Country Report South Africa South Africa at a glance: 2006-07 OVERVIEW The ruling African National Congress (ANC) is expected to maintain its overwhelming hegemony during the forecast period. However, the party and its leadership will be preoccupied with maintaining party unity and an orderly process of electing a successor to Thabo Mbeki as ANC president at the party!s national congress in December 2007. Economic policy will continue to focus on increasing economic growth and investment in order to create employment. Assuming a sound mix of fiscal and monetary policy combined with public- sector wage moderation, weaker administered prices and lower private-sector unit labour costs (owing to productivity gains), inflation is expected to remain within the target range of 3-6% in 2006-07. The rand is forecast to average R6.85:US$1 in 2006, and to continue to depreciate gently in the medium term. A sharper fall is possible, however: risk factors continue to be the high price of crude oil, US interest-rate movements, South Africa!s widening current-account deficit and the role of short-term speculative inflows in the capital account. Further growth in construction and continued expansion in total domestic demand is expected to support real GDP growth of 4.7% in 2006 and 4.5% in 2007. Fairly strong global demand and high commodity prices will help to boost exports, but rising imports mean that the current account is forecast to remain in deficit, at 5% of GDP in 2006, although the deficit should narrow to 4.7% of GDP in 2007. Key changes from last month Political outlook • The corruption trial of the former deputy president, Jacob Zuma, finally started on September 5th, an event that has served to intensify divisions within the ANC. Indeed, if the trial goes Mr Zuma!s way or the case is dismissed for technical reasons, he would be a firm favourite to succeed Mr Mbeki in 2009. The stage has thus been set for a period of increasing uncertainty that will last until the end of 2007, by which time the ANC will have chosen its candidate for the May 2009 presidential poll. Economic policy outlook • The economic policy outlook remains unchanged from last month. Economic forecast • The economic forecast remains essentially unchanged. September 2006 The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ 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. 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South Africa 1 Contents South Africa 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2006-07 7 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 18 Economic policy 24 The domestic economy 24 Economic trends 27 Mining 28 Energy 29 Telecommunications 30 Infrastructure 30 Foreign trade and payments List of tables 10 International assumptions summary 11 Gross domestic product by expenditure 13 Forecast summary 23 Business environment 24 Real GDP growth by sector 26 Inflation as measured by CPIX 31 Balance of payments List of figures 14 Gross domestic product 14 Consumer price inflation 20 Spending on key infrastructure sectors, 2006-09 26 Household debt as a percentage of disposable income Country Report September 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 South Africa 3 South Africa September 2006 Summary Outlook for 2006-07 The ruling African National Congress (ANC) is expected to maintain its overwhelming hegemony during the forecast period. However, the party and its leadership will be preoccupied with maintaining party unity and an orderly process of electing a successor to Thabo Mbeki as ANC president at the party!s national congress in December 2007. Economic policy will continue to focus on increasing economic growth and investment in order to create employment. Growth in construction and continued expansion in domestic demand is expected to support real GDP growth of 4.7% in 2006 and 4.5% in 2007. Fairly strong global demand and high commodity prices will help to boost exports, but rising imports mean that the current account is forecast to remain in deficit, at 5% of GDP in 2006, although this will narrow to 4.7% of GDP in 2007. The political scene The corruption trial of the former deputy president, Jacob Zuma, has finally started, an event that has served to intensify divisions within the ruling ANC. If the trial goes Mr Zuma!s way or the case is dismissed by the court, he will be a firm favourite to succeed Mr Mbeki in 2009. The government!s position on HIV/AIDS has been complicated after the health minister was effectively sidelined on the country!s most crucial health issue by a cabinet committee. Concerns about the rising level of crime in South Africa have intensified as the government steps up its preparations to host the 2010 football World Cup. Economic policy The SARB raised its interest rates in August, for the second time in three months, to take the repo rate to 8%. The SARB based its decision mainly on the increasing risk to inflation posed by high international oil prices and a weaker rand exchange rate. A recent World Bank survey has ranked South Africa among the top 30 easiest countries in which to do business, but the country lags behind its emerging-market peers in effecting regulatory reform. The domestic economy Real GDP growth rose by 4.9% in the second quarter of 2006, making the cur- rent economic upswing the longest on record. Strong consumer spending has continued to be financed by new debt, with household debt at a record high. The first fixed-line SNO was launched, to rival the largely state-owned Telkom. Foreign trade and payments South Africa!s overall current-account deficit breached 6% of GDP in the first half of 2006 as the visible and invisible trade deficits both deteriorated. A positive turnaround for the local textile industry is expected following the government!s announcement of textile quota restrictions from China. Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: September 12th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report September 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 4 South Africa Political structure Official name Republic of South Africa Form of state A federal state, consisting of a national government and nine provincial governments Legal system Based on Roman-Dutch law and the 1996 constitution, in force since February 4th 1997 National legislature Bicameral parliament elected every five years, comprising the 400-seat National Assembly and the 90-seat National Council of Provinces Electoral system List system of proportional representation based on universal adult suffrage National elections April 14th 2004; the next election is to be held in 2009 Head of state President, elected by the National Assembly; currently Thabo Mbeki; under the constitution, the president is permitted to serve a maximum of two five-year terms; Mr Mbeki is serving his second term National government African National Congress Main political parties The African National Congress (ANC) is the governing party with the support, in a tripartite alliance, of the smaller South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU);