South Africa

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COUNTRY REPORT

South Africa

3rd quarter 1997

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1997-98

9 Review 9 The political scene 13 Economic policy 16 The economy 18 Finance and prices 19 Agriculture 20 Mining and energy 21 Manufacturing and infrastructure 22 Foreign trade and payments

25 Quarterly indicators and trade data

List of tables 8 Forecast summary (domestic) 9 Forecast summary (external) 17 National accounts 23 Current account 25 Quarterly indicators of economic activity 27 Foreign tradea

List of figures 9 Gross domestic product 9 Rand real exchange rates 15 Prices, money supply and credit

EIU Country Report 3rd quarter 1997 © The Economist Intelligence Unit Limited 1997

South Africa 3

September 2, 1997 Summary

3rd quarter 1997

Outlook for 1997-98: The ANC will pick its leaders for the new millennium. The president will increasingly leave the running of the country to Mr Mbeki, while focusing on mediation efforts abroad. COSATU will renew its election pact with the ANC, in spite of strains in the relationship. The government will try to push through its controversial labour bill. The NP will elect a new leader and woo the IFP. Mr Meyer and Mr Holomisa will launch a new opposition party. Falling inflation will please the SARB, but real GDP growth will be limited by current high interest rates and the possibility of lower farm production in 1998. The slide in gold prices will keep pressure on the balance of payments. The rand will depreciate gently.

The political scene: Senior ANC figures have been jostling to succeed Mr Mbeki as deputy president. Mr de Klerk has resigned as leader of the NP. The New Movement Process is set to become an opposition party. Fresh violence has flared in KwaZulu-Natal. The Truth Commission has been criticised by the IFP, the NP and relatives of victims of apartheid killings. Transparency International has highlighted perceptions of increased corruption in South Africa in its new rankings. South Africa has resumed arms sales to Rwanda. The census has shown a lower population than previously estimated.

Economic policy and the economy: The ANC’s alliance with COSATU and the SACP has remained under strain over its GEAR economic strategy and labour legislation. Foreign exchange controls have been eased further, and some tax loopholes have been closed. There have been calls for interest rate cuts. The SARB has continued its phased withdrawal from the forward market. Economic growth has slowed and job creation has remained a problem.

Finance and prices: Wage rises have kept pace with inflation, which has followed a downward trend. The rand has remained stable compared with 1996.

Agriculture, mining and energy: Heavy rains have threatened the current maize crop, but there are fears of drought next year. Wool farmers have benefited from strong prices. Mining houses have been hit by low gold prices. Gencor has announced plans for an aluminium plant in Mozambique.

Manufacturing and infrastructure: Steel producers have faced problems over prices and quality. Manufacturing confidence has been muted. The government has indicated support for the Coega harbour project.

Foreign trade and payments: The current-account deficit widened in the first quarter of 1997. Gold earnings have been hit by lower prices and the stronger rand. Long-term capital inflows have returned and foreign reserves have strengthened.

Editor: Gill Tudor All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 3rd quarter 1997 © The Economist Intelligence Unit Limited 1997 4 South Africa

Political structure

Official name Republic of South Africa

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

Legal system Based on Roman-Dutch law and the 1996 constitution, implemented from February 4, 1997

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

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

National elections April 26-29, 1994; next election due by 1999

Head of state President, elected by the National Assembly; currently Nelson Mandela

National government Government of National Unity (GNU) consisting of a state president and a deputy president from the majority party in the National Assembly; and a cabinet in theory drawn from the majority party and all other parties achieving over 5% of the national vote. However, the second largest party, the National Party (NP), withdrew from the GNU on June 30, 1996

Main political parties The African National Congress (ANC) is the majority party in the GNU; the only other partner since the NP’s pullout is the Inkatha Freedom Party (Inkatha or IFP). Other parties include the Freedom Front (FF); the Democratic Party (DP); and the Pan-Africanist Congress (PAC)

President Nelson Mandela (ANC) Deputy president Thabo Mbeki (ANC)

Key ministers Agriculture & land affairs Derek Hanekom (ANC) Defence Joe Modise (ANC) Education Sibusiso Bengu (ANC) Finance Trevor Manuel (ANC) Foreign affairs Alfred Nzo (ANC) Health Nkosazana Zuma (ANC) Home affairs Mangosuthu Buthelezi (IFP) Housing Sankie Mthembi-Mahanyele (ANC) Justice Dullah Omar (ANC) Labour Tito Mboweni (ANC) Mineral & energy affairs Penuell Maduna (ANC) Posts, telecommunications & broadcasting Jay Naidoo (ANC) Provincial & constitutional affairs Mohammed Valli Moosa (ANC) Public enterprises Stella Sigcau (ANC) Safety & security Sydney Mufamadi (ANC) Trade & industry Alec Erwin (ANC) Transport Mac Maharaj (ANC)

Central bank governor Chris Stals

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Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996 GDP at current market prices R bn 341.0 383.7 431.7 485.8 543.0 Real GDP growth % –2.2 1.3 2.7 3.4 3.1 Consumer price inflation % 13.9 9.7 9.0 8.5 7.4 Populationa m 33.7 34.7 35.7 36.8 37.9b Exports fob $ bn 24.0 24.2 25.0 28.6 29.3 Imports fob $ bn 18.2 18.3 21.5 27.0 27.2 Current account $ bn 1.74 1.87 –0.32 –2.80 –1.99 Reserves incl goldc $ bn 2.98 2.68 3.13 4.30 1.26 Total external debt $ bn 27.2 25.5 27.9 32.0 34.6d Manufacturing production 1990=100 93.5 93.3 95.8 103.0 103.4 Mining production 1990=100 99.5 102.5 100.9 99.3 98.7 Exchange rate (av) R:$ 2.850 3.264 3.549 3.627 4.270

August 29, 1997 R4.691:$1

Origins of gross domestic product 1996 % of total Components of gross domestic product 1996 % of total Agriculture, forestry & fishing 4.7 Private consumption 60.9 Mining & quarrying 8.1 Public consumption 20.9 Manufacturing 23.8 Gross domestic fixed investment 17.0 Construction 3.0 Change in stockse 0.5 Financial services 17.4 Exports of goods & services 26.5 Trade, catering & hotels 16.1 Imports of goods & services –25.7 Public administration 15.2 GDP at market prices 100.0 GDP at factor cost incl others 100.0

Principal exports 1994 $ bn Principal imports 1994 $ bn Gold 6.4 Machinery & transport equipment 10.2 Metals & metal products 3.1 Manufactured goods 2.8 Diamonds 2.7 Chemicals 2.7 Food, drink & tobacco 2.1 Food, drink & tobacco 1.0 Machinery & transport equipment 1.7

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total Italy 7.8 Germany 15.9 Japan 7.3 UK 11.5 USA 6.6 USA 10.9 Germany 5.5 Japan 9.8 UK 5.0 Italy 4.5 a EIU estimates based on census figure for 1996. b Actual. c Gold reserves are valued at 90% of the last ten London fixing prices during December. d EIU estimate. e Includes residual item.

EIU Country Report 3rd quarter 1997 © The Economist Intelligence Unit Limited 1997 6 South Africa

Outlook for 1997-98

The ANC will pick its The leadership and policies of the ruling African National Congress (ANC) for leaders for the new the new millennium will begin to crystallise as the party and its traditional millennium allies, the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU), prepare for the ANC’s 50th national congress in December. The deputy president, Thabo Mbeki, already has the party presidency sewn up, putting him in direct line to succeed Nelson Mandela as head of state, but the ANC’s nominations committee is at an early stage of looking for consensus on nominations for the key remaining positions of deputy president, secretary-general, deputy secretary-general, treasurer and national chair- person. Mr Mandela’s chief adviser, Joel Netshitenzhe, will be drawn from the backrooms of the party (which he prefers) to a place on centre-stage as the ANC Youth League’s favoured candidate for high office.

The president will Mr Mandela will increasingly leave the business of government in the hands of concentrate on foreign Mr Mbeki while he builds his own position as an international peace-broker. affairs He is to receive East Timorese opposition leaders ahead of a state visit to South Africa by Indonesia’s President Suharto in November, and will continue to press for the release of the East Timorese rebel leader, José Xanana Gusmão. He will also negotiate privately with the Nigerian military leader, General Sani Abacha, before the Commonwealth reviews Nigeria’s programme for democracy in October, and will set a date for a visit by the new leader of the Democratic Republic of Congo (formerly Zaire), Laurent Kabila, as well as pur- suing a peace deal for Sudan.

