Real GDP has recovered from -1.7% in 2009 to 2.8% in 2010; this rate of GDP growth remained clearly below potential, estimated around 4% per annum for South Africa. GDP is expected to grow at a rate of 3.6% in 2011 and 4.3% in 2012. GDP growth for 2010 was driven primarily by a steady recovery in consumer spending, partially attributed to the FIFA World Cup. Inflation fell to 3.5% by the end of 2010, averaged 4.3%in 2010, and is expected to reach 5.3% in 2011.

The consolidated government deficit rose to 6.9% of GDP in fiscal year 2009/10, and the central bank’s policy rate declined by 6.5 percentage points since the end of 2008. Fiscal policy is now taking a less expansionary turn, with the consolidated government deficit slowing to an estimated 5.4% in fiscal year 2010/11 and projected to decline further to 5.0% in fiscal year 2011/12. Likely increases in the wage bill pose a downward risk to the fiscal balance outlook as do the possible introduction of a new public health insurance system and youth employment subsidy. The repo rate, the price at which the South African Reserve Bank lends cash to the banking system, is expected to remain close to 5.5% throughout 2011 and to start rising moderately only towards the end of the year.

China has become the top destination for South Africa’s exports since mid-2009 and is also South Africa’s leading source of imports. China is the dominant investment partner among emerging partners with its foreign direct investment (FDI) ranked fifth in terms of value in early 2010, at33 billion South African rand (ZAR). Many emerging partners use South Africa as a gateway to other African countries. In December 2010, South Africa became an official member of the BRICS (Brazil-Russia-India-China-South Africa) group. The challenge for the government is to show that it has a purposeful plan to engage with BRIC countries, to prioritise its productive capacity, and to maximise its contribution to the national economy. Another challenge is to avoid neglecting traditional partners while nurturing its strategically important emerging partnerships. Indeed, the EU is still South Africa’s topmost regional export destination. The year 2011 will also see the launch of the South African Development Agency (SADPA) to inform and direct the country’s development assistance.

In the political arena, 2010 was characterised by a clearer elaboration of the Zuma administration’s goals, and progress in achieving some of them. The administration has shownstrong commitment to fighting crime. Significant progress has been made, for example, in crime prevention. Corruption, however, remains a major challenge, and both unemployment and inequality are on the rise. South Africa has achieved the 1st Millennium Development Goal (MDG) – reducing the proportion of the population living on less than 1 USD a day by half – butthe government still needs to tackle issues such as providing adequate public health services,improving the quality of education, and reducing unemployment, especially for the youth.HIV/AIDS remains a critical issue: South Africa has the world’s largest population of people living with HIV: 5.6 million. In April 2010, the Zuma administration launched a campaign to test 15 million people for HIV by end-2011; 5 million people have been tested since the launch began.

Structural challenges such as infrastructure bottlenecks hampered recovery in private investment in 2010. Unemployment remained very high in 2010 even though it declined marginally in the fourth quarter of 2010 to 24% from 25.3% in the previous quarter. The government outlined a number of measures to address these challenges in the New Growth Path framework (November 2010), including more investment in infrastructure, skills enhancement, public service and regional economic ties.

Table 2: GDP by sector (in percentage)

Source:AfDB Statistics Department, based on data from Statistics South Africa.

Figures for 2010 are estimates; for 2011 and later are projections.

Table 3: Demand composition

Source:Data from Statistics South Africa (Stats SA); estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

The government employed expansionary fiscal and monetary policies in 2010 to counter the effects of the economic crisis. These fiscal measures led to a 10% expansion in government expenditure for the 2009/10 fiscal year. The stimulus on the monetary side brought interest rates to a 30-year low as the repo rate was cut by 650 basis points between 2008 and November 2010. In theory, some policy space exists for further stimulus. However, in practice, not much of the remaining space, if any, is likely to be exploited in 2011 as the economy rebounds to trend growth.

Looking ahead, a fiscal deficit of 5.0% of GDP is expected for fiscal year 2011/12 with a more moderate 4.5% of GDP for fiscal year 2012/13 – that is relative to a deficit of 5.4% in fiscal year 2010/11. These projections will have to be revised if the wage bill rises substantially again or in case of the introduction of a new public health insurance system or youth employment subsidy. Likewise, a tightening of monetary policy is possible early in 2012. The South African Reserve Bank (SARB) has been communicating to the market that the repurchase rate has bottomed out and that it is not planning to cut rates further in 2011 and 2012.

