South Africa: Economy

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.

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. However, 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.

Financial Policy
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.

Impact of the 2010 FIFA World Cup
On May 15, 2004, South Africa was awarded with the winning bid to host the 2010 FIFA World Cup, becoming the first African nation to serve as host for the international football (soccer) competition. Nine cities hosted matches for the event: Johannesburg (with two stadiums), Cape Town, Pretoria, Durban, Port Elizabeth, Bloemfontein, Rustenburg, Nelspruit, and Polokwane. With a large number of tourists expected to arrive and travel throughout the country for the event, attention focused on improving transportation. Americans purchased the largest number of tickets from overseas. South Africa's transportation infrastructure is well developed, supporting both domestic and regional needs. Johannesburg’s O.R. Tambo International Airport serves as a hub for flights to other southern African countries. Billions were spent to upgrade international airports and national roads for the 2010 FIFA World Cup. The first segment of the Johannesburg-Pretoria urban rapid rail Gautrain, linking O.R. Tambo airport to the northern Johannesburg office node of Sandton began operations June 8. A brand-new international airport and trade port opened in Durban in May 2010. Bus-rapid-transit (BRT) systems for the World Cup host cities were also created, but faced strong opposition from existing minibus/taxi operators who feared the competition.

The 2010 World Cup was the largest event ever to be held on the African continent. In preparation, South Africa spent over $5 billion on building and improving stadiums and transportation systems, and ensuring that security measures were up to par for the event. By the end of the competition on July 11, over 3.18 million fans had attended the 64 matches, the third-highest turnout in FIFA’s history (falling short of the records held by Germany and the U.S.). The World Cup was expected to add an additional 0.5% to South Africa’s 2010 GDP growth, fully an additional $5 billion (R35 billion) to GDP, according to South African Finance Minister Pravin Gordhan.

Trade and Investment
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 is 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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