COSATU will renew its COSATU will review its alliance with the ANC at its own congress in election pact with the September. Despite rumblings about a break, the union federation is likely to ANC— renew the election pact for the country’s second democratic election in 1999, but will press for greater influence in determining economic, social and labour policy. Calls from within COSATU for a new workerist party will be sidelined.

—but at a price The COSATU conference and an equivalent SACP congress will spur the ANC into setting up a delayed summit of the so-called tripartite alliance, originally scheduled to be held in June, to examine tensions over economic policy. The ANC will not give ground on the central pillars of its growth, employment and redistribution strategy (GEAR) and will defend the independence of the South African Reserve Bank (SARB, the central bank) concerning monetary policy. However, an ANC strategy document released in August does call for better integration of the SARB’s monetary policy with the broad economic goals of government.

The labour bill will be The labour minister, Tito Mboweni, will keep labour and business under pres- pressed through sure to agree the terms of a Basic Conditions of Employment Bill, and will shift the deadline for consensus beyond September 15 if necessary to ensure its passage before parliament rises in November. Mr Mboweni will lean on the trade unions to give ground on overtime pay and maternity benefits, in return for a stronger government commitment to work towards a 40-hour week.

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The NP will keep looking The battered National Party (NP) will renew the search for anti-ANC alliances for new friends— ahead of the 1999 election under a new leader to be elected in September. Without the former president, F W de Klerk, who announced his retirement in August, the NP will seek to woo Chief Mangosuthu Buthelezi and his federalist Inkatha Freedom Party (IFP). However, it will be frustrated by the ANC’s counter-offer to the IFP of high office—possibly a non-executive deputy presidency for Chief Buthelezi—and the improving relationship between ANC and Inkatha leaders in KwaZulu-Natal, the major arena of their conflict over the past decade.

—as Mr Meyer ties the The NP’s former chief negotiator, Roelf Meyer, and the sacked ANC parlia- knot with Mr Holomisa mentarian, Bantu Holomisa, will cement the alliance of their fledgling opposition movements on September 27 with the formal launch of the country’s first opposition party targeting both blacks and whites in the middle ground between the ANC and the NP. The new party will be hampered by a constitutional prohibition on crossing the floor of the national and provincial parliaments until closer to the 1999 election, when some NP legislators may feel ready to leave the party and stand for re-election under a new banner.

The truth commission The Truth and Reconciliation Commission (TRC) will face one of its most will make some tough sensitive decisions when it rules on the amnesty application by the right- decisions— wingers Clive Derby-Lewis and Janusz Walus, who were convicted of the murder in 1993 of the SACP leader, Chris Hani. It will also start hearing evidence on the death in police custody of the black consciousness icon, Steve Biko, in 1977. With the families of other high-profile victims already seeking court rulings against any amnesty for apartheid’s assassins, and the NP challenging its neutrality in court, the TRC will wind down to its scheduled closure in December leaving many people dissatisfied.

—and the government The government will seek to bolster South Africa’s international credibility will try again to contain with a crackdown on burgeoning corruption in the government, the police and growing corruption regional administrations. Parliament will hasten to adopt a tough new bail law during the current session and the cabinet will authorise additional expenditure to strengthen the courts in the administration of justice.

Falling inflation will Inflation will continue to fall from its April peak of 9.9% year on year and is please the SARB— forecast to average around 9% in 1997. Given the commitment of the SARB to tight monetary policy, and the high level of indebtedness amongst South African consumers, most economists expect the monthly inflation rate to fall to around 6% year on year late next year, averaging 8% in 1998 as a whole, before another inflationary cycle begins in 1999. Domestic demand is expected to slow over the next 12 months, dragging imports down with it. Growth in the M3 money supply will continue to decline from the better than expected 13.4% recorded in July, but not yet to the target range of 6-10% set by the SARB’s governor, Chris Stals. The increase in private credit extension will also slow as the SARB’s strict monetary policy continues to take effect. Mr Stals will wait for an un- equivocal improvement in inflation figures before he lowers the SARB’s key lending rate from the current 17%, but he has hinted at a relaxation in monetary policy before the end of 1997. Once he feels the time is right, interest rates are likely to fall quite rapidly, by up to 3 percentage points by the end of 1998.

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Forecast summary (domestic) (R bn at constant 1990 prices; % change in brackets) 1995a 1996a 1997b 1998b Private consumption 169.42 175.83 179.34 184.36 (4.7) (3.8) (2.0) (2.8) Government consumption 58.83 61.77 62.08 63.94 (0.3) (5.0) (0.5) (3.0) Gross fixed investment 55.36 59.12 60.89 64.55 (10.3) (6.8) (3.0) (6.0) Exports of goods & services 83.85 90.41 97.20 104.48 (9.3) (7.8) (7.5) (7.5) Imports of goods & services 84.22 90.56 94.19 101.72 (16.6) (7.5) (4.0) (8.0) GDPc 287.51 296.47 302.69 312.38 (3.4) (3.1) (2.1) (3.2) Consumer prices (8.5) (7.4) (9.0) (8.0)

a Actual. b EIU forecasts. c Includes stocks and residual items.

—but growth prospects The 0.8% contraction in real GDP in the first quarter of 1997 has left econ- will remain a guessing omists divided on prospects for economic growth, despite the modest rebound game in the second quarter. However, a consensus seems to have emerged that the economy is likely to expand by about 2.1% in 1997 as a whole—slightly lower than the EIU’s previous forecast of 2.5%. This is mainly owing to weaker private consumption and investment demand, which have both been affected by continuing high interest rates. The El Niño weather pattern forming over the Pacific Ocean raises the risk of dry weather or even drought in southern Africa, which could pull down agricultural production in 1998. Nevertheless, assuming that interest rates start to fall later this year, real GDP growth is forecast to recover slightly in 1998, to about 3.2%.

Gold’s slide will keep The dramatic fall in world gold prices, which hit a 12-year low of $318/oz in July, pressure on the balance of will inevitably have a negative impact on the balance of payments, although payments— Mr Stals has said he is not unduly concerned as gold now accounts for less than one-fifth of South Africa’s total export earnings. We expect gold prices to average around $335/oz in 1997, compared with $389/oz in 1996, and to remain at a similar low level in 1998. We therefore expect total export earnings to amount to $30.8bn this year, rising to $33.3bn in 1998 on the back of stronger non-gold exports. Slow import growth will also help to limit the impact of lower gold prices on the trade balance, and the trade surplus is expected to expand to some $3.4bn this year. This, combined with lower net outflows of service and transfer payments, is projected to cut the current-account deficit back to around $200m in 1997, widening slightly again in 1998 as import growth speeds up.

—and the rand will The SARB appears to have decided to allow the rand to drift slightly lower in depreciate gently the run-up to the latest easing of exchange controls in July, and by August the exchange rate had reached around R4.7:$1. Some further depreciation is likely, in line with the inflation differential between South Africa and its major trad- ing partners, and we expect an exchange rate of R4.8:$1 by the end of 1997. We have therefore revised our forecast for the average exchange rate to R4.58:$1 in 1997, sliding to R4.8:$1 in 1998.

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Forecast summary (external) ($ bn unless indicated) 1995a 1996a 1997b 1998b Merchandise exports fob 28.6 29.3 30.8 33.3 of which: net gold exports 6.2 5.7 6.0 6.3 Merchandise imports fob–27.0 –27.2 –27.4 –30.4 Trade balance 1.6 2.0 3.4 2.9 Net services & transfers –4.4 –4.0 –3.7 –3.7 Current-account balance –2.8 –2.0 –0.2 –0.7 Average exchange rate (R:$) 3.63 4.27 4.58 4.80

a Actual. b EIU forecasts.

Gross domestic product Rand real exchange rates (b) % change, year on year 1990=100 5 120 South Africa R:US$ 4 Africa 110

3 100

2 R:DM

90 1

80 0 Z$:US$ 1994 95 96 97(a) 98(a) (a) EIU forecasts. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World Economic Outlook. 1990 91 92 93 94 95 96 97(a) 98(a)

Review

The political scene

Mr Mbeki is unchallenged The deputy president, Thabo Mbeki, already effectively South Africa’s chief as Mr Mandela’s executive officer, will stand unopposed for the post of president of the ruling successor— African National Congress (ANC) at the party’s 50th national congress, which ends on December 21 in Mafikeng, north-west of Johannesburg. The premier of Gauteng province, Tokyo Sexwale, one of the few figures who ever looked like mounting a serious challenge to Mr Mbeki, has lost out in a trial of strength with the deputy president and has said he will resign at the end of the year to go into business. Mr Mbeki’s election will secure his place as heir to the 79-year-old head of state, Nelson Mandela, who has promised to see out his five-year term as the country’s first democratically elected president, but insists he will not seek re-election in 1999.

