South Africa

Output in manufacturing and mining declined in 2009 as a result of lower exports and agriculture contracted because of adverse climatic conditions. The only sector that showed sustained growth was construction, boosted by a public investment programme and by the forthcoming football World Cup.

Thanks to its prudent macroeconomic policies, South Africa was one of the few countries on the continent able to implement strong and coordinated countercyclical fiscal and monetary policies. Fiscal stimulus measures together with cyclical revenue shortfalls resulted in a sharp deterioration of the fiscal position by 6.2 percentage points of GDP, culminating in a deficit 7.3% of GDP in 2009/10. The Central Bank responded to the recession by cutting the repo rate by 500 base points. Weak demand and the appreciation of the currency helped reduce inflation from its peak of 11.5% in 2008 to 7.1% in 2009. A sharp increase in electricity prices and wage cost pressures prevented a further decline of inflation into the target range of 3-6%. This made the trade-off between fighting the recession and achieving low inflation more delicate, causing public debate over the mandate of the Bank. Inflation is expected to decrease in 2010, falling back into the target range.

In the coming years, the main policy challenge will be to strike a good balance between fostering growth, while preserving fiscal sustainability and low inflation.

South Africa‘s economic and social outlook remains shadowed by huge structural challenges, notably deficiencies in transport and energy infrastructure, which raise production costs and limit growth potential. Public service delivery, also a severe bottleneck to growth, has proven inadequate in a period of severe economic distress and has led to significant social discontent. Demonstrations took place throughout 2009 and if the government fails to improve basic service delivery social instability could continue.

President Zuma, elected in April 2009, must achieve a delicate balancing act: reassuring the international and domestic business community by upholding market friendly policies, while delivering on his promises to alleviate poverty, against a backdrop of sharply increased unemployment.

Public resource mobilisation has improved, as shown by the rising number of registered taxpayers, both individuals and corporations. However, the recession resulted in significant revenue shortfalls in 2009.  Further simplification of the tax code and of filing procedures will meet business expectations and free staff within the tax administration to strengthen auditing in sectors where evasion is still widespread. Here again, voter satisfaction with public service delivery must be improved in order to broaden and strengthen the direct tax base and to increase its contribution to public financing.  

After growing by 3.7% in 2008, the economy shrunk by 1.8% in 2009, due to a severe contraction in mining and manufacturing activities. The timid resumption of external demand, coupled with a partial relaxation of credit conditions, is expected to progressively bolster economic activity in 2010 and 2011, with GDP growing by 2.4% and 3.3%, respectively. Given energy supply constraints, especially in the mining and manufacturing sectors, there are, however, important downside risks to this forecast.

2009 was a bad year for agriculture, due to adverse climatic conditions and a new outbreak of Foot and Mouth disease in Mpumalanga province. As a result, output decreased by -3.2%. South Africa has been a net importer of food since 2008, and while agriculture contributes only 3% to total value added, it has become a government priority. This choice reflects more the political sensitivity of South African agriculture than its economic potential. The revitalisation of this sector will depend on the resolution of the pending land reform and its capacity to boost productivity.

The mining sector, in recession since 2006, was hard hit by the fall in export demand and falling prices of hard commodities. After a decline by 8% in 2008 due to the energy crisis, production fell by 7.2% in 2009. Gold, diamond, platinum and coal production fell by 6.9%, 51.3%, 0.6% and 0.9% respectively, with only iron ore increasing by 12% thanks to demand from China. Gold and platinum account for about 50% of the sector.

Investment in mining, which had begun to pick up in 2006 after years of underinvestment, has slowed again. While mining output represents around 9.7% of total value added, the sector continues to be constrained by poor rail and energy infrastructure, red tape, skills shortages, safety related issues and a relatively strong – though volatile – currency. Nevertheless, the outlook for the sector is moderately good, due to the upswing of global demand for South African commodities, even if lower investment levels and rising electricity prices are likely to limit the sector’s expansion. The new mineral royalty act was enforced in the first quarter of 2010, after being delayed due to the crisis.