Fiscal Policy

The government responded to the global crisis by expanding public spending on social assistance. Consolidated government gross capital spending rose by 1.5% in 2010, much more slowly than current payments and transfers. Government borrowing remained high in 2010 even though spending decreased and tax revenue increased somewhat: the consolidated government’s fiscal position went from a deficit of 6.9% of GDP in fiscal year 2009/10 to a deficit of 5.4% of GDP in fiscal year 2010/11. Government spending supported the economy throughout the recession. According to the Treasury, the structural fiscal deficit widened from 2.25% to 4.1% of GDP between fiscal year 2008/09 and fiscal year 2010/11, mainly due to lending to state-owned enterprises Eskom, Transnet and SANRAL, an increase in public sector salary, and increased coverage of social transfer programmes.

Corporate taxes decreased in 2010 due to lower profitability ratios, and VAT decreased due to decline in consumer spending. International trade contracted dramatically due to the slump in global demand. This manifested in a 25% underperformance in collections of customs duties than projected in the budget. Import VAT was also impacted by the slump in global demand. Tax compliance appears to have deteriorated during the recession. The pro-cyclicality of tax collection in South Africa leads to expectations that revenues will bounce back if growth rebounds back to trend. To encourage taxpayers to make payments early, a voluntary disclosure programme was instituted in late 2010. Over the next three years, the South African Revenue Services will also modernise its systems, improve enforcement and strengthen audit capacity.

The fiscal policy outlook is less expansionary. The government foresees a cyclical upswing which will enable them to hold expenditure increases below GDP growth. Indeed, total expenditure and net lending is expected to decrease from 30.4% of GDP in 2010/11 to 29.2% in 2011/12 and further to 28.7% in 2012/13. Treasury estimates that the debt stock will stabilise at about 40% of GDP in fiscal year 2015/16. This is a cautious projection in case of faster GDP growth or smaller deficits than projected by the government. If the expenditure trajectory proposed in the 2010 budget is maintained, the improvement in revenue prospects of aboutZAR 80 billion over initial budget for fiscal year 2010/11 will assist a faster reduction of the deficits. The government also plans to curb real non-interest spending from the circa 9% growth rate of the past three years to 2-3% over the three-year period beginning in fiscal year 2011/12. The downside risk to this scenario is that Treasury’s expected increase in wage bill is rather low, and the projections do not take into account the possible approval of some of the different social programmes being debated. In addition, if aspects of the New Growth Path become policies, the expenditure landscape could change substantially. The proposed expenditure framework for 2011 budget gives priority to education, health, infrastructure and job creation.

Table 4: Public finances (percentage of GDP)

Table 5: Current account (percentage of GDP)

Source:Data from local authorities’ data; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports of goods and services)

China became the topmost destination for South Africa’s exports in mid-2009 and is also South Africa’s leading source of imports. India currently ranks eighth as a source of imports. As a destination for exports, India ranked sixth in 2010. China, and to a lesser extent India, have become dominant trading partners not only compared to other emerging partners but also compared to traditional partners as well. China’s 14% share of imports in the first three quarters of 2010 overshadows Germany’s 11.6% and the US’s 7%. Similarly, China’s 9.3% share of South Africa’s exports surpasses the 8.8% and 8.1% claimed by the US and Japan, respectively.

This contrasts sharply with the situation at the turn of the century, when China took 11th position as a destination for South Africa’s exports and was the eighth largest source of the country’s imports. Back in 1992 China was even less important as a trading partner, ranking 20th as an export destination (accounting for a mere 0.8% of South Africa’s exports) and 15th as a source of imports (claiming only 1.2% of South Africa’s import basket). By 2010 (that is, the first three quarters of the year), 9.3% of South Africa’s exports were destined for China, which in turn accounted for 14% of South Africa’s imports.

South Africa exports a narrow range of mineral and resource-intensive products to China: metals, minerals and other commodities. By contrast, South Africa imports a widening range of higher value-added products from China, including clothing, data processing machines, printing machinery, bulldozers and motor vehicles. Indian exports to South Africa are dominated by petroleum products (other than crude), electrical and electronic equipment, as well as pharmaceutical products. Its imports from South Africa consist largely of inorganic chemicals, coal and coal products.

China is the dominant investment partner amongst emerging partners having reached rank five in terms of the value of its stock of FDI in early 2010, with ZAR 33 billion. The figure is considered to understate reality. This status was reached notably fast since China’s stock of FDI back at the beginning of 2008 was only R480 million. The subsequent acquisition of a 20% stake in Standard Bank by the Industrial Commercial Bank of China (ICBC) was central to this rise. Yet, South Africa also ranks second (behind the Democratic Republic of Congo) in China’s mining investment in Africa with five projects in total, mainly focused on chrome. Other investments have been in metals (around R3.8 billion), followed by chemicals, food and tobacco, consumer electronics, automotives and communications. In late 2010, a USD 877 million Chinese investment from Jinchuan and the China-Africa Development Fund into the Johannesburg Stock Exchange (JSE)-listed junior platinum firm Wesizwe Platinum was announced.

