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South Africa - Economy

Statistics South Africa (Stats SA) reported in Septembe 2018 that the country's real Gross Domestic Product (GDP) had decreased by 0.7% in the second quarter of the year. Because GDP contracted by 2.2% in the first quarter‚ two consecutive quarters of negative growth meant the country was now in a technical recession. The post-apartheid years saw remarkable progress in terms of poverty reduction, access to education, and reducing unemployment. But some of those early achievements have unwound amid slow growth and political uncertainty.

The IMF's 2018 assessment of South Africa's economy projects real GDP growth will stay slightly below 2 percent in the medium term, not enough to increase living standards or make a dent in unemployment. Confidence among stakeholders has been weak during the last several years, leading to low rates of economic growth. And that has been in part related to the fact that governance is not at its best. Corruption in South Africa has had an impact on the trust of the population in their leaders and their institutions. For confidence to improve permanently and contribute to higher investment and employment, economic agents need to see tangible progress in the economic environment.

South Africa is one of the most unequal societies in the world, and to some extent this reflects the legacies of apartheid which still weigh on the economy. Black South Africans are still by far poorer than white South Africans, and there are disparities within races as well. Also, there is a pay gap between women and men of about 30 percent, which is quite high, and where people live still determines how much access they might have to an education and to a job.

There remains a large and growing gap between South Africa’s accomplishments and its concrete economic needs. The outlook is sobering with considerable downside risks. Growth is projected to slow to 0.1 percent in 2016, with a weak recovery envisaged from 2017 (1.1 percent), approaching 2–2½ percent in the outer years, as shocks dissipate and new power plants are completed. The unemployment rate could rise further over the medium term.

South Africa is grappling with growth that is too slow to raise average living standards, which is deeply problematic when one-third of the working population is effectively excluded from the economy. So far, there has been only limited progress on reforms to remedy that situation. South Africans between ages 15 and 34 account for around 19.7 million (55 percent) of South Africa's working-age population. But unemployment rate within this category is between 35-37 percent.

In South Africa, companies that generate jobs find it difficult to find workers that fit their high standards, and workers who don't have jobs find it difficult to find a job that accepts their limited skills. And this is because of the skill mismatches that exist in the country. So, investing in improving the quality of education is a key element to fighting unemployment and inequality.

Public schools in urban areas receive more funding per pupil than in rural areas. In low-income sectors of the country, even if students don’t pay tuition, they still must spend a lot in transportation, and that has led to more people dropping out of school. So, despite the increase in spending, South Africa has ranked very poorly in international surveys evaluating educational attainment.

But if the workforce cannot be improved to meet job demands, possibly gainful work can be created that is more suited to the existing labor force. the Alliance for Rural Democracy, a coalition of activist groupings, is demanding a pro-poor fast-tracked program to land reform with land expropriation without compensation, security of tenure, the ending of corruption and nepotism when land is allocated and sustainable production support for black farmers. Other demands include affordable inner-city housing, a moratorium on farm evictions and tighter restrictions on the power of traditional leaders. Last week, oral submissions were made to the Constitutional Review Committee on the issue of land expropriation without compensation and the amending of Section 25 of the Constitution. As of mid-2016, the prospect was falling per capita income and increases in a jobless rate already among the world’s highest. Per capita income in 2017 is set to fall to 2010 levels. That would spell tough times ahead, particularly given the difficulties facing the global economy.

While income inequality is a profoundly difficult problem, it also is true that living standards have improved significantly. An estimated 3.6 million people have been lifted out of poverty—that is to say, those living on less than 2.5 US dollars a day. The rate of extreme poverty has been more than halved to 16.5 per cent of the population. Access to infrastructure and to education and healthcare has improved remarkably, and social grants benefit over 16 million people.

The rebalancing of the Chinese economy reduced demand for exports throughout the world and contributing to the steep fall in commodities prices. This includes South African exports—iron ore, coal, and platinum. The fact is that China’s growth now matters more to South Africa than growth in the EU and US.