—but many are in the race The race for the deputy leadership of the ANC, which many see as a stepping to be his deputy stone to the presidency when Mr Mbeki has served the maximum ten years allowed by the new constitution, is still wide open. Mr Sexwale has left the arena

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bloodied, after trying to fight Mr Mbeki head-on. Others are staking their claims through alliances with the deputy president, whose neo-liberal policies are re- viled by the ANC’s partners in the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU). The labour minister, Tito Mboweni, the transport minister, Mac Maharaj, and the premier of Mpumalanga province, Mathews Phosa, are front-runners. Joel Netshitenzhe, Mr Mandela’s chief adviser and possibly the sharpest mind in the ANC, is under pressure to stand either for the deputy presidency or as secretary-general of the party. The ANC’s nominations committee plans to present a full slate at the congress and to avoid a public vote on any of the party’s top positions.

Mr de Klerk throws in the The former president, F W de Klerk of the National Party (NP), shocked even towel— his closest colleagues with his announcement on August 26 that he would retire from active politics and write his memoirs. Saying the party needed a younger leader unencumbered by the legacy of apartheid, he triggered an immediately messy succession race that drew in old-guard veterans such as the former foreign minister, Pik Botha, and one-time agriculture minister, Kraai van Niekerk, as well as the youth leader, Marthinus van Schalkwyk. None of the party’s few black leaders seemed ready to take up the challenge a few days before the leadership election, due on September 9. The NP has remained strong in the Western Cape, the only province where it has political control, and is holding on to its parliamentary members mainly because of a constitutional provision that obliges a legislator to resign if he quits the party. How- ever, at municipal level, usually the nursery for national leadership, scores of councillors have quit in protest against what they see as the NP’s failure to adapt to the challenges of the time. Right-wing defectors have accused Mr de Klerk of doing too little to protect the language and culture of the Afrikaner minority; left-wing leavers say he lacks the imagination to oversee the restructuring of opposition politics to build a viable opposition to the ANC.

—mainly to the advantage The Johannesburg-Pretoria branch of the NP youth league defected to the new of Mr Meyer’s opposition political movement set up by the former NP cabinet minister, Roelf Meyer, initiative— soon after he quit the party in May (2nd quarter 1997, page 12). In mid-July ten NP members of Pretoria city council crossed over to Mr Meyer’s New Movement Process (NMP), depriving Mr de Klerk’s party of control in the Afrikaner capital for the first time. Councillors in several other cities have left the NP to follow Mr Meyer, while other NP stalwarts have resigned from politics in protest against what they see as the NP’s lack of vision.

—which is soon to enter a Mr Meyer’s NMP is scheduled to merge on September 27 with the National new phase Consultative Forum set up by the charismatic former ANC member of parliament, Bantu Holomisa, to form an as yet unnamed political party with an as yet undefined moderate platform. The alliance will bring together Mr Meyer’s mainly white Johannesburg-Pretoria constituency of Afrikaner liberals and Mr Holomisa’s mainly black Eastern Cape constituency, drawn from Mr Mandela’s Xhosa tribe. Analysts expect it to attract national and provincial legislators shortly before the 1999 election, if Mr Meyer and Mr Holomisa have been able to hammer out a credible policy platform. However, the new party could be undermined by an ANC renegade and notorious KwaZulu-Natal

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warlord, Sifiso Nkabinde, who lost a municipal by-election to the ANC in July. Mr Nkabinde has joined Mr Holomisa in opposition to their former ANC colleagues and could deliver a significant following, but political analysts in the war-torn east of KwaZulu-Natal have warned the new party’s leaders that they are unlikely to be able to control him.

Fresh violence flares in Mr Nkabinde has been accused of playing a role in the murder of five ANC KwaZulu-Natal members in the KwaZulu-Natal town of Richmond, soon after he lost his council seat to the ANC in mid-July. Two of the five men dragged from their beds and shot in the back of the head were newly elected ANC councillors. The killings unleashed a new round of political conflict that took the running death toll for the year to around 100 in the province. More than 14,000 people have been killed since 1984 in political conflict in KwaZulu-Natal, mainly between the ANC and the Inkatha Freedom Party (IFP).

The truth commission The history of political warfare in KwaZulu-Natal, South Africa’s most populous reels under criticism from province, has partly been exposed in hearings of the Truth and Reconciliation Inkatha— Commission (TRC), where former IFP members have claimed they were trained by Mr de Klerk’s government to assassinate key ANC leaders in the final years of apartheid. One man, saying the IFP leader, Chief Mangosuthu Buthelezi, must have known about his activities, claimed to have lost count of the number of people he had killed on Inkatha’s behalf. Chief Buthelezi has consis- tently refused to participate in the work of the TRC, which is empowered to probe the human rights record of the war over apartheid, to pardon offenders and to grant limited compensation to victims. In August he asked Mr Mandela to institute a formal enquiry into alleged anti-IFP bias by the commission. At the same time, the IFP’s provincial premier for KwaZulu-Natal, Ben Ngubane, said the Zulu-based party would suspend peace talks with the ANC until the TRC stopped its probe into IFP activities during the last decade of white rule.

—the NP— The IFP’s criticism followed the NP’s appeal to the High Court in June for protection against the alleged bias of the TRC chairman, Archbishop Desmond Tutu, who is undergoing treatment in the USA for prostate cancer, and of its deputy chairman, Alex Boraine. The NP alleged that Archbishop Tutu’s out- burst against Mr de Klerk (2nd quarter 1997, page 12) demonstrated a fatal bias and asked for his removal from the panel. The NP also sought the dismissal of Mr Boraine, who has criticised Mr de Klerk’s repeated rejection of responsibility for the excesses of apartheid.

—and the families of The TRC’s independent amnesty committee pardoned a self-confessed apart- apartheid victims heid assassin, Dirk Coetzee, and two former policemen, David Tshikilange and Almond Nofomela, for the 1981 murder of the renowned human rights lawyer Griffiths Mxenge, who was stabbed and hacked to death on a sportsfield near Durban. Mr Mxenge’s family, which has opposed the amnesty process from the outset, has instructed lawyers to pursue all avenues to overturn the pardons, including an attempt to take the matter to the International Court of Justice in The Hague. Another lawyer, Cyril Mafolo, said he had similar instructions from the family of the late black consciousness leader, Steve Biko, who died in police custody in 1977. The TRC, which is due to disband on December 8, nevertheless

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pressed on with its work, scheduling special hearings on the role of the media, the justice system and business under apartheid.

Tragedy and comedy Two stories in the headlines in July highlighted South Africa’s continuing crime underline the crime crisis in July—one tragic and one bizarre. The nation grieved for seven-year-old crisis— Mamokgethi Malebane, who was brave enough to testify against an adult rapist. She disappeared hours after the alleged rapist was released on bail by harried court officials, who had failed to discover that he was a repeat offender, and was found buried in a shallow grave weeks later. Then the nation cheered Max, a gorilla in the Johannesburg zoo, who survived after being shot four times as he tried to protect his mate from a runaway robber who leaped into their enclosure by mistake.

—but the government The chief executive of South African Breweries, Meyer Kahn, began his two- continues to fight the year secondment to the police on August 1 (2nd quarter 1997, page 12), pledg- scourge ing to overhaul the creaking infrastructure and free policemen and women to patrol the streets rather than fill in forms. Mr Mbeki complained in Cape Town that the press was obsessed with crime, but the issue remains the major impedi- ment to investment in South Africa and the major cause of escalating emigra- tion. The justice minister, Dullah Omar, unveiled new legislation in August to tighten up on bail conditions and prevent the release of repeat offenders facing new charges. He has also asked the cabinet for an additional R300m ($64m) to relieve some of the pressure on overburdened courts, staffed mainly by young prosecutors and tired magistrates.

