for doing this has now passed, however, and pressure has risen not only from investors but also from the Treasury, which would benefit from the proceeds of sales. Privatisation: how much and when?

Proceeds from the restructuring of state-owned companies were budgeted at R5bn (US$700m) in 2003-04, but actually amounted to only R9m. Privatisation proceeds since 1997 have totalled R33.7bn, around three-quarters of which has been used to pay down state debt. The most important transaction to date has been the R10.4bn sale of a 30% interest in the telecommunications company, Telkom, to a foreign strategic partner. Other inflows have come from the restructuring of the interest of the state-owned transport company, Transnet, in a private mobile-phone company and the whole or partial sale of state forests, insurance assets, South African Airways, the airports company, radio stations and the Central Energy Fund. The government has said that it expects privatisation revenue of R2.5bn in each of fiscal years 2004-05 and 2005-06.

There may be a further sale of shares in Telkom, probably to a local consortium including black economic empowerment interests, and another attempt to bring a strategic foreign partner into South African Airways after the government was forced to rescue it following the collapse of its previous partner, Swiss Air, is also possible. However, the most desirable state company, the highly efficient electricity company, Eskom, is unlikely to be privatised in the near future.

Economic performance

Gross domestic product (% real change at constant 1995 prices) 2003 Annual average 1999-2003 Private consumption 3.0 2.9 Government consumption 4.6 3.0 Gross fixed investment 8.4 1.9 Exports of goods & services -0.5 2.4 Imports of goods & services 9.7 2.6 GDP 1.9 2.7 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Steady, but unspectacular, South Africa's growth performance remains disappointing in the context of the economic growth social needs of the country. In 2003 the economy expanded by only 1.9%, being held back on the supply side by the negative impact of a strong rand on the mining and manufacturing export sectors, difficult climatic conditions for agriculture, and insipid demand in the euro area, the country's main external market. Real GDP growth picked up in the first half of 2004, to an annualised rate of 3%, helped by lower interest rates, an increasingly expansionary fiscal policy and buoyant world commodity markets. On the demand side, household consumption, which accounts for about 62% of GDP, increased by a real 3% in 2003, helped by lower interest rates and higher social security allocations. In the first half of 2004 the rate had risen to 4.5%. Final consumption expenditure by government and gross fixed capital formation also accelerated during the same period, to 6.5% and 12% respectively, although the latter figure includes the effect of the purchase of warships by the state and new aircraft for South African Airways. It must be noted that Statistics South Africa (SSA), the official data agency, has indicated that it believes that the current historical time-series of GDP figures may well underestimate the true picture. SSA is due to publish new figures by the end of 2004, which could well significantly alter (upwards) the historical data for GDP.

Construction and services Increased levels of prosperity in any economy usually translate into vigorous sector has continued to grow demand for services. This is happening in South Africa, helped by the growth in tourism. Perhaps the most notable sectoral story recently, however, has been the boom in construction and the property market generally. In a number of urban areas commercial developments such as offices and shopping malls have been multiplying rapidly, while the government's public works and housing programmes have provided extra stimuli. According to the SARB, turnover in real estate increased by 29% in 2003 and 58% in the first half of 2004. At the same time, residential property prices are estimated to have risen by 25% between January and July 2004, although there are signs of a slowdown. Major factors have been the decline in housing interest rates, income tax breaks and demand from foreigners, along with the relatively better performance of property compared with other forms of investment.

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Gross domestic product (% real annualised change from the previous quarter; seasonally adjusted unless otherwise indicated) 2002 2003 2004 Year 1st half 2nd half Year 1st half Primary sector 3.0 -2.0 -6.0 -1.0 2.0 Agriculture 6.5 -6.5 -18.5 -6.0 1.5 Mining 0.5 1.5 4.5 2.5 2.5 Secondary sector 4.5 -2.0 -1.5 0.0 3.0 Manufacturing 5.5 -3.5 -3.0 -1.0 2.5 Electricity, gas & water 2.0 2.5 2.5 2.5 2.5 Construction 4.5 5.0 4.5 5.0 6.5 Tertiary sector 3.5 3.0 3.0 3.0 3.5 Commerce 3.0 2.5 3.5 3.0 3.5 Transport & communication 6.5 6.5 6.0 6.0 6.0 Financial & other services 4.0 3.0 2.0 3.0 3.5 GDP 3.5 1.0 1.0 2.0 3.0

Source: South African Reserve Bank, Annual Economic Report, 2004.

Inflationary pressures mount Since the new government took office, its policies and those of the SARB—as in 1980s and 1990 well as the international inflation environment—have set in motion a significant decline in the inflation trend. Inflation has been brought down from high double-digit figures in the 1980s and early 1990s and remained relatively subdued as a result of restrictive macroeconomic policy, real wage restraint and capacity under-utilisation. However, the rapid deterioration of the rand in 2001, rising oil prices and food price inflation owing to regional grain shortages placed inflation on an upward trajectory in 2002. At the end of May 2003 SSA lowered its estimate of the country's inflation rate for the period January 2002- April 2003 following the discovery of statistical errors in its calculation of housing rental income. Although carrying a small weighting (4.76%) in the inflation basket, the rental data used were from an outdated survey carried out in 1999. As a result, the SARB's CPIX inflation barometer, which excludes mortgages, averaged a lower 9.3% in 2002 and 6.8% in 2003.

Inflation as measured by CPIXa in 2003-04 2003 2004 Average Jan Feb Mar Apr May Jun Jul Aug Sep Index (2000=100) 124.4 127.4 128.1 128.9 129.3 129.4 129.7 130.1 129.9 130.3 % change, year on year 6.8 4.2 4.8 4.4 4.4 4.4 5.0 4.2 3.7 3.7 a CPIX is the consumer price index excluding interest rates of mortgage bonds. Source: Statistics South Africa.

Inflation remains within the Inflation has remained with the SARB's target range in 2004. The resilience of SARB's range the rand has been credited with the low levels of inflation experienced recently, as it contributed to stability by keeping the cost of imports down and shielding South Africa from the global inflation resulting from high international oil prices. Some forecasters expect inflation to remain stable for the next 24 months, and recent statements released by the SARB's Monetary Policy Committee appear to confirm this view by implying that, as long as inflation remains within the targeted 3-6% range, there will be no need for further

changes in the interest rate for the remainder of the year. The SARB has recognised that although high wages and increased public spending represent a threat to the inflation target (particularly over the December period), the oil price is the biggest consideration.

Regional trends

Nine new provincial Like many institutions in South Africa, regional government was reorganised governments created in 1994 after 1994. Nine new provincial governments were created. For the first time provinces were given not only administrative powers but also certain limited legislative powers. The new constitution defined the areas in which the provincial legislatures could legislate. In the national parliament, the provinces each send ten representatives to the National Council of Provinces. Provincial elections occur at the same time as the general election. Financial management has improved in the provinces: there has been a significant decline in their net indebtedness to the private sector since 2001. A major obstacle to the provision of better social services has been capacity constraints at the provincial tier of government allocation. This is perhaps most vividly demonstrated by the fact that less than 50% of the allocated budget for treating HIV/AIDS patients has been spent.

Gauteng produces 40% of The most important province to the economy is Gauteng. It is the commercial, national GDP industrial and mining centre of the country, contributing almost 40% of GDP. The province has nearly 9m people, swelled by a constant influx of rural and illegal foreign migrants, concentrated mainly around greater Johannesburg. Gauteng is the best of the provinces at fiscal management. The next two most important provinces are KwaZulu-Natal and Western Cape. KwaZulu-Natal is the most heavily populated province, with almost 9.5m people. Its economy is based mainly on tourism, agriculture and some heavy industry, and is centred on the port of Durban. The Western Cape has over 4.5m people. The province has a limited industrial and mineral base but has consistently performed better than the rest of the country, owing to agriculture (including a thriving wine industry), tourism and other services. Within the government and the ANC at national level, concern is expressed over the cost and effectiveness of the provinces and the diffusion of political power. This feeling is manifested in the national government's unwillingness to allow the provinces powers to raise their own revenue. A permanent body, the Financial and Fiscal Commission, is charged with advising central government on the formula for disbursing centrally collected revenue to the provinces, but in practice the body has little influence. In reality, the provinces have created their own vested political interests, which will be difficult to dislodge.

Provincial finances come The 2003 intergovernmental fiscal review is important for detailing the under scrutiny provision of services at provincial and local government level. The main find- ing of the review is that, as a result of increasing allocations to the provinces from central government (in both nominal and real terms), the provinces are

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now in a strong position to carry out the government's aim of reducing poverty and inequality against a background of improved accountability. The extent of this shift is particularly apparent when the data are looked at in real terms: figures from the National Treasury show that transfers from the national budget rose by only 2.6% per year in real terms between fiscal years 1999/2000 and 2002/03 (April-March), but are set to increase by 8.8% annually over the three years to 2006/07.

Spending by the provinces (R m) 2002/03a 2003/04b 2004/05c 2005/06c Eastern Cape 24,019 27,933 29,959 33,065 Free State 10,054 11,056 12,248 13,363 Gauteng 24,159 27,030 29,696 33,003 KwaZulu-Natal 29,043 32,908 36,434 39,808 Limpopo 18,455 21,373 23,477 25,721 Mpumalanga 9,779 11,362 12,524 13,675 Northern Cape 3,424 3,932 4,326 4,699 North West 11,349 13,203 14,682 16,069 Western Cape 14,605 16,414 17,623 18,974 Total 144,887 165,211 180,969 198,376 % increase, year on year 18.2 14.0 9.5 9.6 a Actual. b Government estimates. c Government medium-term forecasts. Source: Intergovernmental Fiscal Review, 2004. As the Economist Intelligence Unit has argued previously, this budget trend allows the government to shift the blame for poor services to the provinces (although, as most of the provincial governments are dominated by the ANC, the benefits of blame-shifting are limited). The report also argues that, despite the substantial increase in resources available to provincial and local governments, it is not the amount of spending but the quality that is crucial. Not only has there been considerable underspending on capital projects against the increased employment of staff, but there also remains the huge problem of attracting qualified staff to work in rural areas, notably in health and education.

Local government Local government is an autonomous sphere of government. At the first all-race local elections in 1995-96, minority groups in every local area were guaranteed representation. Councils faced the challenge of fusing formerly separate racial areas into unified local authorities and changing the culture of rent and payment boycotts, which had been a form of political action in African areas before 1994. In 2000 guaranteed minority representation was removed, the number of local councils was reduced from 843 to 284, the number of councillors was similarly reduced and large city councils were created in Cape Town, Durban, Johannesburg, Pretoria and four other metropolitan areas. This rationalisation was designed to bring economies of scale and to enhance the efficiency and cost-effectiveness of service provision. The new structures are considerably more powerful, commanding larger budgets and becoming key structures for the provision of services. The new local structures are expected to eclipse provincial

government in importance, fuelling further debate about the future of provincial government. The main challenges facing these new local government structures include increasing payment for services in black areas and building their capacity for service provision. The role of the private sector in this will be critical, despite opposition from local government trade unions.