Covering only 3% of the African continent, South Africa accounts for a massive 40% of industrial output and is by far the most sophisticated free-market economy in Africa. South Africa is a middle-income, emerging market economy with purchasing power parity GNI per capita of $3,206 (2008), akin to Chile, Malaysia, or Thailand. South Africa's economic growth since the fall of apartheid has been significant. Among the advances made in the economy since 1994, the gross domestic product (GDP) jumped from $136 billion to $400 billion and the number of households with electricity went from nearly 60 percent to 85 percent. Among other changes: tax receipts increased from $114 billion to $814 billion and the Johannesburg stock market cap went from $3 billion to $50 billion.

This is very deceptive, though, because South Africa's income is distributed very unequally. There are stark racial inequalities in terms of income, with 85 percent of blacks poor, while 87 percent of whites are middle to upper class. The Gini index is a measure of income inequality, with a value of 0 meaning perfect equality and 100 denoting perfect inequality. South Africa's value overall was 66 in 1993, the year before Apartheid ended, and 70 in 2008 - income became less equal. To put this into perspective, the Gini index for Haiti is 59. The Gini index for India in 2007 at 37, better than China’s 42, compared to a GINI index for the US around 41, Germany around 28, and in Slovenia about 23. [ According to the World Health Organization (WHO), South Africa's HIV infection numbers are the highest in the world - 18% infection of adults between 15 and 49.]

The Quarterly Labor Force Survey (LFS) published on October 26, 2011 listed the official unemployment rate at 25.0 percent. The LFS defines unemployment to exclude persons who have not actively sought employment during the previous four weeks. The unemployment rate increases to 37.4 percent if these 2.2 million discouraged job seekers are included. Many unemployed people have never worked. Despite the high unemployment rate, South Africa has a shortage of skilled workers across many sectors.

The National Treasury warned in February 2012 that the global outlook had once again deteriorated and that much of Europe, South Africa’s major trading partner, risked slipping into recession. This could harm domestic growth prospects. The National Treasury downgraded its growth forecast for 2012 from 3.4% to 2.7%. It is then expected to recover, reaching 4.2% by 2014. The forecasted growth rate falls short of the 6% rate analysts believe the country needs to tackle its stubbornly high unemployment levels. The official unemployment figure is 25.2% but the real figure is probably nearer 40%. Two thirds of all unemployed are below the age of 35. The IMF warned in September 2012 that if not addressed, "the stubbornly high unemployment rate, especially of the young, is likely to become politically and socially unsustainable."

Black Economic Empowerment (BEE) is the main thrust of attempts to correct the imbalance in ownership of the economy and distribution of wealth. Its intention is to redress the exclusion of the majority of South Africans from the mainstream economy by supporting and favouring the economic empowerment of previously disadvantaged people in the private sector.

A Black Economic Empowerment Commission chaired by Cyril Ramaphosa reported to the Government in 2001 and in March 2003 the Government released a strategy document entitled South Africa's Economic Transformation, A Strategy for Broad Based Black Economic Empowerment. It provides a clear definition and guidelines for businesses to follow. In 2004, the Government published the Broad Based Black Economic Empowerment Act and Codes of Good Practice to increase the pace of BEE and to broaden it beyond pure business ownership to include management, employment, skills development and corporate social investment.

South Africa has a two-tiered economy; one rivaling other developed countries and the other with only the most basic infrastructure. It therefore is a productive and industrialized economy that exhibits many characteristics associated with developing countries, including a division of labor between formal and informal sectors, and uneven distribution of wealth and income. The formal sector, based on mining, manufacturing, services, and agriculture, is well developed.

On 10 September 2012 the Cabinet endorsed South Africa's National Development Plan (NDP), a blueprint for eliminating poverty and reducing inequality in the country by 2030, as the strategic framework for detailed government planning going forward. It calls for private investment to be boosted in labour-intensive areas, competitiveness and exports. It also stresses the need for jobs to be located where people live, for informal settlements to be upgraded, and for housing market gaps to be closed. The plan suggests that public infrastructure investment be set at 10 percent of the country's gross domestic product (GDP).

The transition to a democratic, nonracial government, begun in early 1990, stimulated a debate on the direction of economic policies to achieve sustained economic growth while at the same time redressing the socioeconomic disparities created by apartheid. The Government of National Unity's initial blueprint to address this problem was the Reconstruction and Development Program (RDP). The RDP was designed to create programs to improve the standard of living for the majority of the population by providing housing--a planned 1 million new homes in 5 years--basic services, education, and health care. While a specific "ministry" for the RDP no longer exists, a number of government ministries and offices are charged with supporting RDP programs and goals.