Manufacturing suffered greatly from the crisis, declining by over 10.7% in 2009. Production and capacity utilisation declined during the first three quarters of 2009 before picking up towards the end of the year, led by a rebound in exports. The car industry was strongest hit by the crisis, production declining by 30% in 2009, total sales and exports falling by 26.7% and 38.4%, respectively in 2008. This was attributable to lower demand for cars worldwide, the strength of the South African rand (ZAR) (especially in the second half of the year) and the rising cost of energy. While manufacturing is set for a gradual recovery of its export-oriented sub-sectors, production of goods for the domestic market is expected to remain depressed, due to weak private consumption. Downside risks are the strength of the rand, affecting competitiveness, a slow global recovery, and energy shortages. Designed to encourage international competitiveness in manufacturing, some of South Africa’s Industrial Development Zones (such as Coega and East London) rely on highly energy-intensive projects and are thus particularly sensitive to energy shortages.

On the positive side, construction maintained growth at 7.8% over 2009, down from 9.3% in 2008. While residential building activities decreased due to credit tightening and household over-indebtedness, non-residential construction held up thanks to the preparation for the 2010 FIFA World Cup tournament and the extended public work programme. The slower growth of public construction reflected the completion of some projects related to infrastructure development.

The service sector, one of the important drivers of growth in recent years, performed badly in 2009, with the exception of government services. Wholesale and retail trade contracted by 2.9%, while transport and communication grew by 0.5%, supported by the resumption of exports towards the end of the year. Financial, real estate and business services, the drivers for capital expenditure in past years, grew by only 1.3%. The ZAR 20 billion Cornuia Mixed-Use Development, the largest of its kind in the history of the country, has been delayed. The project involves the construction of residential units, commercial centres, bus rapid-transit routes, five interchange roads, bridges, and an electrical substation and parks within an area of 1 250 hectares situated in Kwazulu Natal.

On the demand side, both domestic and external factors contributed to the recession. The downturn began in 2008 with the weakening of private consumption, and continued in 2009, exacerbated by the fall in external demand and the confidence crisis stemming from the turmoil in international financial markets. Private consumption, the driver of growth for the past several years, contracted at an unexpectedly fast pace, due to severe job losses, affecting the financial situation of private households and increasing uncertainty.

The global recession and adverse domestic conditions also caused public and private agents to scale back new investment projects. In the first half of the year, only 29 new projects were announced, a 64% decrease over 2008. Private investment, representing two-thirds of total investment, contracted for the first time in years, due to gloomy perspectives for exports and credit tightening. On a positive note, overall public investment rose by 18%. As a result, this increase compensated for the fall in private investment, resulting in growth rate of 3.4% of total gross capital formation in 2009, following an annual average growth rate of 12.1% between 2003 and 2008. Public consumption also rose. All in all, however, the government’s fiscal stimulus was insufficient to counter the decrease in aggregate demand, or to restore confidence in the banking sector for most of the year.

In 2010, the World Cup, global recovery and the continuation of the fiscal stimulus will help return the country to growth. Private consumption will grow moderately, helped by rising income but still restrained by high unemployment. Exports are expected to grow moderately and will also boost private investment, although higher energy costs will hamper business activity. Output growth is expected to accelerate in 2011 when recovery will be well established in the global economy and the positive demand effect of the 2010 World Cup will continue.

Due to the recession the average growth target of the Accelerated and Shared Growth Initiatives for South Africa (ASGISA) of 4.5% of GDP over 2004-09 was missed, while the growth target of 6.5% fixed for the second phase from 2010-14, now also appears difficult to achieve. The new negative outlook, on top of the already mixed progress in terms of poverty reduction and employment creation, is likely to bring a revision of the strategy and of its targets.

Growth potential has probably been reduced by the recent slowdown in investment and is further constrained by problems with energy supply. To unlock it, South Africa needs to continue with structural reform to further ease investment, including FDI, job creation and skills development. This would boost growth in labour-intensive domestic sectors and in export sectors without placing undue burden on the current account, in a context of rising capital goods imports.  

The new government committed to continue market-friendly policies and to improve basic services, as reiterated in the February 2010 budget speech.

The government confronted the crisis with well-coordinated countercyclical policies. Fiscal stimulus measures were implemented and cyclical revenue shortfalls were financed by additional debt, creating automatic stabiliser effects. While results were mixed, especially in terms of protecting jobs, the impact of the crisis would have certainly been much worse without a strong, coordinated and timely fiscal response.

In the medium term, the main policy challenges will be to strike a balance between fostering growth and keeping public indebtedness at sustainable levels and inflation in check. A policy tightening is expected for 2011.