Economic sectors

Agriculture

Agriculture's contribution Only 13% of the land area is available for cultivation. Nonetheless, the remains significant agriculture, forestry and fishing sector contributes around 5% of GDP, employs approximately 10% of the working population and accounts for almost 30% of non-gold export revenues. The impact of the sector is more acute in rural areas, particularly in former homelands, where employment in agriculture is higher and official statistics do not indicate the amount of subsistence farming in the sizeable informal sector. Although the country produces a wide range of crops, the main exports are maize, wool, sugar, tobacco, citrus and other fruits. In "normal" years South Africa is considered to be self-sufficient in foodstuffs and a net exporter of agricultural products, which particularly benefits some of the country's poorer neighbouring states. However, the country is susceptible to periodic droughts because of erratic rainfalls and limited irrigation. Accordingly, agricultural output can fluctuate dramatically, and this becomes reflected in overall inflationary pressures and economic growth. Forestry, based on conifers, is increasing, but only 6% of the land is currently forested, mainly along the Great Escarpment. Fishing is not a substantial contributor to the economy, despite South Africa's long coastline, partly because over-exploitation led to strict fishing quotas in the early 1980s. The main types of catch are anchovy and Cape hake. Following a weak performance in 2003, the agricultural sector bounced back in 2004, with seasonally adjusted and annualised growth of 4.5% recorded in the first quarter and 7.5% in the second quarter. However, the good second-quarter performance was largely accounted for by the horticultural sector, as field crop production was adversely affected by late harvesting.

Agriculture (% change, seasonally adjusted and annualised) 2004 2003 2 Qtr Production -6.0 7.5 Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

Maize is a staple food The main crop is maize, which is the staple food for many rural South Africans and also contributes to export earnings. Maize harvests fluctuate according to climatic changes and rainfall patterns that can produce both drought and flooding. For example, there was a bumper harvest in 2000, but shortages in 2002 caused rising food price inflation. However, the country's maize reserves (a key factor that helps the country to balance good and bad years) enabled it

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in mid-2002 to offer assistance to its famine-stricken neighbours in Southern Africa. The 2003 harvest was larger but—despite bullish crop forecasts during the growing season—the 2004 maize output was disappointing, largely because of a late start to the harvest. Land ownership

The legacy of apartheid is perhaps most visible in agriculture. The post-apartheid government inherited a highly unequal land ownership structure, created by legislation in the early 20th century and reinforced by apartheid, which attempted to cram 75% of the population on to 13% of the land. Land reform is therefore an important policy issue, and one that has become increasingly pressing since the government-sponsored land invasions that have taken place in Zimbabwe.

In September the Ministry of Agriculture and Land Affairs published black economic empowerment (BEE) targets for the ownership and control of land. The aim is to redistribute 30% of white-owned farmland to blacks by 2015 and to transfer a further 20% through leases, also by that date. These targets appear ambitious and a clear funding and implementation framework is not evident. Moreover, current transfer rates suggest that the targets cannot be achieved; less than 1% of the 1994 targets has been met. There are concerns that the programme will unduly raise the expectations of those seeking to possess land, and also undermine investor confidence and farmer morale. Some features of the programme have raised comparisons with unfavourable events in Zimbabwe and, to a lesser degree, Namibia. The agriculture minister, Thokozile Didiza, recently announced a commission of inquiry into foreign ownership of land, with plans to regulate such investment. There are claims that foreign purchasers are cherry-picking the best coastal land areas (KwaZulu-Natal and the Cape) and game farms (Mpumalanga and Limpopo), and that land prices in general have therefore been forced upwards.

A report by an international think-tank, the International Crisis Group, recently warned that South Africa risks increased rural violence if it does not push forward with land and agricultural reform. The organisation claims that international donor support needs to be made available if targets of land redistribution are to be achieved and a Zimbabwe-type outcome avoided. The report further claims that only 3% of agricultural land has so far been transferred to black ownership.

Mining and semi-processing

Abundance of metals and The geological concentration of mineral wealth in the greater Johannesburg minerals area was the principal factor in opening up the country and in its rapid economic development. Over 90% of South Africa's gold output originates from the rich reef deposits of the Witwatersrand Basin centred on Johannesburg. Further north is the Rustenburg Layered Suite of the Bushveld Igneous Complex, where the country's platinum mining industry is centred. South Africa is the world's leading producer of gold (15.7% of world output in 2002 and 40.4% of world reserves), platinum group metals (52.6% and 87.5%), chrome (47.2% and 77.5%), ferro-chromium (52.2% and n/a), manganese (34.5% and 80%), vanadium (57.9% and 31.6%) and vermiculite (58.3% and 40%). It is also one of

the leading producers of alumino-silicates (37.4% of world reserves), titanium, zirconium, antimony and fluorspar, as well as having a significant presence in the world coal market as the sixth-largest producer and with the fifth-largest coal reserves. In addition, the country is the fifth-largest producer of uncut diamond gems, with De Beers, through its Diamond Trading Company, controlling an estimated 60% of the international diamond market.

South Africa's ranking in world mineral reserves and production, 2002 Reserves Production Gold 1 1 Platinum group metals 1 1 Chrome ore 1 1 Vanadium 2 1 Alumino-silicates 1 2 Manganese ore 1 1 Vermiculite 2 1 Uranium 4 9 Diamonds 5 5 Coal 5 6 Nickel 5 10 Iron ore 11 8 Aluminium n/a 8 Source: Department of Minerals and Energy, Minerals Bureau.

The mining and quarrying sector directly employs over 416,920 workers, equivalent to 2.6% of the economically active population. However, including family dependants and those employed in close ancillary trades, the number of people reliant on mining as a source of income is probably nearer 4m. In 2002 the mining sector contributed 8.1% to total value added, 32.9% to fixed capital formation and 32.9% to the overall value of exported goods.

Corporate and industry The mining industry in South Africa is conducted largely by the private sector reforms and, although foreign investment is not prohibited, it remains mostly a domestically-owned industry. In the 1990s significant restructuring and rationalisation of corporate structures took place as the industry adjusted to South Africa's reintegration into the global economy and to the new dynamics of world industrial development. The Mineral and Petroleum Resources Development Act of 2002 transferred the ownership of the country's mineral resources to the state. Since then, the most significant features within the sector have been the adoption of BEE initiatives in corporate structures and mineral royalty payments under the revised land ownership directive.

Gold South African mining houses are world leaders in deep-level mining technology, but deep-level mines are becoming increasingly uneconomic (ore content fell from 4.6 g of gold per tonne in 1999 to 4.5 g/tonne in 2000). This has led to the closure of mainstream mining groups, the sale of less profitable operations and consolidation within the industry. South Africa's AngloGold is the world's largest producer of gold. Gold output increased by 0.9%, to 398.3 tonnes, in 2002, the first rise in annual output since 1993, when output was 619.3 tonnes. Total sales of gold increased in 2002 by 42.7%, to R41.4bn

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 South Africa 49

(US$3.94bn), reflecting greater volumes exported, higher gold prices in dollar terms and a weakening in the rand. Employment in gold mines fell below 200,000 in 2002, from almost 259,000 in 1998. Although still a major producer, in 2003 South Africa produced only 15% of the world's new gold supplies, sharply down from a share of 79% in 1970. Poorer quality mines, a strong rand and powerful labour unions have contributed to a situation where, in June 2004, the average price of mining gold in South Africa was US$352/troy oz, compared with the global average of US$250/troy oz. In more bad news for the mining sector, a study by Canada's Fraser Institute, an independent research organisation, showed South Africa dropping from 28th to 34th place in attractiveness for mining exploration. The index measures the effect of government policies on exploration and was most probably brought down by the passing of the mining charter. However, in terms of mineral potential, South Africa improved from 13th to 11th place. The survey lent some support to political risk, with 29% of survey respondents saying that they consider political stability a strong deterrent to exploration investment in South Africa.

Platinum Platinum group metals (PGMs) are much in demand because of their use in the automotive sector as catalysts (particularly as emissions legislation becomes stricter), and in the chemical and computer hardware industries, as well as for jewellery (particularly in China and Japan). As a result, PGM prices have remained buoyant for several years and, on the back of high commodity prices, the platinum group of metals (principally platinum and palladium, but also rhodium, ruthenium and iridium) overtook gold as the country's largest single export commodity in 2000. In 2002 output of PGMs increased by 4.7% year on year, to 239.6 tonnes, of which platinum and palladium accounted for 56% and 27% respectively. Employment in the PGM sector reached 111,419 in 2002. South African platinum companies are expanding domestically and regionally, involving both greenfield and brownfield developments, in response to the positive outlook for PGMs. Anglo Platinum has embarked on the most impressive expansion programme, which will increase its production of platinum by 75%, to 3.5m oz in 2006. Implats has a strategy for maintaining production at its Impala mine, in the north-west of country, at around 1m oz. Implats intends to use its excess smelter and refining capacity by entering into concentrate deals with new projects in South Africa and Zimbabwe, in which it has taken small equity stakes. The company's platinum output should climb to around 2m oz by 2006-07. Lonmin's mining leases have the potential to take the company's production to 1m oz by 2007-08.

Diamonds The diamond industry is notoriously difficult to quantify because of its secretiveness and because gemstones often enter and re-enter markets several times, with double-entry a constant problem. In 2002 South African production reached 10.9m carats and mine production was estimated at US$900m. However, export proceeds reflect a large re-export trade, rather than domestic production, and tentative estimates indicate that the total gross rough-diamond export value in 2002 was over US$1.1bn. South Africa is the world's fifth largest diamond gemstone producer in volume (Australia is the largest) and value (Botswana is the largest) terms.

De Beers, through its Diamond Trading Company, controls an estimated 60% of the international diamond market. De Beers itself is the world's largest producer of diamonds, having production interests through Debswana in Botswana as well as direct South African output. Although its hold on the global industry remains significant, De Beers faces some significant market problems. Among these are the independence shown by Australian mines, large new mines opening in Canada that are largely outside De Beers' sphere of influence and the illegal trade in "conflict" or "blood" diamonds. The high-value trade in gems provides hard currency for governments, but also for rebel factions who control parts of some countries. Such revenue can be used to secure arms—rather than improve social and economic conditions—and diamonds are therefore associated with the perpetuation and intensification of civil wars, political violence and other conflicts. Such gemstones (blood diamonds) are estimated to account for less than 4% of the annual global market in rough diamonds, but media attention and pressure from consumer and activist groups have given them added significance. The Kimberley Process was developed by representatives of African diamond-producing countries at a meeting in the South African town in May 2000, and is now supported by over 40 countries, industrial participants and non-governmental organisations worldwide. At the beginning of 2003 the initiative launched an international certification scheme to prevent conflict diamonds from entering legitimate markets. Key elements of the certification scheme include: • shipment of rough diamonds only in uniquely identified, tamperproof packaging; • verification on shipping of the contents of the packaging; and • electronic and physical verification on receipt that the packaging is intact. In addition, a register of all licensed diamond producers and traders is maintained. Members of the organization control over 90% of the global market, and non-adherence to its practices and protocols therefore risks exclusion from the sector.