The Government of South Africa demonstrated its commitment to open markets, privatization, and a favorable investment climate with its release of the crucial Growth, Employment and Redistribution (GEAR) strategy--the neoliberal economic strategy to cover 1996-2000. The strategy had mixed success. It brought greater financial discipline and macroeconomic stability but failed to deliver in key areas. Formal employment continued to decline, and despite the ongoing efforts of black empowerment and signs of a fledgling black middle class and social mobility, the country's wealth remains very unequally distributed along racial lines.

Anti-competitive behavior is common in industries including construction, maize and wheat milling, and telecommunications. Government regulations can reinforce these practices, both by entrenching vested interests or through inefficiencies that limit enforcement of anti-competitive behavior. Then there is the matter of state-owned enterprises. They play a crucial role in the economy, but they are plagued by inefficiencies, poor management, and weak balance sheets.

South Africa's budgetary reforms such as the Medium-Term Expenditure Framework and the Public Finance Management Act -- which aims at better reporting, auditing, and increased accountability -- and the structural changes to its monetary policy framework, including inflation targeting, have created transparency and predictability and are widely acclaimed. Trade liberalization also has progressed substantially since the early 1990s. South Africa reduced its import-weighted average tariff rate from more than 20% in 1994 to 7% in 2002. These efforts, together with South Africa's implementation of its World Trade Organization (WTO) obligations and its constructive role in launching the Doha Development Round, show South Africa's acceptance of free market principles.

South Africa has a sophisticated financial structure with a large and active stock exchange that ranks 17th in the world in terms of total market capitalization. The South African Reserve Bank (SARB) performs all central banking functions. The SARB is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks. Quantitative credit controls and administrative control of deposit and lending rates have largely disappeared. South African banks adhere to the Bank of International Standards core standards.

The South African Government has taken steps to gradually reduce remaining foreign exchange controls, which apply only to South African residents. Private citizens are now allowed a one-time investment of up to 2,000,000 rand (R) in offshore accounts. During 2007, the shareholding threshold (the percentage of shareholding that must be South African) for foreign direct investment outside Africa was lowered from 50% to 25% to enable South African companies to engage in strategic international partnerships. In addition, South African companies involved in international trade were permitted to operate a single Customer Foreign Currency (CFC) account for all international transactions. Permission was also granted to the Johannesburg Securities Exchange (JSE) to establish a rand currency futures market, in order to deepen South Africa’s financial markets and increase liquidity in the local foreign exchange market.

In December 2015 President Zuma fired a well-regarded finance minister, replaced him with veritable unknown Parliament Member David van Rooyen, then fired the new minister less than 72 hours after his swearing-in, only to replace him with Pravin Gordhan, the man who served as finance minister two ministers ago. The move sent shockwaves through the nation’s political and economic systems, as the country's ailing currency fell further and stock prices plummeted. The firing of finance minister Nhlanhla Nene, who made a name for himself by standing firm against some of Zuma’s financial proposals, such as his bid for a pricey new presidential jet, set off the firestorm of controversy.

South Africa has rich mineral resources. It is the world's largest producer and exporter of platinum; is a significant producer of gold, manganese, chrome, vanadium, and titanium; and also exports a significant amount of coal. During 2000, platinum overtook gold as South Africa's largest foreign exchange earner. The value-added processing of minerals to produce ferroalloys, stainless steels, and similar products is a major industry and an important growth area. The country's diverse manufacturing industry is a world leader in several specialized sectors, including motor vehicles and parts, railway rolling stock, synthetic fuels, and mining equipment and machinery.

Primary agriculture accounts for about 2.5% of the gross domestic product. Major crops include citrus and deciduous fruits, corn, wheat, dairy products, sugarcane, tobacco, wine, and wool. South Africa has many developed irrigation schemes and is a net exporter of food.

The domestic telecommunications infrastructure provides modern and efficient service to urban areas, but at comparatively high costs and with limited coverage in rural areas. South Africa has made some strides towards liberalizing its telecommunication market; however, many obstacles exist for further progress. The passing of the Electronic Communications Act (ECA) of 2005 marked a new regulatory framework for liberalizing the telecommunication market in South Africa. Established entities such as Telkom and Multi-choice secured market-share under prior monopoly regimes, which make it difficult for new entrants to offer competitive telecommunications services (e.g. pay-TV and internet). The U.S.-led SEACOM project is the first of a series of undersea cable projects to become operational. SEACOM provides the first access to true broadband connectivity for countries on Africa’s eastern seaboard, which were previously 100% reliant on Telkom's expensive satellite-based technology. SEACOM's landing stations operate on a market-based, "open-access" system.