Expansionary fiscal policy began in 2008/09 and was strengthened in 2009/10, when government revenue fell by 6%, and total expenditure increased by almost 18%. Additional spending was concentrated in infrastructure development and social expenditure. Unemployment insurance was widened, bringing an additional 600 000 people into the social safety net. Exceptional job-saving measures were financed, including the Training Layoff Scheme. Child grants were expanded. Furthermore, public employment was increased and public wages significantly raised. As a result, current expenditure increased by 17%, and public investment expenditure (for capital and financial assets) by over 20%, in particular by the state-owned enterprises Eskom and Transnet. Nevertheless, revenue shortfalls coupled to difficulties in borrowing slowed several investment projects, especially for Eskom.

As a result, the general budget deficit increased to 7.3% in fiscal year 2009/10 after registering a deficit of 1.2% of GDP in 2008/09. Most of the deficit was financed domestically, but in 2009, for the first time in three years, the government was led to borrow from international markets.

The 2010/11 budget, presented in February 2010, provides for the continuation of the fiscal stimulus, and it will expand by 9.3%, while revenue will progressively increase. Spending priorities will shift towards job-creation, enhancement of the quality of basic services, skills development, rural development and tackling crime and corruption. Although politically difficult, the government also intends to tighten fiscal policy in 2011, with cuts in expenditure while priority spending is maintained. For the next three years, the National Treasury intends to increase real expenditure by 3% a year on average, while revenue is expected to progressively increase with the strengthening of the economy and expanded taxation. Authorities are aware that rigour will be necessary to restore credit worthiness and business confidence. As a consequence, the fiscal deficit is forecast to diminish slowly over the medium term. Due to the deterioration of the budget, the creation of a universal social security scheme, initially foreseen for 2010/11, has been postponed. The political debate continues however and the creation of a National Health System is being explored.

Thanks to past fiscal prudence, levels of public indebtedness have so far remained moderate. In 2009 the domestic debt to GDP ratio increased to almost 23%, and is set to rise to over 33% in 2010/11. The rise in the debt level together with the recent increase in government bond rates will lead to higher debt servicing costs.  

Monetary policy goals for 2009 were to bring inflation, which had peaked at 11.5% in 2008, back within the 3-6% target band, while at the same time fighting the recession. In order to increase its flexibility and responsiveness, the South African Reserve Bank (SARB) decided to meet once a month throughout 2009. Meetings on a bi-monthly basis were re-established in December 2009.

The contraction of domestic demand, decrease in imported food and oil inflation, strong currency and the re-basing of the index in January 2009 have all helped lower inflation to 7.1%. However, due to high wage settlements and a rise in electricity prices by one third, the target range was again missed. Nevertheless, lower inflation allowed the SARB to put more emphasis on fighting the recession, cutting the key interest rate by 500 basis points between December 2008 and August 2009, resulting in a reference interest rate of 7%. Inflation is expected to decelerate in 2010, despite the expected rebound of international prices for food and oil, a gradual weakening of the currency and the base effect of the past electricity price hike. Under these circumstances, however, further cuts in the repo rate are unlikely in the near term. Inflation is expected to remain around 6% in the coming years.

The sharp contraction in economic activity and the rise of unemployment, coupled with the change in the political constituency, generated strong debate on monetary policy. Inflation targeting and its compatibility with growth and employment objectives came under scrutiny. A fundamental change in the SARB’s policy seems unlikely, however. A new central bank governor, Gill Marcus, was appointed in November 2009.

South African is a very open economy, with the ratio of total trade (exports plus imports of goods and services) to GDP increasing from below 40% in 1993 to around 74% in 2008. Over the 2001-08 period the strength of domestic demand, both for consumer goods and investment, boosted import growth (annual average nominal growth was around 6%) far beyond export growth (annual average nominal growth was around 2.5%). As a result, the trade balance deteriorated by 6 percentage points of GDP driving the current balance from a small surplus to a deficit of 6.6% of GDP over the period. 

In 2009, the current account deficit declined to 4.5% of GDP, despite the deterioration of the trade balance. While imports slowed in both value (linked to lower oil prices) and volume, they continued to outstrip exports. It is worth noting, however, that exports to China did not follow the general trend as exports of iron and ore increased sharply by 70% towards the end of the year, feeding Chinese steel production. On the other hand, a positive contribution to the current account balance came from a decrease in dividends repatriated by foreign firms due to lower corporate profits. Due to large portfolio inflows and despite a sharp decline in FDI inflows, the current balance deficit was comfortably financed by the capital account. Capital inflows amounted to ZAR 75.41 billion, reversing 2008’s ZAR 54.43 billion outflow. Relying on short-term portfolio flows as a means of financing the current account deficit rather than on FDI, however, is problematic given the volatility of such flows.