Manufacturing

Manufacturing (% change, year on year) Annual average 2003 1999-2003 Production -2.3 1.8 Labour productivity -2.1 3.4 Sales -6.6 3.0 Capacity utilisation (%) 80.2 79.8 Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

Manufacturing sector is South Africa manufactures a wide range of consumer goods, including dynamic foodstuffs, textiles and clothing, and footwear, together with metal, chemical and paper products. In addition, the output of capital goods, such as mining machinery, transport equipment, automobiles and electrical machinery, has increased. Moreover, mining beneficiation (see Economic sectors: Mining and semi-processing) and the electronics and automotive industries provide growth areas. As a result of its relative size—accounting for around one-fifth of total GDP—its employment levels and its basis in the private sector, the manufacturing industry is significant in the government's development strategies. The authorities have fostered capital-intensive beneficiation schemes such as Alusaf, Saldanha Steel and Columbus, although job creation is a national priority and may best be served through small-scale manufacturing. As with other sectors, manufacturing developed under a protective trade regime during the apartheid era and had to undergo major restructuring to enable it to compete in the global market once trade and tariff liberalisation was implemented. This brought about the contraction of uncompetitive industries such as clothing and textiles and the growth of new export industries, notably motor vehicles. The sector in general is in relative decline as the country's service sector expands. Low economic growth and a shortage of skilled labour have also limited the expansion of the country's manufacturing sector. Manufacturing is heavily capital intensive, based on mining and energy, heavy chemicals and mineral beneficiation, and iron and steel. The South African steel industry is one of the world's top 25 producers and has a number of extremely competitive producers, such as Columbus Stainless. The country is also a major producer of aluminium. There is, however, a notable weakness in capital and intermediate goods.

Strong growth across a Despite 2003's recession in manufacturing because of the strength of the rand number of sectors and lost export competitiveness, this year has brought relatively strong production, reflecting robust domestic spending. According to Statistics South Africa (SSA), manufacturing output in August was up by 5.2% on July and by 6.8% year on year. Production in the first eight months was up by 3.3% year on year. Moreover, there was stronger growth across the board within the sector, with particularly strong growth in glass and non-metallic products, food- and drink-processing, automobiles, and petroleum and chemical products. The automotive industry's contribution to overall economic activity has been growing in importance in recent years, accounting for around 6.4% of nominal GDP, and is a major source of export earnings. It employed 304,000 people in 2002, second only to the mining industry, and is the largest manufacturing subsector, accounting for slightly under 30% of total manufacturing output. In 2003 South Africa ranked 18th in the world in terms of vehicle production. The domestic market for new vehicles stood at 382,600 units, whereas domestic production reached 421,335 units. Vehicle exports amounted to 126,661 units and imports totalled 87,926 units, making South Africa a net exporter to the tune of 38,735 units in the year. All of this is in stark contrast to the situation a decade ago, when there were dire warnings of an imminent downsizing of the "oversubscribed" South African vehicle-assembly industry. Instead, the industry

is producing more vehicles than ever before, and is responsible for 80% of Africa's vehicle output, although still only a tiny 0.8% of the global market.

Construction

Progress on housing is slow Election promises relating to the number of new homes to be built have invariably failed to materialise, despite housing construction receiving high priority in the government's medium-term economic agendas. Early in its first term the ANC government reached a R2bn agreement with banks and building societies by which the private sector would start lending to poorer customers at the lower end of the housing market. The government agreed to indemnify these institutions in case political unrest prevented repossession. In late 1996 the government made radical changes to its housing policy in an effort to speed up completion, placing new emphasis on a partnership between the private and public sectors, with a bigger role for local government.

Construction (% change, year on year) Annual average 2003 1999-2003 Building plans passed 11.7 6.0 Completions 10.2 3.8 Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

However, progress has been slow and banks are still reluctant to support the subsidy scheme for the poorest families with commercial loans. Slow progress in persuading residents of townships to end their boycott of rent and services payments has constrained local government revenue. In addition, the construction sector has been in recession and its capacity has shrunk dramatically, with outdated equipment, a severe shortage of skilled labour and the closure of many building firms. Revival is complicated by cartelisation, which has made entry into the industry difficult for newcomers, particularly black companies, resulting in a plethora of unreliable contractors. Government expenditure on infrastructure has increased significantly, but the general global slowdown is unlikely to provide a suitable environment for sustained growth.

Financial services

Sophisticated and well- South Africa has a well-developed financial services sector, which has been regulated financial markets increasingly liberalised. The sector is one of the largest and most deregulated within the emerging markets, with sophisticated banking, bond and insurance markets accounting for 20% of GDP and 220,000 jobs in total. Moreover, the international ratings agencies Standard & Poor's and Moody's Investor Services have assigned a higher investment-grade rating for South Africa on the strength of its stable financial services sector. The ratio of savings to GDP remains sub- optimal, hovering at around 16%. Recent government policy in this sector has revolved around the implementation of the Financial Services Charter (which aims to bring

development issues within black communities into the focus of the financial services industry) and the Financial Intelligence Centre Act (which requires increased reporting from all financial services companies), and the granting of a limited foreign-exchange amnesty with a view to further exchange-control liberalisation. Commercial banks are supervised by the South African Reserve Bank (SARB, the central bank), whereas other financial institutions and the financial market fall under the Financial Services Board. A number of financial conglomerates have developed, mainly as a result of the removal of the distinction between banks and building societies, as well as the evolution of large insurance companies into more broadly based financial services groups.

The banking sector South Africa's banking sector is dominated by five large banks—Standard Bank of South Africa (Stanbic), Nedbank, Amalgamated Bank of South Africa (ABSA), FirstRand Bank and Investec Bank. Together they currently account for some 86% of banking services in South Africa. All are universal banks, with the exception of Investec, which focuses on investment banking, asset management and private banking in general. Over the past five years more than 40 domestic banks have disappeared. There is a trend towards closer co-operation with the insurance sector, with alliances between the major banks and insurance companies. For example, ABSA is allied with the country's second-largest insurance group, Sanlam; Standard Bank formalised its relationship with Liberty, the third-largest insurer, through the creation of Stanlib, which focuses on providing investment products such as unit trusts. The SARB made an early commitment to be compliant by the end of 2006 with Basle II, the new capital accord on international banking. Basle II aims to link banks' regulatory capital more closely with their market, credit and operational risks. The SARB sees the new accord as an extension of the risk-based approach to supervision that it has already adopted. The country's major banks are also committed to the implementation of Basle II, seeing it as the adoption of best practice in risk management. Foreign banks in South Africa operate in niche markets such as corporate and investment banking. The financial services sector has traditionally focused on the middle- to high-income population. However, increased demand from the lower-income black population, in addition to pressure from the government through the implementation of the Financial Services Charter, means that the major banks are joining the smaller micro-lenders in the lower end of the market. Much of the savings of black South Africans are outside the formal banking sector, in bodies such as stokvels, which are essentially co-operative savings institutions. There is also a move towards electronic banking and away from cheques. The value of electronic transactions increased from R281.4bn in 1998 to R387.6bn in 2002, whereas the value of cheques processed fell from R300.8bn in 1998 to R187.4bn in 2002.

Top ten domestic banks (ranked by total assets at end-Jun 2004; R m) Bank Assets Market share (%) Standard Bank of South Africa 317,338 23.52 Nedbank 272,594 20.20 ABSA 270,412 20.04 FirstRand Bank 248,454 18.41 Investec Bank 71,698 5.31 Gensec Bank 14,866 1.10 People's Bank 14,056 1.04 Africa Bank 6,644 0.49 Mercantile Lisbon Bank 2,354 0.17 Rand Merchant Bank 2,099 0.16 Total market 1,349,357 100

Source: South African Reserve Bank.

Retail banking segment is In September 2004 it was officially announced that the UK-based Barclays Bank targeted by a foreign bank had entered negotiations to take over ABSA through the purchase of a majority stake in the banking group. The SARB had stated the previous year that it did not have a block on the foreign purchase of one of the major banks. It had appeared that those foreign banks that had investigated the market were put off by a number of factors, including the fact that the market is dominated by large and well-entrenched local banking groups and uncertainties over future developments in the government's plan to push ahead with its BEE policy. Foreign banks had also raised concerns about factors such as the slow rate of economic growth and the high incidence of violent crime. Barclays currently operates a corporate and private banking unit in South Africa, and has an extensive African network of retail branches, including in neighbouring Botswana and Zimbabwe. It appears to have the support of the president, Thabo Mbeki, in its prospective bid for ABSA.

Credit market developments One reason for Barclays Bank to contemplate the purchase of a major bank is to be able to maintain direct control over the market penetration of its credit card business, Barclaycard, which it had planned to do in conjunction with Standard Bank. Barclaycard, which is the UK's largest issuer of credit cards, envisages that 1m customers will sign up within a decade. Currently, it is estimated that only around 5% of the South African population uses credit cards on a regular basis. The South African credit and debit card market has undergone a technical revolution with the advancement of bank usage of cards with in-built chips, which are verified by typing a four digit code into a hand-held terminal at the point of sale. This development is another measure aimed at reducing the fraudulent usage of credit and debit cards.

The JSE Securities Exchange The long-established Johannesburg Stock Exchange was renamed the JSE Securities Exchange in 2001, but is still referred to as the JSE. As part of the ongoing review of its operations, the JSE began to implement changes in January 2002 to improve its global competitiveness. Over the years the performance of the JSE has been volatile. Since the beginning of 1996 the JSE has been hit by a number of adverse factors, including contagion from the

Asian crises, concern over exchange controls and high interest rates. Lack of liquidity is another problem. The JSE remains highly concentrated, with just 70 stocks accounting for 85% of its market capitalisation. The JSE is also characterised by sector concentration. For example, mining stocks account for around 40% of the JSE's market value, with financial services stocks accounting for a further 20%.

Capital market activity (% change) 2003 July 2004 Total value of shares traded 11.3 20.0 Total value of bonds traded 15.3 -27.0 Share prices: all classes 4.9 16.6 Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

After slowing in 2003, the total value of equity capital raised in the domestic and international primary share markets by companies listed on the JSE increased markedly in 2004. Equity financing was R36.7bn in the first eight months of 2004, surpassing the R22.7bn recorded for the whole of 2003. Of the total raised in the first eight months of 2004, the resources sector accounted for R25.2bn. Turnover on the JSE in the January-August period was 35% higher than in the corresponding period of 2003. Market capitalisation in August 2004 was R2,185bn, indicating that the JSE ranked 15th in a world league of markets.

Other services

Tourism industry is showing South Africa was able to open up further to the international tourist trade after strong growth political transformation in the early 1990s. The country has many features that indicate strong tourism potential: a good climate, sandy beaches, mountains, game parks, wildlife reserves, sporting facilities and extensive use of the leading tourism language, English. Moreover, South Africa is strategically located to act as a springboard for regional tourism as a joint destination or transit hub. It has become a favoured travel destination since then, accounting for the highest number of foreign arrivals in Africa. Tourism is one of South Africa's fastest- growing industries, directly and indirectly contributing about 5% of GDP in 2001. According to the World Travel and Tourism Council, this figure grew to 7.1% of GDP, equivalent to US$7.2bn in 2002. The sector employs an estimated 6.9% of the country's workforce and is regarded as potentially the largest provider of jobs and the fourth-largest industry in terms of revenue. Despite the strong growth in its tourism industry, South Africa remains a relatively small international player, accounting for less than a 1% share of the world tourism market.

The number of overseas Despite global concern over terrorism, South Africa is not perceived as a risky visitors continues to rise destination, and the strength of the rand in 2003 and early 2004 appears not to have resulted in a decline in tourist interest. Gauteng commands the highest number of trips as a destination (19.6%), mainly for business, with KwaZulu- Natal following closely, at 19%. The Western Cape has the highest average expenditure per domestic tourist, followed by KwaZulu-Natal and the Free State.

