South Africa - OECD

1 South AfricaPretoriakey figures Land area, thousands of km21 221 Population, thousands (2001) 43 792 GDP per capita, $ (2001)2 587 Life expectancy (2000-2005) Illiteracy rate (2001) Economic Outlook AfDB/OECD 2003279 TEN YEARS AFTER APARTHEID ENDED, South Africastill faces the challenges of reducing inequality andenhancing growth performance. The policiesimplemented so far have had somewhat limited terms of growth, South Africa , grew by per centin 2001, from per cent in 2000, mainly on accountof a contraction in overseas demand that loweredexport prices and volumes. However, the sharpdepreciation of the exchange rate at the end of 2001mitigated the slowdown of the economy, and growthis expected to be about per cent in 2002 and3per cent in 2003, supported by buoyant exports,domestic demand and higher public positive expectations are, however, precarious asuncertainty and lack of confidence in the economyremain, fuelled by the political instability inneighbouring Zimbabwe, the delay in the privatisationprocess, the high level of crime, and the handling ofHIV/AIDS.

2 These are among the main factors thatdetermined the sharp depreciation of the rand in thesecond half of 2001 (when it depreciated by 34 percent against the US dollar).Although this depreciationboosted exports in somemanufacturing sectors, it wasresponsible for an upsurge inthe inflation rate. The response has been to tightenmonetary policy, moving in the opposite direction ofthe 2002/03 mildly expansionary budget. Againstthis background, the prospects for reducing the highunemployment, fighting poverty and promoting socialcohesion remain the competitiveness gains reaped in 2002, South African growth prospects remain precarious-10-8-6-4-202468102003(p)2002( e)2001200019991998199719961995 Figure 1- Real GDP GrowthSource:Authors estimates and prospects based on South African Reserve Bank Economic DevelopmentsThe South African economy has inevitably sufferedfrom the slowing down of the global economy, butstill succeeded in keeping growth at per cent, aidedby a strong export performance following thedepreciation of the rand.

3 Indeed, the second half of 2001was characterised by sharp depreciation of the rand asa result of the confluence of economic, political andconfidence factors built up during the year. This wasresponsible for an upsurge in inflation which hascontinued its upward trend since the last quarter of2001, reaching per cent in October 2002 per cent in September 2001. The growth performance of 2001 can be explainedby the steady increases in manufacturing, construction,and the tertiary sector. The ongoing depreciation ofAfrican Economic Outlook AfDB/OECD 2003280 South Africathe rand has boosted manufacturing output which grewby per cent in 2001, accelerating to per cent inthe last quarter of 2001 in tandem with the peak of therand s depreciation. Construction grew by 5 per cent,backed by the lower interest rate that boosted the salesand construction of homes and buildings.

4 The tertiarysector expanded throughout 2001, buoyed by continuousexpansion of financial intermediation and transportand communications sectors and by the sustained growthof retail trade. Growth for 2002 is estimated at percent, rising to 3 per cent in 2003. In 2002, growth ofthe general economy was sustained by buoyant exports,a pick-up in the demand for goods produced by import-competing industries, and public investments. In the mining sector, despite a sharp decline ingold production, mining output remained unchangedat the levels of 2000, owing to continued strong outputof platinum and diamonds which also experiencedrobust growth in 2002. The mining industry isexperiencing turmoil owing to the Minerals andPetroleum Development and Resource Bill passed inlate June 2002. This is significant in so far as this is thefirst time in South Africa s 130-year mining history, thatmineral rights are vested with the state.

5 The mainpurpose of the Minerals and Petroleum Bill is to set outhow South Africa can manage its mineral resources ina way that will bring about transformation in themining industry. The new mining legislation, whichshould come into effect early next year, will grantmineral rights for 30 years, while the internationalaverage for mineral rights is 25 government Act, which is backed by blackempowerment groups and trade unions, aims at creatingbetter opportunities for black business, as well as smalland medium enterprises. The law is strenuously opposedby the main mining conglomerates because it is seenas not providing the long-term security necessary tojustify billion dollar investment decisions. Furtherdiscontent by the white-controlled mining companieshas been caused by the leaking of the empowermentmining charter which states that at least 51 per centof the mining industry must be transferred to blackpower entities within ten years.