Corruption could be the In the corruption index compiled by the Berlin-based organisation, Transpar- new Achilles’ heel ency International, South Africa has slid from 21st position in 1995 to 33rd position this year. The index, based on international business surveys, reflects the perceived level of corruption and ranked South Africa at around the same level as Malaysia, Taiwan, Italy and Poland. Mr Mandela identified corruption as a priority issue earlier this year (2nd quarter 1997, page 11), and appointed Judge Willem Heath to investigate and root out the practice before it becomes part of the South African way of business. Judge Heath, working from unlikely headquarters in King William’s Town, Eastern Cape, confirmed in July: “We have to accept that South Africa has lost substantial assets over the years through corruption—and it is a continuing process.” Examples of corruption totalling R10bn have already been identified, including R43m stolen from a scheme to feed impoverished schoolchildren and a fraudulent R220m tender identified and blocked before it was paid out.

Mr Mandela expands his Mr Mandela continued to offer his government’s support to the government of role as global peacemaker Laurent Kabila in the new Democratic Republic of Congo (formerly Zaire), and denied sanctuary to the country’s former dictator, Mobutu Sese Seko. He has engaged in secret correspondence with Nigeria’s military leader, General Sani Abacha, ahead of the Commonwealth’s review of its programme for democracy in Nigeria, scheduled for October. In perhaps his most ambitious initiative so far, he met the jailed East Timorese rebel leader, José Xanana Gusmão, in Jakarta and subsequently asked Indonesia’s President Suharto to release him as a first step to ending the conflict in East Timor. The Nigerian effort is complicated by

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rivalry between the two countries, which both aspire to the first African seat on the UN Security Council.

South African arms sales South Africa renewed its arms sales to Rwanda on July 23, with the water court controversy— minister and chairman of the state arms-control committee, Kader Asmal, saying he was satisfied with Rwandan guarantees that the military hardware would not be used in an offensive capacity or on its own people. South Africa suspended an arms contract with Rwanda worth $19m in November 1996. Mr Asmal has so far declined to say what weapons would now be exported. The ANC applauded the decision but the London-based human rights group, Amnesty International, deplored the move, saying there was evidence of continuing human rights abuses in Rwanda. In August the arms-control committee halted the proposed sale of 12 Rooivalk helicopter gunships to Turkey, citing human rights concerns.

—and put state-owned The state-owned armaments manufacturer, Denel, won a court order against Denel at loggerheads with several newspapers in July to prevent them from naming Saudi Arabia as the the media client in an export contract for missiles and nuclear-capable G-6 and G-7 howitzers. The company said identification of the client would torpedo the deal at a cost of about R7bn and threatened 30,000 jobs. Johannesburg’s Sunday Independent newspaper led an industry-wide defiance of the court order after it became known that the client had been identified in British newspapers, and Denel dropped its action. The defence minister, Joe Modise, said he would visit Saudi Arabia in an attempt to rescue the deal.

The census brings a The Central Statistical Service (CSS) stunned both the government and busi- population surprise ness in July with its announcement that the first post-apartheid census in 1996 had revealed a total population of 37.9 million, down from the previous estimate of 42.1 million. The census showed 20.3% of the population living in KwaZulu-Natal, 18.9% in Gauteng (which includes Johannesburg and Pretoria) and 15.5% in the Eastern Cape. The Northern Cape was the least populated province with 2% of the country’s people. South African economists have long had only the sketchiest statistics to work on because most blacks refused to participate in apartheid-era censuses. The lower than expected total population could have a significant impact on assumptions about poverty, unemployment and the housing shortage, but the CSS said further details of the census would not be released until next year.

Economic policy

The ANC’s Tripartite The proposed summit in June between the ANC and its partners in the so- Alliance remains under called Tripartite Alliance, the Congress of South African Trade Unions pressure— (COSATU) and the South African Communist Party (SACP), failed to take place. COSATU has become increasingly loud in its criticism of the ANC’s centrist economic policies; its deputy secretary-general, Zwelinzima Vavi, told workers in Cape Town on July 27 that relations within the alliance that brought South Africa’s black majority to power in April 1994 were at an all-time low. An internal COSATU document circulating in August expressed concern at the ANC’s “right-wing” economic policies and raised the possibility of a left-wing

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breakaway to form a new workerist party. Most ANC and COSATU officials dismissed the breakaway threat as brinkmanship, but it will be on the agenda for the federation’s crucial annual congress in mid-September.

—mainly over the COSATU, representing 1.9 million members, intensified its criticism of the government’s strategy— high interest rate regime of the South African Reserve Bank (SARB, the central bank), saying it was stifling growth. The union federation wants monetary policy, currently the sole preserve of the SARB, brought within the realm of cabinet authority and on the table for tripartite talks between government, labour and business. COSATU also focused opposition on the government’s strategy for growth, employment and redistribution (GEAR), unveiled by the finance minister, Trevor Manuel, in June 1996 (3rd quarter 1996, page 11), which calls for a stepped reduction in the budget deficit from 5.1% of GDP in the 1997/98 financial year (April-March) to 3% of GDP in 1999/2000. COSATU points out that Mr Manuel is on track to achieve his deficit targets but is nowhere near another GEAR target, of creating 252,000 new jobs this year.

—but also on labour policy COSATU has also taken on the government over its labour policy proposals, calling a series of hour-long stoppages in June and July and staging a succession of successful one-day regional strikes in August to underline its objections to the Basic Conditions of Employment Bill (2nd quarter 1997, page 16). The bill aims to end inherited inequalities in the labour market by establishing and enforcing basic conditions of employment. It will allow for a shorter working week, increased leave and a higher premium on overtime worked, and proposes a business levy to fund worker training and education. COSATU wants the age threshold for employment raised from the proposed 15 years to 16, maternity leave extended from four months to six, higher overtime rates and a commitment to cut the working week from the proposed 45-hour maximum to 40 hours within five years. COSATU has also lashed out at the SARB for saying that the bill could increase the wage and non-wage costs of labour and have adverse implications for the overall level of formal-sector employment. The SARB, which is supposed to be politically neutral, was seen as siding with business, which has rejected much of the bill. The labour minister, Tito Mboweni, has said labour and business must resolve their differ- ences, and appears willing to tough out the confrontation with COSATU even if the bill does not make it to parliament this year.

Foreign exchange controls The promised further relaxation of foreign exchange controls (2nd quarter 1997, are eased further— page 14) was implemented on July 1 with the SARB setting a higher than expected ceiling of R200,000 for individual investments abroad, or in foreign currencies in South Africa. The SARB and private-sector analysts had predicted that more than R2bn—and possibly as much as R5bn—would leave the country as private investors were allowed back into the world markets for the first time in more than 30 years. In the event, the perceived stability of the rand and high real interest rates at home held the outflow to only R144m in July.

—but the wealthy will The official Katz Commission on taxation recommended in July that the lose some tax loopholes government, in line with its commitment to tax equity and transparency, should crack down on benefit funds being used by high-income earners at the expense of the poor and the self-employed. The commission warned that so-

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called salary sacrifice schemes linked to company funds for healthcare, retirement, disability and education were being abused to reduce tax liability. The government also promised to close a loophole in legislation introduced earlier this year, and limit the tax advantage of a second company car.

Economic indicators point Anticipation of a cut in the SARB’s key bank rate, raised last November to 17%, to a series of interest rate rose to a clamour in August as nearly a year of tight monetary policy drove cuts— inflation, credit extension growth and the growth in money supply down towards the SARB’s targets. A poll of South African economists, carried out by the international information agency, Reuters, pointed to a probable cut of 100 basis points in the third quarter of 1997 and to a bank rate of not more than 15% by the end of the first quarter of 1998. This optimism was dampened, however, when the Central Statistical Service (CSS) reported higher than expected inflation of 9.1% in the year to July, from 8.8% in June. The disappointing figure was attributed mainly to increased property taxes and water costs. Nevertheless, economists said it need not signal a reverse in the downward trend in consumer prices. An economist at the Cape Town-based Old Mutual Asset Managers, Johan Els, said he expected one interest rate cut by Christmas, starting a downward trend which could reduce interest rates by two or three percentage points over the next 18 months.

Prices, money supply and credit % change, year on year 25 Total credit extension

20 M3

Consumer prices 10

0 May . Jul . . Oct . . Jan . . Apr 1996 97 Source: South African Reserve Bank, Quarterly Bulletin.

—as economists warn that Economists were alarmed by the unexpected real contraction in GDP in the timidity could trigger first quarter of 1997, which shrank by an annualised and seasonally adjusted recession— 0.9%, and called for quick action on interest rates to boost the economy and ward off a recession, technically defined as two successive quarters of negative GDP growth. However, figures for the second quarter showed real GDP growth back to an annualised 2.5%. The governor of the SARB, Chris Stals, said on August 26 that a recession had been avoided, at least for the time being, with growth of 7% in manufacturing, 6% in electricity, gas and water and 4.5% in transport and communication. A report by the economics division of Boland Bank said the GDP figure for the first quarter represented a slowdown, but not a recession. “The current economic upswing is still firmly established and it is difficult to pinpoint a specific factor that can place the economy in a recession in the foreseeable future,” it said.