Visitor numbers to the country were up by 1.2% in 2003, compared with an average contraction of 2% in 2002 caused by the global economic slowdown, the outbreak of Severe Acute Respiratory Syndrome (SARS) and fears relating to terrorism. The country experienced positive growth in all its primary tourist markets. For example, the number of travellers from Germany rose by 3.2% and from the UK by 3.1%. The number of visitors from the US and Canada increased by 2.7% and 3% respectively. According to SSA, almost 70% of foreign tourists come from other African countries. More than one-quarter of the African tourists are from neighbouring Lesotho, Swaziland, Botswana, Mozambique, Zimbabwe, Namibia and Zambia. Whereas the numbers from Europe grew at a steady 8% per year in 1996-2000, arrivals from North America and India/Indian Ocean Islands grew at a higher rate over this period, averaging 10.3% and 9.9% respectively, and indicating a potential for further marketing. Of all overseas travellers entering the country in 2003, 86% were holidaymakers and 8% were on business trips, according to SSA. By contrast, SA Tourism 2003 statistics put holiday visitors at 50% of the total, followed by 30% on business and 11% visiting friends and relatives (VFR). Of travellers from Africa in 2003, 88.3% were in the country on holiday and 6.5% were on business trips. VFR is a major trip purpose for tourists from Africa, but many visitors from neighbouring countries are on day-shopping or business trips; overseas visitors tend to stay for longer and spend more. Official targets indicate promising prospects for the tourism sector

The government sees tourism not only as a significant source of foreign-exchange revenue and foreign investment, but also as a vehicle for black economic empowerment (BEE). A luxury hotel group, Gatsby International Hotels, has announced a R40m (US$6.5m) merger with the black-owned Community Investment Holdings (CIH). CIH, which has interests in the healthcare, energy, transport and telecommunications sectors, will have a 51% stake in the new venture and the renamed Gatsby International Hotels and Resorts will retain the remainder. The firm plans to expand into other Southern African states, as well as the Indian Ocean Islands, to meet rising demand in the medium term. The government's targets for promoting the industry over a three-year period (2003-06) include:

• increasing the number of tourists visiting the country by 7% a year and the number of those visiting the six less-visited provinces by 10% a year; • increasing the length of stay of the average tourist from eight days to 12 days; • increasing foreign direct investment into tourism by 35% and encouraging investment in a wider range of facilities and geographical areas; and • increasing the number of formal-sector jobs created through tourism to 8% of total formal employment (a study by the World Travel and Tourism Council showed that tourism employs 6.9% of the country's formal workforce).

The external sector

Trade in goods

Structural change International economic sanctions and a debt standstill in the 1980s (see Capital flows and foreign debt) forced South Africa into engineering large trade surpluses to counteract the outflow of capital, as new flows were minimal and creditors demanded repayment. Trade surpluses were achieved through restrained import demand and a massive import substitution programme. With the dramatic political change in the 1990s came the ending of sanctions and an outward-looking trade policy, underpinned by an extensive trade liberalisation programme. It formed the basis for South Africa's integration into the global trade and financial markets. South Africa is a founding and active member of the World Trade Organisation and a member of numerous regional and international economic organisations.

Merchandise trade account (R bn, seasonally adjusted and annualised) 2004 2003 1 Qtr 2 Qtr Exports (excl gold) 256.0 257.0 281.5 Exports (incl gold) 291.4 290.5 314.0 Imports -262.8 -269.5 -319.6 Trade balance 28.5 21.0 -5.5

Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

This liberalisation is indicated in the ratio of exports of goods and services to GDP, which was just over 20% in 1996 but almost 33% in the second quarter of 2004. Similarly, in the second quarter, the ratio of imports to GDP had grown to over 29%. Significantly, the deterioration in the visible trade account does not reflect a weak export performance but a relatively stronger increase in imports. Accordingly, over the four-year period 2000-03, the volume of exports (excluding gold) increased by an annual average of 3% but import volume increased by 5.5%. In the second quarter of 2004 export volume was 12.6% up on the preceding quarter but import volume increased by 20.6%.

Both exports and imports have Recent export performance has been buoyed, in particular, by global demand continued to increase for commodities. In turn, this has been caused by the broad-based nature of the current expansion, with continuing growth in North America, recovery in the Japanese economy and strong demand from the emerging markets (particularly China and India). Hence gold, coal and platinum exports have been strong (see Economic Sectors: Mining and semi-processing). However, also reflecting international developments, the value of oil imports has risen with the sustained period of high oil prices caused by supply concerns from Russia, Nigeria and Venezuela, and the constrained ability of key Middle East producers to raise output in the short term. The value of oil imports increased by over 200% in the second quarter of 2004 compared with the preceding quarter, and accounted for 16% of total imports. A deficit in the country's

merchandise trade account is not in itself a negative element. It represents a stage of development and, as long as the bulk of imports constitutes intermediate or capital goods and not consumer items, can be an indication of future growth. A visible trade deficit turns attention to other areas of the country's balance of payments.

Invisibles and the current account

Current-account deficits are As noted above, South Africa had to run large merchandise trade surpluses in manageable the apartheid era to counter large capital outflows. This resulted in current- account surpluses that narrowed with the trade liberalisation from the 1990s. Deficits in the current account became manageable and in 1995 South Africa registered its first deficit (equivalent to 1.5% of GDP) for ten years. The deficit on South Africa's services and income account has shown a widening trend in the last few years, primarily because of the increased foreign purchase of bonds and equities and the consequent outflows of dividends. Other components of services payments include freight and merchandise insurance. There is also a significant outflow of remittances by a declining but still significant number of migrant workers in gold mines, on large farms and in other employment. Services receipts, particularly from foreign tourism, passenger fares, freight, insurance and the provisioning of ships and aircraft typically cover about 80% of payments. In 2001 and 2002 high services receipts enabled small surpluses to be recorded in the current account (equivalent to 0.6% of GDP in 2002), the first since 1994. These surpluses were an exception, however, and the current account reverted to a modest deficit of 0.8% of GDP in 2003. Data from the South African Reserve Bank (SARB, the central bank) in its September 2004 Quarterly Bulletin show that the current-account deficit widened from 1.1% of GDP in the first quarter of 2004 to 3.8% of GDP in the second quarter. The current account has posted a deficit every month until September, when the deficit narrowed to R301m (US$46m), from R3.1bn (US$500m) in August. The continued widening of the deficit is partly due to the weakening of the trade balance, and also to higher dividend payments to non-residents and increased interest payments on the government's foreign debt. For the whole year, the current account is estimated to register a very manageable deficit of around 1.5% of GDP.

Capital flows and foreign debt

Structural changes in capital The counterpart to the developments in the trade and current accounts noted flows above has been a structural change in the country's capital account. Perhaps the most dramatic feature of South Africa's balance of payments is the turnaround in capital flows after the 1994 election. From 1984 to 1993 short-term capital outflows were substantial and the country was a net capital exporter. This was largely a consequence of sanctions and related disinvestment, and of the unilateral declaration by the SARB of a debt moratorium in 1985 in response to a perceived external debt crisis. By contrast, since 1994 the financial account has had consistent net inflows of capital.

Despite the reversal of net capital flows since 1994, there is concern that the bulk of capital inflow has tended to be in the form of volatile portfolio investment, which is subject to the vagaries of emerging-market sentiment. Although these short-term flows have financed balance-of-payments deficits and bolstered foreign reserves, the Treasury, the SARB and the government recognise the need to attract more stable foreign direct investment (FDI). In turn, this is dependent on the continuation of sound economic policies, an enabling business environment (labour market rigidities are often cited as a reason for weak FDI) and regional factors (events in Zimbabwe have acted to depress flows to Sub-Saharan Africa as a whole). Net inflows of capital (including unrecorded transactions) in 2003 amounted to R63.4bn and continued strongly into 2004: in the first quarter of 2004 net inward movement of capital was R14bn, and R25.9bn in the second quarter. Indeed, the R103.4bn from the first quarter of 2003 to the second quarter of 2004 compares favourably with the total net inflows of R129bn in the nine-year period up to the end of 2002. Capital flows are by their nature volatile, including one-off large movements as a result of privatisation, corporate restructuring—including delisting from the JSE Securities Exchange—and inflow from syndicated foreign loans. Nevertheless, the current trend is for positive net capital flows to offset deficits on the current account. As noted, the key development is to ensure that inflows reflect FDI flows rather than an over-dependence on portfolio investments. In relation to many emerging markets, particularly in Africa, South Africa appears to have a sound economy, a marked degree of transparency, good quality management at the top and a relatively attractive asset base. The lack of FDI flows appears to reflect market sentiment, which is coloured by regional factors and lingering suspicions related to the previously held anti-capitalist policies of the ruling African National Congress (ANC), as well as competition from emerging Asia.

FDI inflows into Sub-Saharan Africa (US$ m) 1999 2000 2001 2002 2003 Total FDI into Sub-Saharan Africa 8,558 5,810 14,126 8,149 9,250 FDI into South Africa 1,502 888 6,789 757 762 FDI into Sub-Saharan Africa excl South Africa 7,056 4,922 7,337 7,392 8,488 Flows into selected countriesa Angola 2,471 879 2,146 1,643 1,415 Côte d'Ivoire 324 235 273 230 389 Democratic Republic of Congo 11 23 82 117 158 Ghana 267 115 89 59 137 Mozambique 382 139 255 155 337 Nigeria 1,005 930 1,104 1,281 1,200 Uganda 222 275 229 249 283 Tanzania 542 282 467 240 248 a Only countries that received more than US$100m in foreign direct investment in 2003 are listed. Source: UN Conference on Trade and Development, World Investment Report 2004.

External debt is low In August 1985 South Africa declared a partial moratorium on debt repayments. Basically, this reflected the refusal of mainly US banks to roll over the short- term obligations of South Africa at a time when the country faced a bunching of repayments. South Africa's debt crisis therefore resulted from political pressures that led to sanctions rather than from any fundamental economic reason. As a consequence of the country's isolation, foreign debt did not accumulate to the extent that it did in other African countries, and the ensuing ANC leadership was able to observe closely the consequences of over-reliance on foreign debt. The ANC governments have, therefore, been relatively sheltered from foreign-debt problems. Total foreign debt (US$39.2bn at the end of March 2004, of which US$27.9bn represents foreign-currency-denominated debt) remains largely manageable. Moreover, the US$2bn increase in debt from the end of 2003 to March 2004 is almost entirely related to exchange-rate factors, with the total debt increasing by only US$600m in rand terms. South Africa will encounter few problems in issuing additional debt, benefiting from the country's relatively good classifications awarded by the leading credit rating agencies, its acknowledged sound debt management policies, and low debt stock and relatively favourable servicing ratios.

South Africa's credit ratings All three of the major rating agencies (Moody's Investor Services, Standard & reflect investment status Poor's and Fitch Ratings) now classify South Africa as investment status, indicating a vote of confidence in the country's macroeconomic stability and policy orientation. Both Fitch and Standard & Poor's have awarded BBB to the country's long-term foreign currency debt, and Moody's Baa2 is an equivalent rating. All three rating agencies have cited the same factors as driving their assessments, in particular the country's continued strong macroeconomic performance and the government's ongoing sound fiscal policy. Although the ratings have not had an observable impact on inflows, it is established practice for some tracker investment funds to allocate predetermined amounts automatically to emerging markets classified as investment status. However, the investment status is an indicator of creditworthiness rather than a guarantee of investor appetite.