6 The leaked charter wasunderstood as partial nationalisation, provoking a fallin the mining government has therefore backtracked, pointingout the draft was still to be negotiated with the industryand labour force. A task force of the government,industry, black business and unions has been establishedwith the scope of drawing up a new mining government ensured that the new mining charterwould not measure empowerment by percentage targetsand that any sale or transfer of ownership in the miningindustry would be undertaken in a transparent mannerat fair-market value. Africa South Africa0500100015002000250030003500400020 0120001999199819971996199519941993199219 911990 Figure 2- GDP Per Capita in South Africa and in Africa ($ current)Source:Authors estimates based on IMF Economic Outlook AfDB/OECD 2003281 South Africa Value Price Volume-2024681012 Gross value added at basic pricesOther servicesGovernment servicesFinance and business servicesTransport, storage and communicationWholesale and retail tradeConstructionElectricity and waterManufacturingMining and quarryingAgricultureFigure 4- Sectors contribution to growth in 2001 Source.

7 Authors estimates based on South African Reserve Bank and quarryingManufacturingConstructionElectr icity and waterWholesale andretail tradeTransport, storageand communicationsFinancial andbusiness servicesOther servicesGovernmentservices8%18%20%16%13% 3%3%10%3%6%Figure 3- Structure of GDP in 2001 Source:Authors estimates based on South African Reserve Bank manufacturing sector has shown mixed resultsover the last five years. Following the continuous randdepreciation, some sub-sectors, such as chemicals, basicmetals and motor vehicles manufacturing, and therelated leather and rubber products, have raised outputsubstantially. The growth rate of the motor vehicles partsand accessories averaged 4 per cent per annum from1996 to 2001 and with the rand still at quite depreciatedlevels, it is expected to continue expanding in 2002 and2003. Although small, the fastest growingAfrican Economic Outlook AfDB/OECD 2003282 South Africamanufacturing sub-sectors are plastic products,television, radio and communication equipment whichgrew on annual average by more than 8 per cent overthe past five years.

8 On the other hand, more labour-intensive sectors, such as textiles, clothing and footwear,have been hard hit by low domestic demand, tariffreductions and increased international sectors have experienced a slow growth, or in somecases negative growth, resulting in significantemployment losses. It is important to emphasise thatif we look at manufacturing performance in aggregateover the last 5 years (1996-2001) there has been a smallgrowth in output hovering annually in real terms ataround 2 per cent with a parallel average annual declinein employment of around 2 per cent. This partlyexplains increasing productivity growth in the last fiveyears where firms have become more productive butat the cost of jobs. The tertiary sectors continued to expandsignificantly all through 2001. Wholesale and retailtrade grew by an average rate of per cent in 2001and experienced an acceleration in the fourth quarterof the year, owing to pre-emptive buying by consumersin response to high inflation expectations.

9 Over the sameperiod, the transport, storage and communicationsectors grew by an average of per cent. Growth inthese sectors was spurred by increased activity in thetelecommunications industry, where a third cellulartelephone operator Cell C started operations in2001, an increase in harbour and docks traffic, and livelyforeign tourism. Recent statistics show that foreigntourism increased substantially in 2002 (the numberof non-residents visiting South Africa rose million in the first 10 months of 2001 to millionin the same period of 2002), boosted by the randdepreciation. A number of initiatives in environmentaland tourism policy are expected to boost tourism evenfurther. These include: the Transfrontier ConservationArea Program, World Heritage sites, and the Coastcareand the Wetlands Conservation programme. Althoughaffected by the global downturn, the financialintermediation, insurance, real estate and businessservices sector maintained a growth rate of 4 per cent,compared with 6 per cent in 2000.

10 Agriculture s share of total output is about 3 per centof real gross value added. However it remains animportant sector in terms of employment creation,accounting for per cent of the country semployment. The strong growth of agriculture in 2000was followed in 2001 by a decline in output of anestimated 3 per cent. As a result of a substantial decreasein the production of summer crops, the volume offield crop production decreased by 15 per cent comparedto the previous year. Horticultural production decreasedby per cent while animal production decreased by4per cent. Maize, which is the most important fieldcrop (white maize, in particular, is the staple food forthe major part of the population) experienced a decreaseto 8 million tonnes in 2001 compared to milliontonnes in 2000, owing to less than normal rainfall atthe beginning of 2001. The lower domestic productionand the regional shortage (especially in Zimbabwe)coupled with the depreciation of the rand led to anincrease in maize price - from R800 per ton in June 2001 Table 1- Demand Composition (percentage of GDP)Source:Authors estimates and predictions based on South African Reserve Bank (e)2003(p)Gross capital Economic Outlook AfDB/OECD 2003283 South Africato R1 500 per ton in June 2002.