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—but the SARB governor Mr Stals has declined to be hurried into cutting interest rates, however. He bides his time acknowledged for the first time early in August that the conditions were falling into place for a cut before the end of 1997, but reiterated his oft-stated conditions: consolidation of a decline in inflation; a sustained decline in the growth of money supply; and a long-term fall in the rate of growth of private-sector credit extension. At the SARB’s annual meeting he said that a cautious monetary policy was still justified by the continuing high levels of inflation, money supply growth and credit extension.

The rand holds its own Mr Stals said in July he had no policy to force the rand down against foreign without significant currencies. He said the SARB would intervene to smooth sharp fluctuations, but central bank support would not try to defend the rand at any level. “We still lean against the wind, we intervene in the markets,” he said in a television interview. “We’ve been buying foreign exchange for some time now to prevent the rand from apprec- iating more, but with the main purpose to provide liquidity to the market, to smooth out fluctuations and to add to the foreign reserves of the Reserve Bank.” The SARB offered no more than smoothing support in the first week of August, when the rand confounded economists’ predictions and broke below the psychological barrier of R4.70:$1 to reach a nine-month low. Mr Stals attributed the fall to the strength of the dollar, saying the rand had not depre- ciated against a broader basket of currencies.

The SARB continues its The SARB continued the cautious implementation of its announced with- phased withdrawal from drawal from the forward foreign exchange market in July, reporting a net the forward market oversold position of $18bn at the end of August. The SARB’s deputy governor, James Cross, said the withdrawal had affected the shortage on the money market, which rose from a 1997 low of R5.1bn on June 30 to R8.49bn on July 16. He explained: “We deliver a lot of forwards to the market every month, which has an effect on the [money market] shortage because we give dollars to the banks and they give us rands. The higher shortage has an effect of pushing forward premiums up and the higher premiums make forward cover slightly less attractive, so the forward cover balances tend to reduce and we slowly achieve what we want to achieve.”

The economy

Economic growth slows South Africa’s GDP shrank by 0.8% in real terms, quarter on quarter, in the first down— three months of 1997. The figure showed the first contraction in the economy for 11 quarters, sending a ripple of concern through the financial and business community, although it still represented real GDP growth of about 2.5% year on year. The SARB said in July that the decline reflected the steep 34% fall in agricultural output, but many economists placed greater blame on the SARB’s restrictive monetary policy, accusing it of “overkill”. The bank said particularly good rains in the 1995/96 crop season had boosted agricultural output, and this could not be repeated in the more normal 1996/97 season. The economy turned back into growth in the second quarter of 1997, expanding in real terms by an annualised 2.5% quarter on quarter, although this still reflected a net slowdown in the post-apartheid economic recovery. Real output in non- agricultural sectors continued to rise in the first quarter of 1997, albeit at an

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annualised rate of 1.5%, which was slower than the 3% recorded in the fourth quarter of 1996. Output in the mining sector, which had fallen in the first three quarters of 1996, rose by 1% in the fourth quarter but then fell again, by 0.5%, in the first quarter of 1997 (see Mining and energy).

National accounts (% change at constant prices, quarter on quarter) 1996 1997 2 Qtr 3 Qtr 4 Qtr 1 Qtr Private consumption 3.8 2.8 2.5 0.7 Government consumption 9.2 5.7 4.7 5.4 Gross domestic fixed investment 5.9 4.6 2.3 2.2 Exports of goods and services –8.7 36.7 8.1 –2.3 Imports of goods and services 18.5 14.5 –8.9 –1.9 GDP 3.7 3.2 3.3 –0.8 Source: South African Reserve Bank, Quarterly Bulletin.

—as gross domestic Real gross domestic expenditure continued its gradual decline in the first expenditure continues to quarter of 1997, falling by 0.7% quarter on quarter, although it was still 1.5% fall— higher than in the first quarter of 1996. The decline was mainly caused by lower inventories and slower growth in private consumption expenditure, which grew by only 0.7%, compared with 2.5% in the last quarter of 1996, as consumers continued to feel the effects of tight monetary policy, high interest rates and high personal debt. The ratio of household debt to personal disposable income reached a new high of 68% in the first quarter of 1997, while the cost of servicing household debt absorbed about 14% of personal disposable income. Retail stores were also more cautious about private credit extension, especially through private label credit cards, which had become commonplace. Salary and wage increases were also lower while unemployment continued to rise. Growth in real gross domestic fixed investment slowed slightly to 2.2% from 2.3% the previous quarter, while government consumption continued to grow strongly, rising by 5.4%, compared with 4.7% in the last quarter of 1996.

—and job creation South Africa’s failure to create enough jobs for its working population has remains a problem remained a matter of concern. The SARB said that total employment in the formal non-agricultural sectors of the economy rose by 0.4% in the fourth quarter of 1996; this was the first quarterly increase since the fourth quarter of 1995, and employment in the formal sectors of the economy outside agriculture was still 1.1% lower in 1996 than in 1995. The number of jobs in the formal sector has fallen by a total of 7% between 1989 to 1996; in other words, about one out of every 14 jobs that had existed in 1989 was lost in the following seven years. The number of registered unemployed workers rose by 8.3% between the first quarter of 1990 and the fourth quarter of 1996, to about 283,000. Private-sector employment had fallen for five consecutive quarters up to the third quarter of 1996, but increased by 0.9% in the fourth quarter, mainly in the mining sector, the construction industry, retail trade and insur- ance. Jobs continued to be shed in manufacturing (mainly textiles and clothing), electricity generation, banking and private road transportation. Public-sector employment fell by 0.5% in the fourth quarter of 1996, but rose by 2% over the year as a whole.

Black empowerment has There have been ups and downs for the black economic empowerment drive. its ups and downs An on-again, off-again “merger” between the black-owned Johannesburg Consolidated Investments Ltd (JCI) and the UK-based Lonrho resolved itself in early July with an announcement that JCI had acquired an option to buy a 26.8% stake in Lonrho from Anglo American Corporation and De Beers Consolidated Mines for R2.5bn. This was seen as solving Anglo American’s problem caused by the ruling from the European Commission (EC) early this year that it should place all but 9.99% of its Lonrho stake into a trust and sell it within two years. However, the EC has said it will study the new deal. The JCI option put paid to an announcement at the end of June by Anglo American’s chairman, Julian Ogilvie Thompson, that Lonrho had suggested it could solve its problems with the EC by swapping its Lonrho stake for Lonrho’s 33.6% stake in Ghana’s Ashanti Goldfields Corporation. There has been speculation that the outgoing premier of Gauteng province, Tokyo Sexwale, who has announced his intention to step down in January 1998, might join JCI, which is chaired by his close friend, Mzi Khumalo.

Gold Fields of South Africa and its Driefontein Consolidated division gave renewed notice at the end of June about talks with the black-owned New Africa Investments Ltd (NAIL). NAIL had announced earlier that it was in talks with the Rembrandt Group to take control of Gold Fields, the world’s third largest gold producer, by buying a stake in Asteroid Ltd, which holds a 40% interest in Gold Fields. On the negative side for the black empowerment process, questions have been raised about financial management at the troubled Nat- ional Sorghum Breweries (NSB) group, which last year sold a 30% stake to India’s United Breweries (UB) for R70m. UB reportedly ordered an audit of executive salaries and loans and several “problem areas” were identified. NSB’s losses for 1996 are reported to have risen by R17m to R83m, with bank debt running at R135m.

Finance and prices

Wage increases keep pace Wage increases during the first six months of 1997 averaged 9.7%, compared with inflation— with 10.4% in the same period of 1996, running neck and neck with average inflation for the year to date, according to a survey by local analysts. Wage settlements were expected to overtake inflation, however, with the expected year-end figure close to the 9.9% figure recorded for the whole of 1996. Union demands for pay increases have ranged from a low of 8% to 146%, with settlements ranging from 6.8% to 15%; the average minimum wage has been R1,650. Wage negotiations were settled without industrial action in just over half of the cases considered in the survey, with strike action being taken in 16% of cases.