Foreign reserves and the exchange rate

Foreign reserves improve Following the elections in April 1994, total reserves increased from R7.3bn to R11.1bn by the end of that year, and to R15.7bn by end-1995. The run on the rand in 1996 seriously depleted reserves to R4.4bn in December of that year. That history of volatility was repeated in 1998 when the SARB attempted to defend the rand and used an estimated US$1.2bn in trying to protect the currency. It is now stated policy that the SARB will not try to protect any predetermined level for the rand over a sustained period. Accordingly, reserves have increased gradually in recent years, although some holdings were used to draw down the forward book (the net open forward position), which was finally accomplished in July 2003 and thereby heightened perceptions that liquidity risks had improved. Gold and other foreign reserves held by the SARB totalled R52.9bn at the end of 2003, and gross gold and foreign reserves (including other financial institutions) amounted to R165.3bn, or US$24.9bn. By

July 2004 the SARB's gross reserves had increased to R72.7bn, and further accumulation is expected.

International reserves 2002 2003 July 2004 Forex held by SARB (R m) 50,987 43,523 63,954 Total SARB (incl gold; R m) 65,977 52,905 72,670 Gross gold & foreign reserves of financial system (US$ m) 15,352 24,896 27,862 Source: South African Reserve Bank, Quarterly Bulletin, September 2004.

Mixed fortunes of the rand Although the SARB now has a non-interventionist policy with regard to specific values for the rand, the government's policy is to oversee a gradual depreciation of the rand in the medium term to take account of the inflation differential between South Africa and its main trading partners, and thereby maintain competitiveness. This does not preclude periods of rand strength, as was the case throughout 2003 and in the first half of 2004. After the heavy fall of the rand in November and December 2001, when the currency hit a low of R13:85:US$1, it recovered throughout 2002. The collapse in the rand in 2001 took it to well below fair value, and some recovery in its value in 2002 was not surprising. However, the recovery was stronger than most had forecast, with improved gold and platinum prices further boosting the rand to make it into one of the best performing currencies in the world in the last two years. Some conspiracy theories that had circulated in 2001 relating to the rapid depreciation of the rand in that year were partially quashed by the report of the Myburgh commission of inquiry, which was published in August 2002. It did not find that market players had acted illegally to influence the exchange rate, and attributed the decline in the rand to a variety of domestic and international economic factors that had come together to drive market sentiment downwards. However, the rand remains subject to market perceptions of volatility that cause some trepidation to the export and import communities. These perceptions will take some time to assuage. The rand strengthened to R6.1:US$1 in July 2004, but had subsequently depreciated to around R6.5:US$1 by mid-November.

Exporters are concerned about The strengthening of the rand has been of concern to exporters. With strong the value of the rand competition from the manufacturing sectors in China, India, South Korea and Thailand, there appears to be a prima facie case for rand depreciation. However, external trade figures do not suggest that markets are being lost—as yet—because of rand strength. Nevertheless, a consensus is emerging that a fair value for the currency in the medium term is around R8:US$1, particularly if the small- business sector is to develop export markets. Measured against the US dollar in the period between end-2003 and end-August 2004, the rand was the strongest performer among a group of commodity and/or high-yielding currencies. Over this period, the rand depreciated by 0.7%, the New Zealand dollar by 0.8%, the Canadian dollar by 1.7%, the Australian dollar by 6.8% and the Turkish lira by 7.5%. This tends to indicate that it is not just the manufacturing sector that will be concerned about potential loss of competitiveness.

Largest falls in the rand since 1995 Main reason for fall Mar-May 1995 7% in three months Relaxation of exchange controls. Mar-Aug 1996 17% in six months Lack of confidence in economic policy. Apr-Jul 1998 20% in four months Concern over the appointment of Tito Mboweni as governor of the SARB. Sep-Nov 2000 21% in three months Fall in confidence in long-term economic outlook. Nov-Dec 2001 42% in one month Strength of US dollar; post-Sept 11th negative sentiment; weak global economy; emerging market contagion from Argentina; the Zimbabwe factor; negative domestic sentiment about HIV/AIDS; NOFP; delays in privatisation.

Sources: Gensec Asset Management; Economist Intelligence Unit.

Exchange controls are In March 1995, the abolition of the financial rand mechanism (South Africa gradually relaxed operated a dual exchange-rate system) and the unification of the rand exchange rates in effect ended controls on non-residents. Since then attention has focused on the removal of restrictions on residents. The authorities have been reticent about abolishing such controls other than through a gradual and piecemeal approach. The government is committed to their eventual removal, but will not be swayed from this policy of gradual liberalisation. Each passing budget eats away at the controls on residents, introducing a range of concessions. Further relaxation was announced in October 2004 (see The economy: Economic policy). A factor limiting the ability to implement a "big bang" approach to the removal of controls has always been the limited international reserves to support such liberalisation. With the closure of the SARB's forward book overhang and the build-up of foreign reserves, this restriction has been diluted. It is very difficult to assess the potential size of capital outflows that would result from complete liberalisation. International experience indicates that, over the short to medium term, outflows are usually matched (or surpassed) by inflows. Although the SARB administers exchange-control regulations, the final decision on restrictions is taken by the Ministry of Finance and is therefore a political decision. Accordingly, the gradual approach is likely to continue (see box in see Economic policy: Are South Africa's policymakers putting the currency at risk?).

Regional overview

Membership of organisations

African Union (AU) The African Union (AU) is the successor to the Organisation of African Unity (OAU) and is based in the Ethiopian capital, Addis Ababa. The AU was formally launched in July 2002 at a meeting of African heads of state in the South African city of Durban. This came two years after the AU's formation was first agreed in Togo in July 2000 and followed a one-year transitional period that began after the ratification of the constitutive act of the AU by two-thirds of the member states in May 2001. The AU is modelled on the EU and has ambitious plans for a parliament, a central bank, a single currency, a court of justice and an investment bank. The most advanced of these is for a Pan-African Parliament, which held its first session in South Africa in October, although it will not play a legislative role for five years. The president is currently Gertrude Mongella from Tanzania. The AU also aims to have common defence, foreign and communications policies, based loosely on those of the EU. Even if these goals are not fulfilled, the organisation fills the need for a forum for discussing the continent’s problems and the idea of pan-African unity exerts a strong hold over member countries. In practical terms, the most high-profile AU event is the annual conference of heads of state, which is hosted by the member state that is due to hold the chairmanship of the organisation for the following year. The day-to-day affairs of the AU are managed by the AU commission, which is modelled on the EU commission and was endorsed by the AU heads of state summit in July 2003. The commission is headed by the former Malian president, Alpha Konaré, aided by a deputy, Patrick Mazimhaka of Rwanda, both of whom were elected at the summit. There are also seven appointed AU commissioners. One of the main problems facing the AU is that many of the proposed new institutions and policy co-ordination mechanisms are costly and cannot be funded within the AU's current resource allocations. To help to counter this, at the July 2004 Annual Summit Mr Konaré presented a 2004-07 Strategic Framework aimed at launching Africa into the 21st century. Under this, member states are supposed to pledge 0.5% of GDP to fund the AU, which will allow it to double the staff at its headquarters and to push ahead with the implementation of the New Partnership for Africa’s Development (Nepad). This is a potential bone of contention with the South African government, which is keen for Nepad to remain in its South African headquarters. However, to date, many members still fail to pay their membership dues so further commitments, other than from external donors, are unlikely. In December 2003 donors and external lenders expressed their full support for the AU’s initiatives and the creation of new institutions. The main criticism levelled at the OAU in the last decade was that little real action resulted from its policy announcements. There are concerns that the AU, like its predecessor, will be undermined by a lack of real commitment to its initiatives amongst the 53 member states, many of which suffer from very weak governance. This problem is further compounded by the fact that many

member states are unlikely to give up the sovereignty required to make several of the proposed initiatives—such as a single currency or a court of justice— operate effectively. The AU will also battle to overcome opposition to the principle of non- interference, which has been a major hindrance to the resolution of conflicts on the continent and is a contentious issue among member governments. Although non-interference was enshrined in the old OAU, this is not the case with the AU, which has set up a Peace and Security Council (PSC; to replace the OAU's Mechanism for Conflict Prevention, Management and Resolution) modelled on the UN Security Council. It is envisaged that the PSC will sanction military intervention in member states in cases of genocide, unconstitutional changes of government and gross human rights abuse. The proposed military intervention by the AU is to be through a standing armed force, which is projected to comprise five battalions by 2010 and has already received some funding from both the EU and the US. Even without the establishment of the PSC, since May 2003 the AU has had an observer mission in Burundi, led by South Africa and including troops from Mozambique and Ethiopia, to help enforce a peace agreement in Burundi's civil war. An AU observer mission was also sent to the Darfur region of Sudan in July 2004, and a protection force is being deployed. If this is increased, to become a real peacekeeping force, it could prove to be the first real test of the AU’s commitment to intervening in member countries’ domestic affairs.

Southern African Customs The Southern African Customs Union (SACU), which links Botswana, Lesotho, Union (SACU) Namibia, Swaziland (the "BLNS" states) and South Africa, is the oldest and most formal regional economic grouping in Southern Africa, with origins extending back to 1910. Historically South Africa administered the union, and under it the customs union gathered excise duties on local production and customs duties on member states' imports from outside the SACU area. These were then paid to all the member states in quarterly instalments, using an agreed revenue- sharing formula. South Africa's tariffs have been reduced in recent years, as the country has reformed its trade policy in accordance with its free-trade agreement with the EU and to meet World Trade Organisation (WTO) guidelines. However, the BLNS states still depend on South Africa for most of their imports and, more importantly, on the privileged access to the South African market that their goods receive. Negotiations to reform SACU began in 1994, and a new agreement was signed in October 2002. The problem with the old revenue-sharing formula, devised in 1969, was that it included an element of compensation, which was supposed to make up for the fact that, under South Africa's old trade regime, exports from South Africa to the BLNS states were more expensive than on the world market. It was also meant to compensate for the concentration of the region's industry in South Africa and for the loss of policy discretion. However, even after the end of apartheid and South Africa's joining of the WTO, the BLNS states continued to benefit from the stabilisation component of the agreement, which, in effect, set a minimum for average duty rates, even though external trade barriers were being reduced. In addition, the compensation element was now greater because imports into the BLNS countries had grown more rapidly