In 2010 and 2011, the current account deficit is expected to increase moderately. With imports recovering faster than exports, the trade balance deficit will increase, driven by a recovery of private investment, 80% of imported goods being investment goods. At the same time, the deficit in the services balance will continue to decline, helped by the increase in tourism associated with the World Cup.

The share of manufactured goods in total exports has declined from 74% in 1994 to 61.5% in 2008 as commodity exports have increased. South Africa is currently ranked 24^th amongst developing countries and 47^th overall in terms of its share of exports of advanced manufactures but if recent trends continue this ranking will decline. Indeed, South Africa’s export performance in recent years fell well behind other emerging countries, such as China, India and Brazil.

Among imports, manufactured goods also dominate but their share is also declining (from 69.5% in 2002 to 61.5% in 2008). These imported manufactures are largely comprised of technology and capital-intensive goods, including machinery, vehicles and scientific equipment. Imports of advanced manufactures are mainly driven by business investment, although demand for consumer goods (e.g. electrical appliances, electro-technical goods, etc.) also plays a role. The share of imported agricultural and basic processed goods has declined, while that of mining-related products (mainly oil imports) has increased.  

The regional distribution of trade is also gradually changing with China becoming a more important trading partner. While the EU continues to be the main destination for South Africa's exports (35% in 2009) China moved into first place as single country destination.

A National Industrial Plan was launched in 2007, aiming to support selected export-oriented sectors by reducing import tariffs and increasing subsidies. The new action plan will be published in early 2010 and will try to overcome limited take up of previous initiatives. Two critical points will be tackled in the new plan: the scaling up of subsidies, which will depend on resources allocated by the Treasury, and the definition of a closer collaboration with financial institutions, such as the Industrial Development Corporation (IDC), as providers of financial support. A new monitoring and evaluation programme will also be developed. The National Industrial Plan and the implementation of the forthcoming action plan are priorities in the 2010/11 budget. 

The international financial crisis together with domestic factors contributed to the volatility of the rand exchange rate over the past two years. During the second half of 2008, the rand depreciated by almost 50% against the US dollar. This weakness was caused by capital flight from emerging markets due to the international crisis, but also due to domestic factors, such as the increase in the current account deficit and internal political instability. The resumption of portfolio flows driven by higher gold prices and carry-trade buoyed the rand in 2009 pushing it back to its earlier peak. 

The government released capital controls for residents in order to reduce the volatility of the currency. The Central Bank did not intervene to support the currency when it depreciated during 2008, nor did it intervene when the rand appreciated during 2009. This neutral stance was in line with the free-floating policy implemented since the 1999 devaluation, but it triggered a controversial discussion about the risk of overvaluation. While the strength of the rand, together with increased wage cost pressures risk impeding the competitiveness of South Africa’s industry, any intervention to smooth the exchange rate could potentially be very costly and not necessarily effective. 

South Africa has been steadily accumulating foreign exchange reserves for over a decade. At the end of 2009, net foreign reserves stood at USD 38.96 billion, bringing import cover up to nearly 6 months, corresponding to a 16.5% improvement of the international liquidity position on 2008. The latter was boosted by higher gold prices (up 27.2% during the year) and the USD 2.45 billion Special Drawing Rights (SDR) allocation of the International Monetary Fund (IMF), in response to the global economic crisis.  

Total external debt in South Africa remains low, at USD 74 billion at the end of the second quarter of 2009. Almost half of this is denominated in rand, lowering the exchange rate risk. As a result of the continued appreciation of the rand against the dollar in the second quarter of 2009, South Africa’s foreign debt shrank in rand terms from ZAR 649 billion at the end of March 2009 to ZAR 574 billion at the end of June. Relative to the country’s GDP, the country’s external debt increased from 25.7% at the end of March 2009 to 28.5% at the end of June. 

While South Africa’s framework conditions for business rank favourably in international comparison and are much better than most other African countries, there is still much room for improvement. The country ranks 34^th out of 183 economies in the 2010 World Bank Doing Business report, losing two places since 2009, although this result was due to changes in relative ranking rather than a worsening of the country’s performance. The country is the second-best performer on the African continent, after Mauritius (17^th place) and ahead of Botswana (45^th).