There are a few emerging partners whose absolute trade and investment standing in South Africa, while still low, are progressing very fast and can be expected to reach prominence in a few years time if current trends stay in place. For example, in terms of South African exports, the United Arab Emirates were the 20th largest destination market in the first three quarters of 2010, claiming 1% of exports, up from 49th in 1992, when it was the recipient of a negligible 0.1% of South Africa’s exports. Malaysia, which did not even feature amongst the top 50 destinations for South Africa’s exports in 1992, captured 31st position at the turn of the century and ranked 22nd in the first three quarters of 2010. Brazil’s ranking has also improved over this period, from 30th in 1992 to 23rd in the first nine months of 2010, when the South American economy absorbed 0.9% of South Africa’s exports. The relative performance is slightly better on the import front, in the sense that Brazilian products have represented between 0.9% and 1.7%of South Africa’s import basket in these periods (ranking between 17th and 21st). Interestingly, Turkey has seen its relative importance as a trading partner for South Africa drop since 1992, both on the export and import fronts, with the downward trend being also quite pronounced in the case of Chinese Taipei.

Many emerging partners use South Africa as a gateway to other African countries, and vice versa – countries in the region use South Africa as a gateway to emerging markets. Investors enjoy the high property rights, protection standards and relatively good infrastructure of South Africa as a base for trading with and investing in other African countries. Other African countries are becoming increasingly important as trading partners accounting for 8.4% of South Africa’s imports and 14.4% of its exports in the first three quarters of 2010. Imports from the rest of the continent have risen dramatically over the past decade, from a 2.3% share in 2000. In terms of exports, the share has stabilised since 2000, when Africa accounted for 14.9% of South African exports (9% in 1992). About half of South Africa’s investments are targeted toward companies within the continent. However, in the last two years, the top ten investments made by South Africa have been mostly targeted towards emerging countries on other continents with the exception of the investment made in Unki Mine, Zimbabwe.

South Africa has put a lot of political effort into engaging diplomatically both industrial and fellow southern countries since the country’s democratic transformation. The year 2011 will see the launch of the South African Development Agency (SADPA) to inform and direct the country’s development assistance. Almost all development assistance has been directed at the African continent so far, with a strong focus on member countries of the Southern African Development Community (SADC). This focus is not expected to change. The government argues that the SADPA will boost the country’s status as an emerging economic power and champion of the African continent, and improve accountability about the way funds are being disbursed.

The diplomatic weight of South Africa is more than proportional to its economic and demographic size. This has been underlined by the invitation to join the BRIC summit in April 2011 in Beijing. The hope is to gain substantial trade and investment benefits, through potential preferential trade pacts and economic co-operation. Reputational gains in joining this largely symbolic ‘club’ are argued to increase investors’ interests. South Africa is very different from the BRIC countries, however, particularly with respect to its size and growth rate. It remains to be seen whether investors will react to a political gathering. The government argues that membership is aimed at promoting South Africa as an important player and that it complements its role in various other organisations, including the United Nations, the India-Brazil-South Africa (IBSA) initiative, and the G77.

One challenge for the government is to show that it has a purposeful plan to engage with the BRICs and to prioritise productive capacity and local beneficiation. The South Africa-China Partnership for Growth and Development (PGD) has not delivered concrete results so far. Yet, South Africa could seek to actively understand and implement the “China developmental model”. Another challenge is to avoid neglecting traditional partners while nurturing its strategically important emerging partnerships. Indeed, the EU is still South Africa’s topmost regional export destination.

The year 2010 saw the Zuma administration more clearly articulate its priorities, which paid more attention to social issues. Progress has been made in crime prevention: national crime statistics for 2009/10 show that street robberies declined by 10.4%, bank robberies by 8.8%, and truck and car hijackings by 6.8 %. Violent crime also declined, with murder down by 8.6%. Reliability of police services also marginally improved in 2010 relative to 2009, according to the GCI. Improvements are also due to the tightening of security during the FIFA World Cup.

According to Transparency International, the Corruption Perceptions Index (CPI) has deteriorated further, from 4.7 in 2009 to 4.5 in 2010. The Broad-based Black Economic Empowerment Programme is also perceived as being vulnerable to political influence, as is the issuing of mining rights. The Directorate for Priority Crime Investigation (also known as the Hawks) established in mid-2009 to fight corruption, organised crime, and economic crime had made several thousand arrests against organised crime and commercial crime by mid-2010, with conviction rates of 15% and 60% respectively. Despite a large number of incidents of corruption being investigated, fewer convictions were made.

Public trust in politicians, judicial independence, and decisions of government officials also deteriorated in 2010, according to the GCI. While the political environment remains stable, slow delivery on key social goals – youth unemployment and inequality in particular – remains a major risk.