—which follows a broadly The consumer price index rose by 9.5% year on year in the first quarter of 1997, downward trend compared with a rise of 11.6% in the previous quarter. In the year to June the inflation rate averaged 8.8%, slowing from 9.5% in May and 9.9% in April. This beat all expectations and represented a nine-month low, fuelling hopes of an interest rate cut later in the year, in spite of poor private-sector credit extension figures. The July inflation figure was disappointing, however, with increased

property taxes and water costs pushing inflation to 9.1% year on year. Producer price inflation, which had hit a 21-month high of 9.6% year on year in March, slowed to 8.8% in April and 8.4% in May. The SARB attributed the overall downward trend in inflation to its continued tough stand on monetary policy and its steadfast refusal to ease up on interest rates. Several economists took the bank to task on this, accusing it of strangling the economy, which many saw as slipping into recession. Some argued that the bank appeared to ignore the fact that recent high growth in credit and the M3 money supply was caused in large part by structural changes in the economy as it opened up to the world.

The rand remains largely After the turbulence of 1996, this year has been relatively stable for the external stable value of the rand. In the first half of the year the currency appreciated by 3% against the US dollar and by approximately 8% in trade-weighted terms, averaging R4.49:$1 compared to R4.27:$1 in 1996 as a whole. Even the run-up to the further partial lifting of exchange controls on July 1 brought only mild pressure to bear on the rand, which stood at R4.53:$1 at the end of June before weakening to R4.58:$1 at the end of July and R4.69:$1 in late August. The SARB governor, Chris Stals, said in July that the renewed weakness of the rand was largely due to negative sentiment towards emerging markets in general, combined with the lower gold price.

Agriculture

Heavy rains threaten the Heavy rains in some maize producing areas threatened to delay the harvesting maize crop— of the 1996/97 crop into August and even early September. Harvesting is nor- mally completed by the end of July. The eastern and north-western areas of the country were most affected but harvesting was reported to be normal in the main maize producing areas of Gauteng and the Free State. Maize futures were unaffected by the lateness of the crop but spot prices moved higher because of early export commitments by farming cooperatives. The central cooperative coordinating the export programme, Unie Graan, had said in May that cooperatives had already committed 70% of this year’s surplus to the export market. It was estimated that South Africa would export about 1.2m tons of maize in the May-April season, out of an estimated commercial crop of 7.6 m tons.

—while fears grow over Maize farmers, millers and traders were in August reported to be making greater the effects of El Niño on use of the agricultural markets division of the South African Futures Exchange the next crop (Safex) to hedge against adverse price movements. This year has been particularly hectic because of rising concern about the expected effect of the El Niño weather pattern, which has been linked with drought in South Africa in the middle of the planting season. Safex reported that a record 2,200 contracts worth more than R110m were traded on the exchange in July, compared with R106m in the May contract period. The maize industry, which used to be controlled by statutory marketing boards, was deregulated in May.

Wool farmers expect a Wool farmers were expected to boost their gross earnings this year by 16%, to bonanza— about R625m, compared with last year’s R538m, despite lower production of 55m-57m kg against last year’s 61m kg. The Wool Board attributed this to the steady rise in the price of greasy wools to an average of R12.22/kg, compared

with last year’s R9.34/kg. Clean wool prices have risen to R20.17/kg, based on strong export demand, with about 90% of the crop exported in scoured and semi-processed forms. The Wool Growers’ Association warned of a looming shortage of merino wool in South Africa and Australia. During the collapse of wool prices in the early 1990s, many farmers moved out of wool to meet the rising domestic demand for quality mutton. The result was a drastic reduction in South African wool production, and the association said that farmers should now take heed of market signals and hold back on slaughtering wool-bearing sheep. The risk is that a shortage of breeding stock could make it difficult for farmers to cash in on next year’s expected even higher prices, and that by the time they do, the cycle might have turned again.

—and olive oil makes its The production of olive oil is not usually associated with the wine and fruit- mark in the Cape rich Western Cape, but a small band of producers is hoping to make it an important new niche product. A few wine estates, such as Morgenster Estate and Hamilton Russel Vineyards, have planted olive trees as well as vines; a practical benefit of this move is that olive trees thrive in soil unsuitable for vines while the use of labour is spread over the year, rather than concentrated in the grape-picking season.

Mining and energy

Mining houses are hit by Output in the mining sector fell by 0.5% in the first quarter of 1997, with gold low gold prices— production particularly affected by the declining quality and quantity of ore milled. Production of coal and diamonds also fell slightly, although other minerals and metals benefited from the weaker rand and better prices. The plunge in the world gold price in early July, to $318/oz, on the back of bullion sales by the Australian central bank, brought further problems. Analysts estimate that only five gold mines—Beatrix Mines, Driefontein Consolidated, H J Joel Gold Mining, Elandsrand Gold Mining Co and Vaal Reefs Exploration and Mining Co—could produce profitably if the gold price were to fall below $300/oz. Randgold and Exploration Co’s East Rand Proprietary Mines (ERPM) said it had decided to close its Benoni Gold Mining Co as soon as possible. Most of South Africa’s mines are deep level, expensive to operate and faced with dwindling reserves and slender margins. Some mining groups, such as Anglo American Corporation, are expected to weather the storm because of successful hedging programmes, but others, such as Gold Fields of South Africa, stuck to their resolve not to sell any gold forward to minimise losses. They believed that the market would soon absorb the news of the Australian sales and they could still benefit from any spikes in the gold price. This view was backed by the fact that physical demand for gold still remained good.

—as quarterly results The string of quarterly results released at the end of July highlighted the strains show strains South African mines were facing. Gencor reported that in the quarter to June 30 all its operating mines showed a profit, even though overall cash profits fell to R61m from R88m the previous quarter. Hedging and improved productivity at the company’s Beatrix mine had helped stem losses but Evan- der Gold Mines remained marginal. Anglo American’s Anglogold division reported a 2% fall in available profits, to R220.7m, blaming the weak gold price

but also frustratingly slow progress in improving operational efficiencies and labour productivity. Earlier in July the National Union of Mineworkers and the Chamber of Mines had signed an interim industry agreement to raise overall production by 90 tons this year, in return for a two-year pay deal which would see wages rise by between 9% and 25%. Anglogold’s chief executive, Bobby Godsell, said it needed another 10.5 tons of profitable gold this year to pay the wage increases, but would not pay them until it was confident that extra profitable production would be achieved. Randgold reported that it made an operating loss of R76m in the second quarter, compared with a profit of R53.4m the previous quarter, but said it believed it could weather the storm.

Aluminium prompts Gencor announced that it would take advantage of the burgeoning aluminium investment market to invest in a $1.1bn new aluminium smelter in Mozambique. This would complement its successful Hillside plant and its older Bayside smelter in Richards Bay, to make it one of the world’s top four aluminium producers. The 245,000 tons/year smelter will be operated by Gencor’s Alusaf division, and will be built near the Mozambican capital of Maputo. The project, named Mozal, was subject to Gencor and its equity partner, the state-owned Industrial Development Corporation (IDC), securing international equity investment of $250m. Gencor said that the project would be taken over by its offshore Billi- ton subsidiary following the latter’s listing on the London Stock Exchange (LSE) in August. Billiton expected to raise about $1.4bn on the LSE to fund a range of projects, mainly in aluminium and coal. Its Ingwe division is already the world’s largest steam coal exporter, based on its South African and Austra- lian operations, and is considering possibilities in Colombia and Indonesia. Billiton is also considering developing aluminium interests in Western Austra- lia and Brazil.

Manufacturing and infrastructure

Steel producers ponder Another downside in the South African metals market has been the over- their future production and low prices facing the steel producers, Iscor and Columbus Steel. Iscor has been forced to abandon plans to convert its Pretoria carbon steelworks into a 500,000 tons/year stainless steel works, and by early July it was considering whether to mothball the plant, affecting 1,400 jobs. Columbus Steel, a joint venture between Samancor, the IDC and the Highveld Steel and Vanadium Corporation, has been plagued by technical and quality problems and was expected to post heavy losses for the year to the end of June. South African stainless steel plants have found it hard to compete in global markets with low-cost competitors in India, Indonesia and China, while tariff reductions in line with World Trade Organisation (WTO) obligations have resulted in import pressure on the domestic market. Studies have shown that South Africa is competitive in stainless steel containers and pipes, but not in more value- added items such as cookware.