South African economic activity is, however, still hampered by serious structural bottlenecks, partly inherited from the Apartheid regime. These prevent the private sector from operating effectively, raise costs of production and harm the competitiveness of South African products abroad. Among the most important constraints are: high levels of concentration in key economic sectors, undermining competitiveness; deficiency in network infrastructure, contributing to high transport and production costs; and, skills mismatch and labour market rigidities that fuel a harsh insider/outsider conflict in the context of extremely high youth unemployment rates. Crime and corruption complete the list.

2009 saw significant progress in several domains, the benefits of which are likely to improve competition within the country, thus lowering prices and improving productivity and the international competitiveness of South African firms over the coming years. A new Competition Amendment Bill was signed in 2009 and waits to be promulgated. While the proactive role of the Competition Commission was already authorised in 2006, through the possibility of initiating a complaint and an investigation this Act makes cartel conduct a criminal offence; authorises the competition court to carry out market inquiries without having to initiate a legal complaint and defines complex monopolies. 2009 also saw the conclusion of several inquiries into uncompetitive conduct leading to the prosecution of cartels in several sectors.

Despite some adverse effects during the global financial crisis, South African banks’ limited exposure to foreign assets kept them basically sound, liquid and well-capitalised. Foreign currency funding represents only 7% of bank liabilities. Conservative prudential rules, such as the timely New Credit Act of 2007/08, limited risky behaviour. The domestic economic downturn, job losses and consumer over-indebtedness, however, raised the ratio of bad loans to 6% and affected bank profitability. According to recent estimates, the level of household indebtedness at the end of 2008 was 83% of available income, declining only marginally to 79% in the third quarter of 2009.

The confidence crisis transmitted by an adverse global financial environment, coupled with bad domestic conditions, pushed banks to adopt highly pro-cyclical behaviour, especially in the early phase of the crisis. Credit to the private sector shrank by 1.6%, the strongest contraction since 1965. While it is not clear to what extent this weakness in bank credits was caused by lower credit demand (due to falling economic activity) or by supply constraints (credit crunch), there is evidence that several firms experienced short term financial troubles (including for trade financing), leading to production disruptions, job losses and firm closures.

The impact on financial markets was significant but temporary. Between July and November 2008, capital flight caused a 26% fall in the market value of the Johannesburg Securities Exchange (JSE), while credit spreads increased by 440 basis points. However, portfolio flows resumed quickly, starting in April, and spreads decreased. Overall, very few stocks were withdrawn from quotation, and the turnover remained high, confirming the JSE as a world-class stock exchange.

The new administration implemented deep institutional reforms, including the creation of a new Ministry for Economic Development and the creation of a Planning Cabinet, under the Presidency. Trevor Manuel, former Minister of Finance, was appointed head of the latter. This institutional arrangement has the potential of increasing the government’s planning capacity and improving policy implementation. However, the lack of skills in the public administration might threaten its success. Institutionally, a balance seems to have been achieved between continuity with the past and expectations of change. A new ministry of Monitoring and Evaluation was also created within the Presidency, with a mandate to find and fix inefficiencies within the public administration, and a new Infrastructure cabinet has also been established.

Important investment projects in infrastructure are underway and promise to remove bottlenecks. Following the energy emergency situation experienced in 2008, an important investment plan was implemented by Eskom, the state-owned energy utility. However, difficulties in finding funds resulted in a shortfall of ZAR 30 billion in its ZAR 343 billion plan and in the postponement of some projects. Beyond very short-term emergency measures, the government’s main focus has been on demand-side management (DSM) or energy savings. This is wise, as even without delays, new capacity would only be operational in 2012. To fill the gap, it is urgent to involve private suppliers (Independent Power Producers, IPP). However, due to artificially low pricing of energy, the economic incentives are not favourable for private actors to contribute to energy supply. Nevertheless, electricity prices have risen regularly since 2008, and an annual increase of 35% for the next three years is planned. In order to avoid the risk of power shortcuts during the World Cup in June/July 2010, a special agreement has been signed with surrounding countries to ensure electricity provision.

Amongst ongoing projects, Eskom is in the process of developing the 4 500-megawatt (MW) Medupi power station in Limpopo Province, for which the African Development Bank (AfDB) allocated a loan of USD 2.5 billion. The return to service of the three mothballed coal-fired power stations, Camden, Komati and Grootvlei is ongoing, while works on Ingula, a pumped-storage scheme, is scheduled to be fully operational by the middle of 2013. The Kusile Project, a coal-fired power station being built in Mpumalanga, worth about ZAR 31.5 billion, was delayed because of the economic crisis. This station, representing Eskom’s second biggest project, is now expected to be completed in late 2016.