South Africa has achieved the Millennium Development Goal (MDG) of eradicating extreme poverty and hunger, by reducing the proportion of the population living on less than 1 USD a day by half. Despite this progress, the country faces many challenges. In January 2010, the Cabinet adopted 12 outcomes against which performance will be assessed with priority given to health, education and job creation.

Lack of adequate public health services remains one of the notable issues. Public expenditure on health grew at an average annual rate of 17.6% between fiscal years 2006/07 and 2009/10, from ZAR 11.3 to ZAR 18.4 billion. The incremental support was towards HIV/AIDS programmes and hospital revitalisation grants.

South Africa has the world’s largest population of people living with HIV – 5.6 million – representing nearly 1/6th of the global disease burden. Of the total population, approximately 18% of adults are infected with the virus. The Zuma administration launched an HIV campaign in April 2010, which aims to test 15 million people by the end of 2011, up from 2.5 million in 2009, a six-fold increase in just two years. Five million people have been tested since the launch, and over 900 000 were found to be HIV positive. To further provide anti-retroviral drugs (ARVs) to its citizens, in December 2010, South Africa successfully negotiated a 53.1% reduction in the cost of total tender with its ten suppliers, including Aspen Pharmacar owning 40.6% share. At least twice as many patients can be treated as a result of this reduction in price.

Further effort to improve child mortality and maternal health is needed to achieve the MDGs. While the mortality rate for children under 5 was 64 per thousand back in 1990, it has only decreased to 62.1 per thousand in 2007. South Africa is unlikely to meet the goal of decreasing maternal mortality ratio (MMR) by 75%, as the MMR effectively doubled between 1990 and 2008. The significant cause of maternal deaths in South Africa is non-pregnancy related, mainly HIV-related infections.

In September 2010, the ruling African National Congress (ANC) released its current proposals for the National Health Insurance (NHI), which aims to provide health coverage for all South Africans. This would cost an expected ZAR 11 billion in additional health budget for 2012. NHI would improve access to healthcare; however, some Treasury officials have expressed scepticism about its financial feasibility.

South Africa has near-universal primary and secondary enrolment, owing to the National School Nutrition Programme (NSNP) and the fee-free schools programme.However, deficiencies are evident in the quality and functionality of the public school system. Although the school-leaving exam pass rate has increased from 60.6% in 2009 to 68.7% in 2010, this outcome is much lower than the 73.3% pass rate in 2003. The drop-out rate is very high with more than 50% of the students leaving before completing matriculation. This implies that barely 1/4th of pupils entering school eventually pass matriculation. A recently commissioned study showed that the number of working hours spent by teachers on teaching is only four hours in South Africa compared with seven hours in the southern Africa region. The education system’s poor outcomes impact far more heavily the poor, rural and township schools – they are also predominantly black – and 80% of these schools remain dysfunctional. The Department of Basic Education is finalising a comprehensive turnaround plan for teaching in schools called “Action Plan 2014”, with the objective to improve the basic education standards.

The country scores well on the targeted gender ratios in education and the share of women in formal employment. South Africa is third in the world in terms of female political representation, with 44.5% of the National Assembly made up of women. This puts the country well on track to achieve the SADC target of 50% female representation by 2015. However, more effort to improve gender equality is needed in areas such as the legal system, traditional succession and religious laws.

From the peak to trough of the labour market in terms of employed workers, i.e. from the fourth quarter of 2008 to the third quarter of 2010, just over a million jobs were lost. Losses were concentrated in the manufacturing, trade and construction sectors. Of the unemployed, youth are hardest hit as there are not enough jobs to absorb the number of new entrants to the labour market. In the 1st quarter of 2010, 40% of youth aged 16 to 30 were unemployed, compared with 16% for those aged 30 to 65. Although total employment increased by 56 000 over 2010 and unemployment had declined marginally to 24% by the fourth quarter, the labour market remains very weak – the share of employed to the population decreased from 41.1% in the first quarter to 40.8% in the fourth quarter of 2010.

The New Growth Path, released in November 2010, sets a target of creating 5.5 million jobs over the next decade. If government succeeds in achieving this goal, the unemployment rate would drop by 10percentage points from 25.3% to around 15%. Besides the macroeconomic package mentioned in the monetary section above, the government plans to reform rural development policy and to promote educational and skills development. For example, the government will re-prioritise the co-ops that enable small producers to enter formal value chains. To enhance education and skills development, the government plans to provide targeted programmes to increase the number of individuals with skills that are vital and/or scarce by 2014. It calls for 30 000 engineers and 50 000 artisans with skills in construction, mining, manufacturing and new industries such as in the green economy.