than imports into South Africa, reducing the residual left for the South African government at a time when South Africa greatly needed to increase fiscal revenue. The BNLS countries, for their part, objected to the loss of sovereignty and the slow pace at which payments were finally agreed, which resulted in what was, in effect, a large interest-free loan to South Africa. The new agreement came into effect in July 2004. As well as resolving the main drawbacks of the old deal and decentralising the implementation of the new agreement into the hands of all member states, the new formula aims to ensure that revenue flows to each country are stable and do not fall below current levels. This is critically important for countries like Lesotho and Swaziland, at least half of whose government income is customs revenue. The following are the main features of the new arrangement. • Customs and excise duties are treated separately. Customs duties are to be distributed pro rata to members according to their share of intra-SACU imports (not the imports from which the duties are derived). South Africa is by far the largest supplier of intra-SACU imports, and will contribute about 80% of the customs pool and get back some 50%. • Most (85%) of the excise pool will be distributed in proportion to the five countries' share of SACU GDP; the remaining 15% will be allocated on the basis of the inverse of income per head, the so-called development component: countries with lower income per head will receive more. However, there is a dampening mechanism to flatten out the income per head differential, as a result of which the main beneficiary will be Lesotho. • South Africa collects R8.5bn (US$770m) in excise duties, compared with about R500m collected by the other countries. South Africa will contribute 95% of the excise pool and get back 80%. • South Africa will continue to manage the common excise revenue pool for the time being. After a transitional period (of around two years) this function is to be transferred to an independent secretariat, which has now been established in Windhoek. The finance ministers will agree excise rates. • Each year, in October or November, the member states will meet to agree the size of the revenue pool that will be allocated in the following fiscal year, starting in April, and the allocation to each member. If no agreement is reached, a panel of experts will be set up to resolve the problem. • A tariff board, consisting of a group of experts, will be set up to consider all tariff and anti-dumping applications. Once negotiations on the new agreement were complete, SACU turned its attention to talks to establish free-trade agreements with other countries and regional trade groups. Talks with the US began in May 2003 and a deal was scheduled to be in place by end-2004. However, by late 2004 the talks had reached an impasse. The SACU negotiators have proposed that the major focus should be on agricultural and non-agricultural market access and services, and that the agreement should not include an investment chapter. The US, in turn, maintains that the free-trade agreement cannot be partial, and that negotiations must cover all areas, including labour, intellectual property and investment.

Within SACU there are also some differences of opinion, the smaller countries being unhappy about the US demands on labour rights. By contrast, South Africa is willing to accede to US demands on labour. South Africa would like to see its labour legislation, which is biased towards high wages and first-world standards of employment, replicated in the rest of the customs union. The smaller countries, however, would prefer to see flexible labour markets with market-clearing wage rates in order to allow them to maximise their comparative advantage in labour-intensive industries. With regard to investment, the five SACU countries do not have a common investment regime, and would find it difficult to negotiate on the basis of the text put forward by the US, which is apparently more detailed than it has demanded in previous free- trade agreements. SACU members are also discussing trade deals with the Mercosur customs union in Latin America and with India.

Southern African In August 1992 Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Development Community Swaziland, Tanzania, Zambia and Zimbabwe signed a treaty establishing the (SADC) Southern African Development Community (SADC). It replaced the Southern African Development Co-ordination Conference (SADCC), which was formed in 1980 by the Southern African states in a largely unsuccessful attempt to reduce the region's economic dependence on white-ruled South Africa. Namibia joined the SADCC shortly after independence in 1990; South Africa became a member of SADC in 1994; Mauritius joined in 1995; the Democratic Republic of Congo (DRC, formerly Zaire) in 1997; and in August 2004 Madagascar was awarded "candidate member status" for a year, which should pave the way to full membership. Although Seychelles joined in 1997, it withdrew from SADC in 2003 to cut costs and because it had difficulty adhering to all of the organisation's protocols. SADC inherited the SADCC's secretariat, based in Gaborone, Botswana, and initially continued with allocating responsibilities for promoting development in different sectors of the economy to member states. However, since 2000 the organisation has been going through a major restructuring process, which aims to give it more focus and enhance its capacity to deliver on its policies. This involves the creation of four directorates within the SADC secretariat (trade, industry, finance and investment; food, agriculture and natural resources; infrastructure and services; and social and human development and special programmes) and an integrated committee of ministers comprising at least two ministers from each member state. There are also proposals to increase the resources available for the organisation, which has traditionally been poorly funded. The restructuring is already over schedule and may not be completed until early 2006. The admission of South Africa into SADC in August 1994 had a profound effect on the organisation. In mid-1994, before South Africa joined, only 4% of members' trade was within the community, but this figure has now risen to around 25%, with most of the countries being major trading partners with South Africa, although not with each other. There has also been a wave of South African investment into many of the countries. After several years of negotiation, on September 1st 2000 the SADC trade protocol came into effect, having been ratified by all member states. This aims to achieve a Free Trade

Area by 2008, when substantially all trade will be duty free. However, progress will depend on the speed at which member governments dismantle their existing barriers to trade, with the SADC likely to be increasingly divided into those countries making progress, such as South Africa and the countries in its immediate economic orbit, and those that are laggards, such as Angola. Under World Trade Organisation rules, the Cotonou Convention, which provides preferential trade access to African, Caribbean and Pacific (ACP) states into the EU market will not be renewed. This means that all SADC member states will have to decide whether SADC as a region should have a free-trade agreement with the EU or whether its members should negotiate individual free-trade agreements. At present, some members of SADC (Angola, Botswana, Lesotho, Namibia, Swaziland and Tanzania) and the EU have agreed to negotiate an Economic Partnership Agreement during 2005-07. The EU and South Africa concluded their own free-trade agreement, which came into effect in January 2000, and the Southern African Customs Union (SACU) countries are in preliminary negotiations with the US to draw up a free-trade deal. Although there are long-term plans for a regional development bank, a common currency and a regional parliament, increased co-operation is more likely in specific sectors, particularly within the energy sector. There are plans for member countries to link their power grids, and considerable progress has been made on this. According to the SADC protocol, member states are bound to help to defend existing governments from foreign invasion and internal insurgency. An important part of this is supposed to be the establishment of a regional rapid- deployment peacekeeping force, which was voted for in 1994 but at present only exists in an embryonic form as a "stand-by force". In the past, when SADC has tried to resolve domestic political crises in its own region, it has created tensions. Despite South African opposition, several states sent troops to the DRC to support the government of the former president, Laurent Kabila, although the moves towards peace in the DRC since December 2002 and the subsequent withdrawal of the troops have eased tensions. In contrast, South Africa was keen for SADC to intervene in Lesotho in September 1998 to prevent a coup, leaving South Africa open to criticism for its inconsistent regional policy. SADC has also been divided on how to deal with the worsening political and economic situation in Zimbabwe in recent years, despite the obvious damage that the situation in Zimbabwe had done to the reputation of the region. However, there was a positive step forward in August 2004, when all SADC member states signed the Principles and Guidelines Governing Democratic Elections. The first real test of commitment to these is due in March 2005, when Zimbabwe holds parliamentary elections. If Zimbabwe breaches the guidelines, which is distinctly possible, SADC will have to decide whether it will suspend its membership or reach a compromise agreement and use the threat of suspension to push for genuine political change in the country.

Multilateral Monetary The Multilateral Monetary Agreement (MMA) formalises the use of the same Agreement (MMA) currency, or parallel currencies, among members of the Common Monetary Area (CMA): Lesotho, Namibia, South Africa and Swaziland. The CMA allows

for the unrestricted transfer of funds within the monetary area, a common capital market and similar exchange control regulations. The effect of this is that the smaller members have no control over their external exchange rates and interest rates, which are determined in a unified market, the core of which is in South Africa. One effect of this arrangement is that, since most of the goods consumed and used in production in Lesotho, Namibia and Swaziland come from South Africa, inflation in the former countries is largely determined by events in the latter. Botswana took part in negotiations to form the Rand Monetary Area (RMA), the predecessor of the CMA, but in 1976 opted to pursue independent monetary and exchange-rate policies. The CMA replaced the RMA in 1986, with the signing of the Trilateral Monetary Agreement, and Namibia joined in 1992 shortly after independence. Lesotho, Namibia and Swaziland introduced their own national currencies after independence (the loti, the Namibia dollar and the lilangeni respectively), but their exchange rates remain fixed at parity with the rand. The rand is legal tender in Namibia and Lesotho, which are compensated by South Africa for loss of seigniorage. In 1986 Swaziland suspended use of the rand as legal tender (although in practice it is still widely used). This move opened up the possibility of de-linking the lilangeni from the rand, but caused Swaziland to lose any entitlement to payments previously granted under the arrangement. However, all member countries have maintained the parity of their currencies with the rand, and foreign-exchange regulations and monetary policy throughout the CMA reflect the influence of the South African Reserve Bank.

Common Market for Eastern Based in Lusaka, Zambia, the Common Market for Eastern and Southern Africa and Southern Africa (Comesa) (Comesa), is the successor organisation to the regional Preferential Trading Area (PTA), and came into force on December 8th 1994 with 12 members. Comesa now has 19 members: Angola, Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The Comesa region has a total population of around 385m and an estimated GDP of US$170bn. Lesotho, Mozambique and Tanzania have all withdrawn from Comesa since 1997 to concentrate on their membership of the Southern African Development Community (SADC), while Namibia withdrew in July 2003, stating that its industries were too weak to compete with Comesa's Free Trade Area (FTA). South Africa's decision not to join Comesa makes SADC membership more attractive to its main trading partners. The original PTA, launched in 1981, aimed to liberalise trade and encourage co- operation in industry, agriculture, transport and communications. Comesa's principal aims build on these ideals; its main goals are to eliminate the structural and institutional weaknesses of member states and to promote the political security and stability necessary for sustained development, both individually and collectively as a regional bloc. These aims are to be achieved through monetary union with a single currency and a common central bank. The creation of an FTA on October 31st 2000 was to be a major step towards achieving them. By mid-2004 eleven of the 19 members had agreed to participate (Burundi, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius,

Rwanda, Sudan, Zambia and Zimbabwe), with Swaziland being granted a derogation to participate on a non-reciprocal basis (in order to reciprocate, Swaziland would require the permission of other member states of the Southern African Customs Union, to which it also belongs). The eleven FTA members have removed all barriers to intra-regional trade, although they retain tariffs on imports from outside Comesa, and the Rwandan government has stated that it will only offer zero tariffs on goods produced by Comesa countries participating in the FTA. To encourage other members to join the FTA, a fund was created in 2002 to compensate those countries facing revenue loss, although the source and extent of this funding is not clear. Indeed, this fund does not appear to have been used when Burundi and Rwanda joined in early 2004, with both countries estimating large drops in customs revenue as a result of participating. The reluctance of most of the remaining eight member countries outside of the FTA to join, coupled with intense disagreements over a Common External Tariff (CET), is jeopardising any chance of the organisation meeting its objective of a customs union by December 2004. Senior members at the Comesa secretariat have reportedly acknowledged that the customs union will have to be delayed into 2005 at least. The target of full monetary union by 2025 remains, but seems similarly improbable. Between 2001 and 2003 trade among Comesa FTA countries grew by 48%, compared with growth of 22% among Comesa countries as a whole. Intra- regional trade was valued at US$5.3bn in 2003. In 2002 intra-Comesa trade as a proportion of total trade ranged from 4.3% for the Seychelles to 18% for Kenya. Over the past 30 years the share of Comesa exports as a percentage of intra- regional exports has grown only slightly, from 9% in 1970 to 10.7% in 2002 (although these figures do not capture the high level of illegal crossborder trade). Reasons for the low level of intra-Comesa trade include a lack of political commitment and political stability in member countries, and weak balance-of-payments and foreign-reserves positions. In some cases there are hardly any official trade links between member states. Egypt, Kenya, Uganda and Zimbabwe accounted for 58.8% of the trade between members of Comesa in 2002. As industry and manufacturing are generally poorly developed, many members are unprepared to reduce tariffs further for fear of undermining local industries (Tanzania's main reason for leaving) and fiscal revenue collection. A further constraint has been the strict and cumbersome rules of origin, which are open to conflicting interpretations, and there have been some instances of member countries refusing to honour the relevant certificate of origin presented with Comesa imports. In addition to these impediments, progress towards free trade is hampered by political tensions between member states. Regional free-trade areas like Comesa's FTA aim to increase intra-regional commerce, leading to higher economic growth rates, but they attract criticism from many who feel that this cannot be achieved while supply-side constraints—such as poor infrastructure, inefficient transport links, low education and skills levels, and cumbersome bureaucracy—remain. Comesa has