Annual GDP growth between 2004 and 2007 averaged 5.0%, but fell to a rate of 3.7% in 2008 because of higher interest rates, power shortages, and weakening commodities prices. GDP contracted by 1.8% in 2009 as South Africa experienced its first recession in 18 years. Growth of 2.8% returned in 2010. The government estimated that the economy must achieve growth at a minimum of 6% to offset unemployment, which was estimated at 25.7% in July 2011. Inflation averaged 11.3% in 2008 and 7.2% in 2009. Increasing food and fuel prices pushed inflation above the upper end of the South African Reserve Bank’s (SARB’s) 3% to 6% inflation target range for the better part of 2007 and 2008. Inflation started to decline in 2009.

A central inflation forecast by the SARB projected that inflation would continue its downward trajectory and return to the 3% to 6% target range in the second half of 2010. Inflation was expected to average 5.8% and 5.6% in 2010 and 2011, respectively. The SARB reduced interest rates at regular intervals from December 2008. The cumulative reduction through August 2009 was 500 basis points, bringing the prime overdraft rate to 10.5%. Subsequently over late 2009 and early 2010, the Reserve Bank left interest rates unchanged. The government managed to eliminate the fiscal deficit in FY 2007 and FY 2008. However, a fiscal deficit of 1.2% of GDP was recorded in FY 2009, mainly due to the impact of weak domestic demand and the global economic crisis on tax revenues. The fiscal deficit was expected to increase to 6.7% of GDP in 2009-2010, according to the Finance Minister's February 2010 budget speech.

Exports amounted to 24% of GDP in 2010. South Africa's major trading partners include China, Germany, the United States, Japan, and the United Kingdom. Japan displaced the U.S. as South Africa's largest export market in 2008, and China overtook both in 2009. South Africa's trade with other Sub-Saharan African countries, particularly those in the southern Africa region, has increased substantially. South Africa is a member of the Southern African Customs Union (SACU) and the Southern African Development Community (SADC). In August 1996, South Africa signed a regional trade protocol agreement with its SADC partners. The agreement was ratified in December 1999, and implementation began in September 2000. It provided duty-free treatment for 85% of trade in 2008 and aims for 100% by 2012. A U.S.-SACU Trade, Investment and Development Cooperative Agreement was signed in July 2008. The four areas singled out for special attention under the TIDCA are customs cooperation, technical barriers to trade, sanitary/phytosanitary (SPS) issues, and trade and investment promotion.

South Africa has made great progress in dismantling its old economic system, which was based on import substitution, high tariffs and subsidies, anticompetitive behavior, and extensive government intervention in the economy. The leadership has moved to reduce the government's role in the economy and to promote private sector investment and competition. It has significantly reduced tariffs and export subsidies, loosened exchange controls, cut the secondary tax on corporate dividends, and improved enforcement of intellectual property laws. A competition law was passed and became effective on September 1, 1999. A U.S.-South Africa bilateral tax treaty went into effect on January 1, 1998, and a bilateral trade and investment framework agreement was signed in February 1999.

South Africa is a member of the World Trade Organization (WTO). U.S. products qualify for South Africa's most-favored-nation tariff rates. South Africa is also an eligible country for the benefits under the African Growth and Opportunity Act (AGOA), and most of its products can enter the United States market duty free. South Africa has done away with most import permits except on used products and products regulated by international treaties. It also remains committed to the simplification and continued reduction of tariffs within the WTO framework and maintains active discussions with that body and its major trading partners.

As a result of a November 1993 bilateral agreement, the Overseas Private Investment Corporation (OPIC) can assist U.S. investors in the South African market with services such as political risk insurance and loans and loan guarantees. In July 1996, the United States and South Africa signed an investment fund protocol for a $120 million OPIC fund to make equity investments in South Africa and southern Africa. The Trade and Development Agency also has been actively involved in funding feasibility studies and identifying investment opportunities in South Africa for U.S. businesses.





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