Important improvements were realised in civil transport, in preparation for the World Cup. A public bus service was launched in Johannesburg, while the first phase of the Gautrain, the 80-kilometre mass rapid transit railway system in the Gauteng Province, was completed, linking the O.T. International Airport to Johannesburg. The second phase of the project connecting Pretoria is behind schedule, and is expected to only be ready by 2011.

A total of ZAR 38.3 billion is currently spent on both the national and provincial roads network, aiming to improve the country’s road network in both rural and urban areas, relieve traffic congestion and create a safer and more efficient public transport infrastructure. With the Gauteng Freeway Improvement Project (GFIP), construction is currently under way on the majority of the province’s roads.

In 2009, Transnet, the state-owned transport utility, completed the implementation of its ZAR 80.5 billion five-year plan to modernise and expand the freight transport chain. A new plan was launched in February 2010 involving a 10% budget increase. Transnet's commodity corridors, under the responsibility of Transnet Rail Freight (TFR), are likely to be the main beneficiaries of the investment programme. In South Africa, 80% of freight still goes by road, limiting export capacity (especially in the mining sector) and raising costs. TFR is investing (total amount ZAR 4 billion) to increase the export capacity of Sishen-Salsanha iron ore up from 47 to 60 million tonnes a year. A combined 90 million tonne channel, with 78 million tonnes for iron ore and 12 million tonnes for manganese, could be pursued.

Despite the above efforts, progress on the important rail connection delivering coal to the terminal at Richards Bay still lags, severely constraining port activity. The Phase V expansion project of the Richards Bay Coal Terminal (RBCT), the largest in South Africa for coal export, was delayed until end-2009 due to technical problems. On completion, the RBCT will have the capacity to handle 91 million tonnes of coal annually, up from the current 71 million tonnes. TFR is on target for the completion of the Ngqura rail terminal, a marshalling yard, and the main line construction to the hinterland, (four of these are currently under construction) and the remaining five are scheduled to be available by March 2010. The route links the new port to the City Deep rail terminal in Gauteng province, through Beaconsfield, in the Northern Cape.

The new deep-water port of Ngqura, deep enough to accommodate the largest new-generation container vessels, was opened in October 2009 by Transnet Port Terminals (TPT). TPT also plans to expand capacity at Durban port. The capacity at the state-of-the-art Pier One terminal will be doubled.

Nevertheless, many problems still hang over network infrastructure, especially relating to the regulatory framework and network management. There is great scope for improving productivity and lowering costs, and reform is becoming urgent. In particular, a clearer separation between ownership and regulatory activity should be introduced, with a better definition of roles and responsibilities among the relevant ministries, the regulatory authority and the board. Lately, concerns have been raised about the politicisation of key administrative positions. Improving regulation and policies would also facilitate private sector entry into infrastructure financing, thus speeding up and broadening infrastructure investment.

Over the last decade, tax revenues excluding import duties have more than tripled as a share of GDP. On the back of a near doubling of imports as a share of GDP, import duties (and transfers back to the South African Union, SACU) have also more than tripled. The number of registered payers of Personal Income Tax (PIT) and of Corporate Income Tax (CIT) has more than doubled. In 2009, PIT revenues represented more than half of tax revenues and, together with CIT and VAT over four-fifths of tax revenues. Thus, excise and property taxes only contribute slightly above 3% of GDP to tax revenues. Property taxes only play a minor role and total non-tax revenues are also marginal. The share of official development assistance (ODA) in total government revenues is relatively small and stable, below half a percent of GDP.

During the last decade, the country has introduced micro and small business taxes, a capital gains tax and Advance Tax Rulings. In an attempt to bring former offenders back into the tax net, tax amnesties were granted. The amnesty met success with large taxpayers but the pickup fell short of expectations with small businesses. The Income Tax Act is currently being rewritten with the intention of simplifying the tax code. A draft Tax Administration Bill was released to consolidate the various administrative provisions into one separate legislation, which should also improve transparency. The Customs and Excise Act has just been redrafted completely with the same intention.

Nonetheless, despite some recent improvements, the tax code remains complex and the compliance costs are high. Additionally, South Africa’s fiscal legitimacy is increasingly being challenged: the percentage of interviewees rating public services as performing well has fallen from a high of 81% in 2004 to a low of 58% in 2009.