Manufacturing confidence Manufacturers’ unrealistically high expectations of business conditions in the is tempered second quarter of the year failed to materialise, the University of Stellenbosch’s Bureau for Economic Research (BER) said in July, adding that the general situation in the retail and wholesale sectors could not sustain the sharp

improvement in manufacturing volumes seen in the first quarter. The BER said it was also possible that the recent appreciation of the rand had affected exports and had had a sobering effect on manufacturers’ export expectations. Instead of accelerating in the second quarter, the growth in domestic and export sales and orders slowed down. As a result, stocks of finished goods accumulated and production growth was curtailed. The unrealised expectations had a major impact on business sentiment; the business confidence index fell from 53 to 38 on a scale of 100, close to the level in the third quarter of 1996. The BER said that stocks of finished goods were now unsatisfactorily high, indicating downward pressure on production and factory employment in the months ahead, but manufacturers said they did not expect a sharp fall in sales and production volumes. Although the overall results pointed to a significant slowdown in the second quarter, the BER said it was still encouraging that the underlying improving trend remained in place. Expectations of the domestic market had been adjusted to more realistic levels and indicated sustained year-on-year growth, but it was unlikely that business conditions would improve significantly in the third quarter.

Port infrastructure comes The government has partially allayed growing concern about the funding of under scrutiny— the planned multi-billion rand Coega harbour project in the Eastern Cape and its 10,000-ha industrial development zone (IDZ) by saying that it supported the project, although it did not indicate whether, or to what extent, it would help to finance it. There was speculation that it aimed to use the port as a pilot project in a long-term programme to privatise commercial ports currently run by the parastatal Portnet, which are in dire need of refurbishment and upgrad- ing to ease congestion. Sited 20 km north of Port Elizabeth, the Coega project includes the building of a R1bn deep-water port and the provision of basic infrastructure for the IDZ at a cost of some R500m. Potential anchor clients include Gencor, which wants to build a R2.5bn zinc smelter at Coega, Kynoch, which is considering a R540m fertiliser factory to feed off the smelter’s by- products, and Pretoria Portland Cement’s planned R500m cement plant.

—and rolling stock The Rail Commuter Corporation said in July that it planned to follow the is farmed out to the example of the UK’s British Rail and farm out its railway coaches. It would sell private sector off 4,500 railway coaches to the private sector, which would refurbish them and lease them back to the rail utility. Several local and foreign firms said they were very interested in the contracts and would probably form joint-venture partner- ships with finance corporations. The average age of the coaches is 22 years but some are nearly 40 years old and will have to be scrapped. The deal will unlock a $60m loan granted to the Rail Commuter Corporation by the Japanese government, which will be used to lease back the coaches. There will be a six-year grace period before the corporation starts paying interest on the loan.

Foreign trade and payments

The current-account According to the June edition of the SARB’s Quarterly Bulletin, the current- deficit widens— account deficit widened from R50m in the fourth quarter of 1996 to R1.87bn in the first quarter of 1997, largely because of a lower volume of exports of relatively price-insensitive goods. The deficit amounted to 1.4% of GDP in the

first quarter, compared with an average of 1.6% in calendar 1996. The SARB said this was due to a 5% fall in merchandise exports between the two quarters, in seasonally adjusted and annualised terms. Vegetable products, such as fruit and nuts, precious and semi-precious stones, vehicles and transport equipment, and paper products, were particularly affected. Although commodity prices rebounded in the first quarter, this was offset in local currency terms by the appreciation of the rand against the dollar. Exports of machinery, electrical equipment and textile products increased. The value of imports fell from R30.68bn in the fourth quarter of 1996 to R29.17bn in the first quarter of 1997. Net service and transfer payments to non-residents, which had fallen from a high of R17.7bn in the third quarter of 1996 to R17.1bn in the fourth quarter, increased again to R17.4bn in the first quarter of 1997. Although service receipts and transfer inflows increased because of tourism and higher investment, outflows rose even more because of increased travel abroad by South Africans and dividend and interest payments to non-resident investors.

Current account (R m) 4 Qtr 1996 1 Qtr 1997 Merchandise exports fob 34,720 31,362 of which: net gold exports 6,552 6,704 Merchandise imports fob –30,684 –29,173 Service receipts 6,341 6,542 Service payments –10,393 –10,442 Net transfers –34 –158 Current-account balance –50 –1,869 Source: South African Reserve Bank, Quarterly Bulletin.

—as gold earnings are hit Gold exports rose marginally from R6.6bn in the fourth quarter of 1996 to by lower prices and a R6.7bn in the first quarter of 1997. Gold export volumes rose strongly because stronger rand— sales from accumulated mine inventories were added to the sale of current production, but the average gold price fell from $376/oz in the fourth quarter of 1996 to $351/oz in the first quarter of 1997. The value of gold sales was also influenced by the relative strength of the rand against the dollar, which caused the rand equivalent of the gold price to fall from R1,744/oz in the fourth quarter of 1996 to R1,585/oz in the first quarter of 1997. The gold price has since fallen even further, hitting a 12-year low of $318/oz in July. Mr Stals said he was not unduly concerned and could accept a price of around $320. “The effect of the gold price on the balance of payments should be judged against a total level of exports of goods and services that now exceeds R150bn a year, with gold con- tributing less than 18% of the total,” he said. “Should the present price of $320 an ounce be maintained for a full year, the loss in foreign exchange on the balance of payments will amount to R4.5bn, or less than 3% of total exports.”

—but long-term capital Unlike the fourth quarter of 1996, when capital movements were dominated inflows return— by an inward movement of short-term capital (2nd quarter 1997, page 25), capital inflows in the first quarter of 1997 were predominantly of a long-term nature. Net long-term capital movements shifted from an outflow of R1.2bn in the fourth quarter of 1996 to an inflow of R4.8bn in the first quarter of 1997,

mainly to non-bank private-sector entities and the public sector. The steady outflow of long-term capital from the banking sector, which had taken place throughout 1996, continued in the first quarter of 1997, while the bulk of the inflow was from non-residents buying domestic bonds (with a total worth of R3.9bn) and shares listed on the Johannesburg Stock Exchange (worth R3.5bn). The SARB warned that portfolio investment flows could be highly volatile and could destabilise the economy. However, to the extent to which they were also the hedging counterpart of Eurorand bond issues made in the first quarter of 1997, they represented a relatively longer-term investment. Net short-term capital movements shifted from an inflow of R4.5bn in the fourth quarter of 1996 to an outflow of R1.2bn in the first quarter of 1997, owing mainly to the repayment of some external loans by the private banking sector.

—and foreign reserves The net inflow of capital exceeded the current-account deficit in the first strengthen quarter of 1997, and by the end of April the SARB’s total foreign reserves had risen to R14.4bn (including R5.3bn in gold), compared with R10.3bn (including R5.9bn in gold) at the end of December 1996. In May total reserves jumped by a further R7.4bn, to R21.8bn.

Quarterly indicators and trade data

Quarterly indicators of economic activity

1994 1995 1996 1997 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Mining Monthly av Gold: volume of productiona 1990=100 93.5 87.1 83.1 87.9 85.6 83.9 81.7 79.9 82.2 79.5b Other: volume of productiona “ 107.0 106.6 111.1 113.3 111.6 112.7 113.8 113.0 111.9 114.0b Manufacturing productionac Total 1990=100 99.6 102.0c 104.1 103.6 102.3 101.9 104.9 103.0 103.5 105.3 Durable goods “ 96.0 99.1c 101.8 100.3 99.3 97.8 103.4 199.5 102.0 103.1 Non-durable goods ” 102.2 104.2c 105.9 106.1 104.5 104.8 106.0 105.6 104.6 106.9 Constructionac Building plans passed (constant 1990 prices) 1990=100 104.3 131.3c 108.7 104.7 104.5 104.6 108.6 100.3 101.5 102.3b Employment privatea Mining “ 77.3 77.0 76.5 76.0 75.3 73.2 72.5 71.8 72.3 n/a Manufacturing ” 94.5 94.3 94.7 94.7 94.0 92.3 91.1 90.4 90.1 n/a Construction “ 87.2 88.3 88.1 83.3 82.8 81.5 79.0 77.0 77.1 n/a continued