concentrated on trade integration, but the lack of uniformity in investment codes and regulatory arrangements has been an impediment to crossborder trade and investment. The commitment to Comesa of many of its members is weak and meetings are frequently cancelled. Moreover, attempts at promoting crossborder investment and monetary harmonisation have been superseded by initiatives introduced by the East African Community and SADC. Under the old PTA system, a multilateral clearing facility was established and a PTA unit of account (UAPTA), equivalent to the IMF's SDR, was used to settle debts between members, the balance being payable in US dollars. In 1997 the UAPTA was replaced by the Comesa dollar, which is pegged to the US dollar. A Comesa court was officially opened in March 2001, although it had been established three years earlier. In theory, the court, which aims to be an independent arbitrator in trade-related disputes, has jurisdiction over national courts, but in practice it does not have the powers to enforce its rulings and has been hamstrung by a lack of finance. Comesa also set up the African Trade Insurance Agency (ATI) in 2001. Financed by a US$5m start-up loan from the World Bank, the ATI aims to provide political risk cover for investors in all member countries. In November 2002 Comesa, along with other Eastern and Southern African regional integration organisations, established the Inter- regional Co-ordinating Committee (IRCC) to promote regional economic integration and the integrated management of natural resources, transport and communications.

Appendices

Sources of information

National statistical sources Statistics South Africa, Bulletin of Statistics (quarterly), Pretoria Statistics South Africa, South African Census 1996, 2001 Pretoria Statistics South Africa, South African Labour Statistics (annual), Pretoria Statistics South Africa, South African Statistics (annual), Pretoria Statistics South Africa, Statistical News Releases, Pretoria Commissioner for customs and excise, Monthly Trade Statistics, Pretoria Department of Mineral and Energy, South Africa's Mineral Industry (annual), Johannesburg Directorate of Agricultural Economic Trends, Abstract of Agricultural Statistics (annual), Pretoria Eskom, Annual Report, Johannesburg Eskom, Statistical Yearbook (annual), Johannesburg South African Reserve Bank (SARB), Quarterly Bulletin, Pretoria South African Institute of Race Relations, Survey of Race Relations in South Africa, Johannesburg

International statistical sources Some of the standard international sources of data on developing countries, such as the World Bank's Global Development Finance and the OECD's Geographical Distribution of Financial Flows to Developing Countries, have not historically included information on South Africa, but do now. The 1998 Global Development Finance (GDF) published by the World Bank included foreign debt data for South Africa for the first time. However, the figures in the GDF do not match the more limited data published in the Quarterly Bulletin of the South African Reserve Bank (SARB, the central bank). The GDF tends to underestimate the country's obligations to overseas residents, whereas the SARB's data include rand-denominated debt owed to foreign residents (mainly bonds). The standard external source of financial and macroeconomic data is the IMF's monthly International Financial Statistics, which draws heavily on national figures from bodies such as the SARB. Data on trade patterns can be found in the IMF's Direction of Trade Statistics. The Monthly Review of Emerging Stock Markets published by the International Finance Corporation (IFC) began covering the Johannesburg Stock Exchange (now the JSE Securities Exchange) in November 1994.

Data problems in South Africa Statistics vary in quality and have suffered from the same politically distorted methodology, secrecy and inefficiency that affected most areas of official life in South Africa in the past. For strategic reasons, data on oil imports (which contravened the UN embargo on oil sales to South Africa, lifted in December

1993) were kept secret throughout most of the 1980s and early 1990s. For similar reasons, clear data on the volume and value of trade with particular trading partners were also kept secret during the sanctions years. Diamond statistics have been only partly available. Thus in a number of areas it is difficult to assess trends through time-series data. Perhaps the most glaring area of statistical trouble is that of population and labour-market trends, although the 1996 census has considerably improved the quality of data. However, because of a combination of weaknesses and problems with definitions and data collection, there is no reliable estimate of the proportion of the population that is unemployed.

Select bibliography Haroon Bharat, Employment Trends in South Africa, Friedrich Ebert Stiftung, 2001 R Bonnel, "HIV/AIDS and Economic Growth", The South African Journal of Economics, vol. 68:5 Absa Group Economic Research, Long-Term Prospects for the South African Economy: 2001-2015 Rian Malan, My Traitor's Heart, London, 1990 Nelson Mandela, Long Walk to Freedom, London, 1994 Hein Marais, South Africa: Limits to Change?, Toronto, 1998 Adrian Hadland and Jovial Rantao, The Life and Times of Thabo Mbeki, London, 1999 Anthony Sampson, The Authorised Biography of Nelson Mandela, London, 1999 Allister Sparks, The Mind of South Africa, London, 1990 Allister Sparks, Tomorrow is Another Country, London, 1996 Peter Fallon and Luis Pereira da Silva, South Africa: Economic Performance and Policies, World Bank, Washington, April 1994

Selected websites South African government: http://www.gov.za National Treasury: http://www.finance.gov.sa South African Financial Forum: http://www.finforum.co.za South African Reserve Bank: http://www.resbank.co.za Statistics South Africa: http://www.statssa.gov.za Business Day: http://www.businessday.co.za Financial Mail: http://www.fm.co.za Mail & Guardian: http://www.mg.co.za

Reference tables

Populationa ('000 unless otherwise indicated; mid-year estimates) 2000 2001 2002 2003 2004 Urban 23,125 23,501 23,888 n/a n/a Rural 20,560 21,059 21,566 n/a n/a African 33,880 34,669 35,474 36,914 36,934 White 4,522 4,533 4,555 4,244 4,434 Coloured 3,797 3,869 3,918 4,131 4,087 Asian/Indian 1,093 1,109 1,122 1,140 1,131 Other/unstated 395 381 385 n/a n/a Total population 43,686 44,561 45,454 46,430 46,587 % change 1.5 2.0 2.0 2.1 0.3 a Data do not take into account the impact of AIDS. Source: Statistics South Africa, Mid-Year Estimates.

Labour forcea ('000; mid-year estimates) 1998 2000 2001b 2002 2003 Total 15,484 15,794 18,531 18,849 19,945 Male 8,321 8,319 9,330 9,507 10,015 Female 7,163 7,475 9,201 9,342 9,930 Formal sector n/a 7,509 7,539 7,845 8,293 Community, social & personal services n/a 1,775 1,812 1,867 2,082 Manufacturing n/a 1,314 1,384 1,439 1,432 Retail, catering & accommodation 2,079 1,442 1,427 1,358 1,532 Agriculture, forestry & fishery 1,099 667 666 811 832 Finance, real estate & business services 931 860 890 959 1,000 Transport, storage & communications 539 432 429 445 438 Construction n/a 348 319 328 360 Electricity, gas & water n/a 79 93 80 84 Informal sector 2,705 2,898 2,232 2,223 2,249 Domestic workers 799 999 914 875 1,022 Total unemployed (expanded definition) n/a 4,082 7,698 7,925 8,332 Registered unemployedc 356 330 346 333 302d a Economically active population. b 2001 census results. c Non-agricultural sectors. d September. Sources: Statistics South Africa, Mid-Year Estimates; October Household Survey; South African Reserve Bank, Quarterly Bulletin.

Government finances (R m unless otherwise indicated; years ending Mar 31st) 2000 2001 2002 2003 2004 Total revenue 198,494 215,592 248,101 260,612 300,260 Total expenditure 216,405 233,944 262,905 287,909 333,965 Balance -17,911 -18,352 -14,804 -27,279 -33,705 Total net borrowing 13,113 18,566 8,952 9,082 28,742 Domestic 2,617 15,929 -24,226 -4,227 -2,455 External 10,496 2,637 33,178 13,309 31,197 Ratios (% of GDP) Budget balance -2.0 -2.0 -1.1 -0.9 -2.3 Government debt 47.6 45.6 45.5 40.2 38.4 Public-sector borrowing requirement 1.4 2.0 0.8 1.4 3.2 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Money supply and interest rates 1999 2000 2001 2002 2003 Money supply (R m; end-period) Notes & coins 22,660 23,719 25,283 29,216 33,715 M1 258,282 266,924 313,211 350,598 376,853 M2 435,526 462,509 535,085 618,865 712,846 M3 472,177 507,591 595,473 698,001 783,556 Interest rates (%; end-period) Reserve Bank discount rate (bank rate) 12.00 12.00 9.50 13.50 8.00 Money market rate 13.06 9.54 8.49 11.11 10.93 Treasury-bill rate 12.85 10.11 9.68 11.16 10.67 Deposit rate 12.24 9.20 9.37 10.77 9.76 Lending rate 18.00 14.50 13.77 15.75 14.96 Government bond yield 14.90 13.79 11.41 11.50 9.62 Sources: South African Reserve Bank, Quarterly Bulletin; IMF, International Financial Statistics.