Personal income tax ranges after basic exemptions from 18% to 40%. By and large, the personal income tax burden is perceived as fair, yet 25% of individual taxpayers pay 75% of all personal income taxes. Property taxes are charged and collected by municipalities based on property value. VAT is levied at 14% but some goods like basic foodstuffs are exempt or zero-rated.

The statutory corporate tax rate is 28% but there are some tax incentives and exemptions, which lower the effective tax rate. South Africa has a residence base of taxation with foreign taxes credited against South African tax payable on foreign income. Multinational Entities (MNEs) and non-residents are taxed on the profits and income they make in South Africa. A new dividends tax (replacing the Secondary Tax on Companies) and a Value Extraction tax have been introduced to combat avoidance structures. The mining sector has its own set of rules built into the tax code.

South Africa ranks very low – 23^rd out of 183 countries – in terms of the burden of taxes in the World Bank’s Doing Business 2009 survey. The total nominal business tax rate as defined in this study is 30.2% as compared with an average of 67.5% for sub-Saharan Africa and 44.5% for the OECD.

The Treasury is responsible for designing tax policy while the South African Revenue Service (SARS) is responsible for tax collection. There is, however, a close working relationship between Treasury and the law administration and policy division of SARS. SARS is present in all the nine provinces of South Africa and there are local revenue, customs and excise offices in each region. However, operations are managed centrally from the head office in Pretoria. A large business centre (LBC) was established in 2004, which focuses on large corporations, international tax arrangements including transfer pricing and wealthy individuals. The national small business office deals with small business and a tax practitioners unit has been established to regulate tax practitioners and collect feedback of the profession on proposed legislative changes.

The collection of custom duties, which is currently undergoing a major modernisation, also falls under the responsibility of SARS. The cost to revenue ratio of SARS has been low and stable at around 1%. With more than 15 000 employees, payroll costs represent more than 60% of SARS expenses. The other two substantial items are administrative expenses and professional and special services. SARS has an extensive enforcement division and has autonomy to hire skilled auditors on a contractual basis and also to set their wage rate at close to the market rate.

E-filing was introduced for payroll taxes in 2008 and represents almost half of all tax returns received. SARS (notably the LBC) has been quite successful in combating tax evasion but more efforts are needed to further improve tax compliance of medium-sized firms by better targeting and better customer service.

The informal economy is estimated to represent almost 30% of GDP and reduces the tax base although the potential to raise additional revenue from informal workers is limited given their generally low incomes. In 2009, with the intention of taxing informal activities, SARS introduced a micro-business tax for businesses under ZAR 1 million turnover per year. The tax is optional and exempts the business from other taxes. It is calculated only on the basis of turnover in order to simplify assessment but so far it has been slow to gain acceptance.

There is currently mounting pressure on SARS to reach revenue targets as a result of the downturn in the economy. A number of strict rules are being introduced in the legislation such as new administrative penalties and a “pay now, argue later” rule, which applies when taxpayers object to the assessed tax liability. SARS has been investing a lot in education and outreach in its fight against tax evasion and is now strengthening enforcement to improve compliance. An alternative option, advocated by tax practitioners, is “horizontal monitoring” characterised by more active mutual engagement between revenue authorities and businesses. Indeed, many businesses would be willing to pay somewhat higher taxes if at the same time their tax liabilities would become more predictable.

SARS has earned a high international reputation and is very active with respect to multilateral cooperation such as policy and capacity building engagements ranging from chairmanship of the OECD’s Forum on Tax Administration, through to regional and bilateral cooperation, to the India Brazil South Africa Revenue Administrations Working Group. SARS also led the way to the formation of the African Tax Administration Forum in 2009. 

Jacob Zuma, elected president of South Africa in April 2009, signals a shift in political influence within the ANC party. Although the new government is not likely to introduce big changes in the guiding principles of economic policy, more attention might be given to social and development issues, which are necessary to preserve social cohesion and attenuate rising tensions. Despite the victory, however, the share of votes going to the ANC declined for the first time since 1994, indicating that future support will depend on success in meeting expectations.

In 2009, several episodes of at times violent demonstrations occurred, highlighting the risk of rising social instability due to hardship in living conditions, especially in shantytowns. This evolution, ongoing since 2004, has been exacerbated by the numerous job losses during the recent crisis. Industrial strikes also intensified, mainly related to wage claims. These factors explain why the African Economic Outlook ‘civil tensions’ indicator remains strongly positive at 2.5, although it is decreasing.