1995 1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Retail tradea Monthly av Sales: 1990 prices 1995=100 96.5 99.4 100.8 103.4 101.3 103.3 106.0 106.3 105.0b n/a Prices Consumer prices: 1990=100 166.7 170.6 171.4 173.6 177.5 180.8 184.7 189.8 194.2 197.1d change year on year % 10.0 10.6 7.4 6.6 6.5 6.0 7.8 9.3 9.4 n/a Productiona: all items Jun 1995=100 97.1 99.4 100.1 102.1 103.3 105.1 107.4 110.7 113.0 n/a domestic goods “ 97.1 99.4 100.3 102.7 103.9 105.6 108.5 111.5 113.4 n/a imported goods ” 97.2 99.7 99.6 100.3 101.7 103.5 104.3 108.7 111.9 n/a Industrial & commercial shares “ 233 242 240 263 294 283 278 279 288 292d Gold mining shares ” 103 92 97 86 110 122 115 105 102 91d Money & banking End-Qtr Money & near money: R bn 216.5 227.7 229.5 245.7 255.1 268.5 271.6 284.4 300.6 n/a change year on year % 12.5 15.6 11.5 13.9 17.8 17.9 18.4 15.7 17.8 n/a Discount rate % per year 14.0 15.0 15.0 15.0 15.0 16.0 16.0 17.0 17.0 17.0e Prime overdraft ratef “ 17.1 17.5 18.5 18.5 18.5 20.2 19.5 19.9 20.3 20.3g Longer-term govt bond yieldf ” 16.9 16.9 16.0 14.7 14.3 16.0 15.5 16.1 15.3 15.2d Foreign trade & paymentsh Qtrly totals Exports fob excl gold R m 17,782 19,234 22,286 21,987 20,665 23,439 26,546 28,168 24,658 n/a Net gold exports “ 5,670 5,569 6,234 5,064 6,233 6,325 7,184 6,552 6,704 n/a Imports fob ” 22,960 24,241 25,870 24,891 24,791 28,539 32,312 30,684 29,173 n/a Terms of trade excl goldaf 1990=100 102.2 100.9 101.6 101.5 100.5 100.7 99.9 99.0 100.6 n/a Current balance R m –2,873 –3,668 –1,978 –1,638 –1,889 –3,581 –2,959 –50 –1,869 n/a Exchange holdings End-Qtr Reserve Bank: goldi $ m 1,248 1,347 1,312 1,229 1,414 1,355 1,114 1,069 959 970 foreign exchange “ 1,833 1,782 1,658 2,815 1,822 1,067 892 940 1,823 3,742 Exchange rate Market rateh R:$ 3.59 3.64 3.65 3.65 3.98 4.33 4.53 4.68 4.42 4.53

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Seasonally adjusted. b Average for January-February. c From 1995 including former TBVC states. d Average for April-May. e End-April. f Monthly averages. g April only. h Including Namibia. i End-quarter holdings at quarter’s average of London daily price less 25%.

Sources: South African Reserve Bank, Quarterly Bulletin; IMF, International Financial Statistics.

Foreign tradea ($ ’000; monthly averages) Total importsb Germany USAc UK Japand Exports to Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-May Jan-May Jan-Dec Jan-Dec South Africa fob 1994 1995 1994 1995 1994 1995 1996 1997 1994 1995 Food, drink & tobacco 87,664 118,412 2,039 4,228 11,309 20,924 10,876 13,682 765 717 Textile fibres 12,449 16,962 1,222 1,434 834 666 1,278 1,657 1,031 1,312 Crude minerals & fertilisers 7,994 10,188 344 432 1,084 929 526 385 64 68 Mineral fuels 6,550 234,976 1,220 1,119 4,787 6,423 1,963 10,354 253 287 Animal & vegetable oils & fats 22,303 26,377 171 276 461 311 278 120 0 0 Chemicals 216,889 279,228 39,152 45,795 27,994 37,570 40,000 39,268 6,438 7,458 Leather & rubber mnfrs 25,614 29,946 3,339 3,924 1,005 1,172 1,459 1,474 5,567 6,811 Paper & manufactures 33,800 44,515 6,415 7,785 5,509 6,950 4,816 5,616 630 773 Textile yarn, cloth & mnfrs 50,655 62,023 4,773 5,354 2,608 2,738 3,550 3,084 1,026 843 Non-metallic mineral mnfrs 150,162 54,067 3,586 5,318 1,306 1,603 6,638 3,247 1,963 2,335 Iron & steel 27,676 34,764 6,601 7,464 885 1,292 6,759 3,513 2,858 4,066 Non-ferrous metals 12,288 27,073 2,276 3,620 436 577 2,365 1,843 167 260 Metal manufactures 37,288 47,020 6,648 9,305 2,677 3,019 4,366 5,457 3,456 4,012 Machinery incl electric 623,894 733,043 105,142 134,614 64,184 74,797 99,559 80,924 71,038 83,504 Road vehicles 221,818 239,732 52,962 79,876 6,626 14,096 23,710 20,190 63,994 80,842 Other transport equipment 32,030 40,921 531 1,283 10,289 14,641 2,887 3,921 1,105 49 of which: aircraft 30,230 38,242 245 332 9,850 13,969 n/a n/a 1 15 Clothing 13,369 11,585 567 631 258 355 763 860 161 44 Scientific instruments etc 65,460 74,444 12,091 13,342 9,516 10,283 10,745 9,627 6,966 7,874 Total incl others 1,863,434 2,311,414 258,112 338,058 180,163 230,326 241,626 228,000 171,217 205,797 continued

Total exportsb Italy Japane USAf UK Imports from Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-May Jan-May South Africa cif 1992 1993 1994 1995 1994 1995 1994 1995 1996 1997 Foodstuffs 125,036 114,280 4,487 4,965 29,634 17,473 10,083 9,803 32,032 28,909 of which: meat, fish & products 21,547 22,614 3,043 3,304 2,969 3,789 3,272 3,598 329 268 cereals & products 12,979 8,654 55 8 21,121 2,783 49 4 22 56 fruit, vegetables & products 70,283 67,357 1,339 1,633 4,521 5,343 3,665 4,220 28,059 25,123 sugar & products 10,563 5,808 3 3 746 5,421 2,524 1,830 1,858 1,026 Beverages & tobacco 13,272 11,743 21 33 531 930 651 561 6,292 5,188 Hides & skins, undressed 6,130 6,642 3,316 3,671 174 180 201 681 254 178 Pulp 29,233 24,580 1,510 2,257 3,397 5,286 3,088 4,972 3,885 3,758 Wool & other animal hair 15,637 10,585 2,830 3,792 2,194 1,800 301 255 2,506 2,147 Crude fertilisers & minerals 28,014 28,101 4,176 4,652 7,462 8,336 3,286 4,784 5,137 4,862 Metal ores & scrap 87,330 76,296 4,593 6,365 20,506 24,580 17,785 17,675 14,327 18,302 Mineral fuels 121,750 138,324 10,234 14,470 21,349 25,393 2,071 2,748 6,431 13,229 Chemicals 107,925 92,894 1,307 1,478 3,232 4,959 8,813 9,723 4,407 5,788 Diamonds 172,661 242,079 8 12 1,158 991 9,431 7,535 37,213g 38,132g Metals & manufactures 270,262 173,887 10,989 14,906 61,224 76,483 100,906 105,718 23,604 20,063 of which: iron & steel 180,370 121,107 8,644 11,664 16,347 26,084 30,113 30,381 10,973 7,718 non-ferrous metals 71,814 35,000 2,238 3,039 44,618 50,006 69,610 74,420 9,869 9,405 Machinery & transport eqpt 130,761 140,061 1,099 1,443 856 792 6,690 9,575 14,100 26,769 Clothing 14,381 17,220 10 43 10 17 10,502 12,095 4,016 4,036 Non-monetary gold 7,465 1,917 130,750 166,728 18,544 27,388 15 1,112 n/a n/a Total incl others 1,964,522 1,994,142 183,860 233,811 185,069 213,956 189,944 203,635 173,224 191,904 a Figures from partners’ trade accounts. b Figures from South Africa’s trade accounts. Exports fob; imports fob. c US exports to South Africa averaged $259.5m and $242.1m in the period January-April 1996 and 1997. d Japanese exports to South Africa averaged $183.9m and $140.8m in the period January-March 1996 and 1997. e Japanese imports from South Africa averaged $213.2m and $245.4m per month in the period January-March 1996 and 1997. f US imports from South Africa averaged $191.0m and $182.5m in the period January-April 1996 and 1997. g Non-metallic mineral manufactures.

Sources: UN, External Trade Statistics, series D; UK HM Customs & Excise, Business Monitor MM20; USA Department of Commerce News, FT900; OECD, Monthly Statistics of Foreign Trade.