Gross domestic product 1999 2000 2001 2002 2003 Total (R m) At current prices 728,782 804,460 895,535 1,021,684 1,100,927 At constant (1995) prices 551,625 571,551 528,214 608,627 619,791 Real change (%) 2.22 3.61 -7.58 15.22 1.83 Per head (R) At current prices 16,927 18,415 20,097 22,477 23,712 At constant (1995) prices 12,812 13,065 13,083 13,390 13,349 Real change (%) 0.07 1.97 0.14 2.35 -0.31 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Gross domestic product by expenditure (R m; current prices) 1999 2000 2001 2002 2003 Private consumption 504,289 556,652 612,349 690,949 750,096 Government consumption 149,393 166,469 185,704 209,353 230,475 Gross fixed capital formation 126,065 131,984 143,048 167,662 190,662 Change in stocks 3,903 5,808 586 10,388 12,733 Residual items -998 850 3,011 640 4,331 Exports of goods & services 207,057 256,448 304,874 378,534 340,963 Imports of goods & services 185,037 229,757 266,122 336,631 319,357 GDP 804,669 888,454 983,450 1,120,895 1,209,497 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Gross domestic product by sector (R m; constant 1995 prices) 1999 2000 2001 2002 2003 Agriculture, forestry & fishing 23,658 25,453 24,602 26,212 24,656 Mining & quarrying 34,472 33,690 33,240 33,356 34,201 Manufacturing 108,085 113,596 117,637 123,873 122,579 Electricity, gas & water 20,728 20,873 21,148 21,526 22,023 Construction 16,670 17,115 17,673 18,435 19,345 Wholesale & retail trade, catering & accommodation 74,161 77,492 80,128 82,407 84,784 Transport, storage & communications 58,141 62,211 66,979 71,472 75,871 Finance, insurance, real estate & business services 104,191 109,220 113,855 118,200 121,642 Community, social & personal services 111,519 111,901 111,952 113,146 114,690 Imputed financial service charges 14,439 15,121 15,702 16,284 17,027 General government 82,161 81,575 80,801 81,194 81,737 Other producers 14,919 15,205 15,449 15,668 15,926 GDP at factor cost 551,625 571,551 587,214 608,627 619,791 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Prices and earnings (period averages; % change year on year in brackets) 1999 2000 2001 2002 2003 Consumer prices (2000=100) 94.9 100.0 105.4 115.3 124.4 (5.2) (5.4) (5.4) (9.4) (7.9) Producer prices (2000=100) 91.6 100.0 108.4 123.8 125.8 (5.8) (9.2) (8.4) (14.2) (1.6) Terms of trade (1995=100)a 96.3 94.2 94.5 96.7 101.1 Earnings per worker (2000=100) 98.4 100.0 101.7 100.4 101.1 Public sector 98.1 100.0 102.2 103.2 106.5 Private sector 98.4 100.0 101.5 102.2 103.9 a Includes gold. Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Agricultural production (crop years; '000 tonnes unless otherwise indicated) 1998 1999 2000 2001 2002 Maize 7,693 7,946 11,455 8,040 9,123 Wheat 1,788 1,733 2,364 2,504 2,400 Sugarcane 22,930 21,223 23,876 21,157 22,349 Fruit excl melons 4,358 4,789 4,983 4,651 4,766 Vegetables & melons 2,171 2,250 2,101 2,204 2,155 Wool 53 56 53 57 57 Cattle & calves slaughtered ('000) 2,766 2,750 2,790 3,100 3,100 Poultry slaughtered (m) 445 711 704 705 722 Sheep & goats slaughtered ('000) 10,160 10,700 8,500 8,500 8,500 Source: Food and Agriculture Organisation, Production Yearbook.

Manufacturing production 1999 2000 2001 2002 2003 100.0 Sales (2000=100) 93.3 104.8 113.1 105.6 Volume of production (2000=100) 96.4 100.0 102.8 108.2 105.7 Capacity utilisation (%) 78.9 79.6 79.8 80.7 80.2 Labour productivity (2000=100) 95.0 100.0 105.6 111.9 109.8 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Construction statistics 1999 2000 2001 2002 2003 Fixed investment (R m; constant 1995 prices) 95,605 97,129 99,141 105,159 114,006 Residential buildings 7,038 7,550 8,265 8,888 9,525 Non-residential buildings 8,803 8,654 8,538 8,653 9,168 Construction works 12,255 11,701 11,597 12,791 14,092 Value of activity (constant prices; 2000=100) Building plans passed 93.6 100.0 90.3 103.8 115.9 Buildings completed 100.7 100.0 107.8 105.4 116.1 Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Stockmarket indicators (period averages unless otherwise indicated) 1999 2000 2001 2002 2003 No. of listed companies (end-period) 668 672 542 450 426 Market capitalisation (R m; end-period) 1,616,207 1,551,489 1,676,269 1,584,150 1,787,200 Trading value (R m) 446,668 536,896 709,673 809,223 755,249 JSE Overall Index (end-period; 1960=100) 8,543 8,326 10,442 9,277 10,387 % change, year on year 57.3 -2.5 25.4 -11.2 12.0 Share prices (2000=100) Mining 77 100 147 218 178 Financial 87 100 100 89 81 Industrial & commercial 88 100 85 85 79 Dividend yield (%) Mining 3.1 3.2 3.6 3.5 3.9 Financial 2.4 2.5 3.5 4.4 5.0 Industrial & commercial 2.5 1.7 1.8 2.4 2.9 Earnings yield (%) Financial 7.7 8.0 10.2 10.7 9.9 Industrial 8.4 7.1 8.5 7.5 9.0 Mining 7.7 7.5 9.0 7.1 8.6 Sources: Standard & Poor's, Emerging Stock Market Review; South African Reserve Bank, Quarterly Bulletin, June 2003.

Banking statistics (total assets, R m; end-period) 1999 2000 2001 2002 2003 South African Reserve Bank 72,595 90,799 134,707 142,006 106,614 Corporation for Public Deposits 6,045 5,780 4,098 4,982 5,092 Banks 726,115 821,047 1,050,068 1,102,860 1,381,497 Mutual building societies & Post Office Savings Bank 1,198 695 457 473 549 Land & Agricultural Bank of South Africa 16,730 17,228 18,498 17,941 20,365 Source: South African Reserve Bank, Quarterly Bulletin.

Main trading partners (US$ m) 2000 2001 2002 2003 Exports to: US 2,407 3,409 3,802 4,391 UK 2,257 3,248 3,825 4,471 Germany 1,899 2,408 2,762 2,906 Japan 1,354 1,931 2,519 3.222 Italy 841 1,272 1,737 1,569 Netherlands 1,012 1,003 1,030 1,246 Belgium 970 900 941 1,110 China 331 835 1,154 1,673 Mozambique 731 754 351 444 Total incl others 21,694 26,958 29,827 35,442 Imports from: Germany 3,436 3,959 4,122 5,550 US 3,100 2,962 2,525 2,821 UK 2,125 2,228 2,416 2,909 Japan 1,878 1,496 1,558 1,906 Saudi Arabia 152 1,319 1,402 1,775 France 1,127 1,061 1,324 1,707 China 1,014 1,049 1,312 2,030 Italy 916 961 951 1,094 Iran 72 889 946 1,197 Total incl others 24,816 25,617 26,664 33,279 Source: IMF, Direction of Trade Statistics.

Balance of payments, IMF estimates (US$ m) 1999 2000 2001 2002 2003 Goods: exports fob 28,681 31,845 30,989 31,422 38,703 Goods: imports fob -24,526 -27,252 -25,809 -26,791 -35,002 Trade balance 4,156 4,593 5,180 4,631 3,701 Services: credit 5,210 5,046 4,653 4,672 6,602 Services: debit -5,759 -5,823 -5,251 -5,340 -7,554 Income: credit 1,791 2,511 2,480 2,179 2,751 Income: debit -5,000 -5,696 -6,267 -4,975 -6,137 Current transfers: credit 66 106 126 139 252 Current transfers: debit -993 -1,033 -865 -695 -1,070 Current-account balance -528 -295 56 610 -1,456 Capital account -62 -52 -31 -15 2 Net direct investment -81 692 10,785 1,137 99 Net portfolio investment 8,686 -1,865 -8,302 -418 761 Net other investment -3,179 1,413 1,312 -123 5430 Net errors & omissions -446 713 1,408 466 2,927 Overall balance incl others 4,270 464 2,606 1,659 7,762 Reserves & related items (- indicates increase) -4,270 -464 -2,606 -1,659 -7,762 Change in reserve assets -4,270 -464 -2,606 -1,659 -7,762 Source: IMF, International Financial Statistics.

Balance of payments, national estimatesa (R m) 1999 2000 2001 2002 2003 Merchandise exportsb 150,619 194,223 235,204 286,422 256,039 Net gold exportsc 24,613 27,275 29,898 43,080 35,347 Services receipts 31,825 34,950 39,772 49,032 49,577 Income receipts 10,947 17,432 21,125 22,709 20,635 Merchandise importsb -149,854 -189,411 -221,235 -280,644 -262,769 Services & income payments -65,731 -79,802 -98,187 -108,096 -102,755 Net transfers -5,662 -6,422 -6,257 -5,843 -6,183 Current-account balance -3,243 -1,755 320 6,660 -10,109 Net direct investment -475 4,280 85,763 12,153 324 Net portfolio investment 52,346 -13,835 -67,626 -4,275 6,884 Change in net gold & other foreign reserves owing to balance-of-payments transactions 26,199 5,559 7,709 37,112 53,329 Change in liabilities related to reserves -65 -1,922 13,571 -20,090 1,911 SDR allocations & valuation adjustments 809 11,474 47,297 -37,175 -22,566 Total capital movements not related to reserves 29,442 7,314 7,389 30,452 63,438 a Data for 1998-99 are preliminary and subject to revision. b Published customs figures adjusted for balance-of-payments purposes. c Net foreign sales of gold plus changes in gold holdings of the South African Reserve Bank and other banking institutions. Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

External debt, national estimates (US$ m unless otherwise indicated; end-period) 1999 2000 2001 2002 2003 Renegotiated debt 1,485 751 0 0 0 Public sector 755 369 0 0 0 Banking sector 90 57 0 0 0 Non-bank private sector 640 325 0 0 0 Other non-rand-denominated debt 22,422 24,110 24,047 25,041 27,348 Public sector 3,207 3,764 3,016 4,999 4,942 Banking sector 8,189 8,278 8,912 6,330 5,865 Medium- & long-term loans 391 196 123 30 8 Rand-denominated debt 14,957 11,997 6,777 7,687 9,790 Bonds 10,673 8,318 4,273 4,515 4,218 Total external debt 38,864 36,858 30,824 32,728 37,138 Ratios (%)a Total external debt/GDP 29.7 28.8 27.0 30.7 23.2 Total external debt/exportsb 109.0 93.5 81.3 85.8 77.7 Interest payments/exportsb 8.5 6.1 5.2 4.7 4.0 a Exports of goods and services. b Recalculated owing to inclusion of rand-denominated debt. Source: South African Reserve Bank, Quarterly Bulletin, June 2004.

Net official development assistance 1998 1999 2000 2001 2002 Bilateral (OECD countries) 420.7 386.2 353.6 313.3 375.3 US 83.0 84.6 105.9 85.9 89.4 UK 54.1 62.9 42.6 41.8 47.0 Germany 42.1 51.1 41.6 36.9 42.4 Multilateral 92.4 153.4 132.0 114.1 280.7 EC 80.8 136.7 119.8 99.2 267.8 Total 513.8 541.4 487.5 428.5 656.8 Grants 457.9 458.6 443.4 432.8 504.9 Source: OECD, Geographic Distribution of Financial Flows to Aid Recipients.

Foreign reserves (US$ m; end-period) 1999 2000 2001 2002 2003 SDRs 288 290 280 303 331 Foreign exchange 6,065 5,793 5,765 5,601 6,164 Foreign reserves 6,353 6,083 6,045 5,904 6,496 Golda 1,020 1,451 1,427 1,735 1,476 Total reserves incl gold 7,373 7,534 7,472 7,639 7,972 a Valued at 75% of the fourth-quarter London gold price. Source: IMF, International Financial Statistics.

Exchange rates (R per unit of currency unless otherwise indicated; annual averages) 1999 2000 2001 2002 2003 US$ 6.1131 6.9353 8.6031 10.5165 7.5647 ¥ 0.05393 0.06434 0.07075 0.08393 0.06517 SDR 8.3418 9.1442 10.9713 13.6127 10.7951 £ 9.8921 10.4863 12.3915 15.7584 12.3404 Pa 1.325 1.3603 1.4694 1.6606 1.5258 Z$b 0.1596 0.1589 0.1558 0.1902 0.0259 Nominal effective rate 68.80 64.73 55.02 43.08 53.88 Real effective rate 85.34 84.20 76.74 69.11 86.40 a Pula (Botswana). b Zimbabwe dollar. Source: South African Reserve Bank, Quarterly Bulletin.

Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: November 10th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]