The new government committed to make the fight against corruption a priority. This, coupled with the conclusion of President Zuma’s judicial vicissitudes before his election have sent positive signs to the business sector and to the population in general. Indeed, strengthening the fight against corruption is crucial, as South Africa has slipped in the international ranking of Transparency International from the 43^th position to 55^th between 2007 and 2009.

As for international relations, President Zuma’s era promises to be more introspective. While addressing domestic problems is of key importance, there is also a risk that the country’s leadership role in Africa could further weaken, at a moment in which the continent needs to strengthen its presence in international fora, such as the G20. 

Poverty remains stubbornly high in South Africa and inequality is rising, with half of the population living on 8% of national income. About 51% of the population lived in poverty in 1994, when the first democratic elections were held. The rate declined to 41% in 2007, according to government data. As a legacy of Apartheid, the poor are concentrated among the black population, in the townships and in former Bantustans, where most of the population was obliged to live. Despite the fact that the social and geographical separation introduced by the past regime still hangs over modern South Africa, a new black middle-class is slowly emerging, helped by the Broad Based Black Economic Empowerment (BBBEE) initiative and raising income. The current crisis is however likely to have a significant adverse impact on this fragile new social class, pushing part of it back into poverty.

In South Africa, one of the indicators of progress towards the achievement of the MDGs is the effective and equitable delivery of public services. While significant achievements have been made in areas such as access to basic water supply, improvement in service delivery remains a priority. Expenditure devoted to education and health will increase by 11% and 6.7%, according to the 2010/11 budget. However, more emphasis will be put on expenditure efficiency and quality. The quality of healthcare and education is extremely heterogeneous across districts. While universal primary education is an achievement in the country, the quality of the service is extremely poor, South African children performing worse than peers in most African countries when tested in literacy and maths. Secondary schools, in turn, fail to prepare students to the meet the needs of the economy.

The latest report from the South African Institute of Race Relations (SAIRR) stated that life expectancy fell from 62 years in 1990 to 50 years in 2009, while in most emerging and developed countries life expectancy continues to increase due to improved living conditions and better medical care. Child mortality figures have not shown significant improvement. The decline in life expectancy is largely related to HIV prevalence, one of the highest on the continent. South Africa has the highest absolute number of people living with HIV in the world, and it kills 1 000 people a day in the country. The government has made the fight against this illness a top priority and has announced new initiatives in the 2010/11 budget to combat the spread of the virus. Weak medical skills and poor funding still risk jeopardising these efforts. The objective is to cut infection by half by 2011 and to provide ARV treatment to 80% of people in need, up from the current figure of 45%. The intention is also to expand testing from 69% to 80% and to reduce mother-to-child HIV transmission to less than 5%. In order to help achieve these objectives, the government allocated an additional USD 840 million over three years.

The economic recession had a dramatic impact on employment. The estimated number of formal jobs lost year on year to September 2009 was around 500 000, with the decline concentrated in mining and manufacturing. So far, the downward trend of employment has not been reversed. A job-rescue plan was elaborated by the government including the expansion of the public works programme, preventing dismissals by offering training, with half of the costs financed through a special state fund. The take up, however, turned out to be very limited. The elaboration of a comprehensive plan was also launched through the National Economic Development Labour Council (NEDLAC), an institution comprising trade unions, private sector organisations, civil society and government. The process was very long and by November 2009 this plan had not yet been launched.

At the end of 2009, 24.3% of the population, mainly black youth, were unemployed. When a broader definition of unemployment is used the rate is about 40%. The modern sector of South Africa’s economy requires mainly higher skilled workers, while a large share of the labour force is unskilled or low skilled, due to the poor quality of education and vocational training. While labour regulations are considered flexible by OECD standards, their practical application causes rigidities. As a result, reservation wages are often higher than workers´ productivity and dismissal costs are high. In order to create additional jobs, the government is exploring the introduction of wage subsidies to stimulate labour demand, and also plans a comprehensive social security scheme. In the South African context, the latter is a necessary step before introducing any further flexibility into the labour market.

Rural development has also become one of the government’s priorities because of its job creation potential. However, the slow pace of the land reform process and its social and economic costs made it impossible for the government to achieve the objective of transferring 30% of land to black farmers by 2014. The government might postpone the deadline to 2025.