South Africa

AFTER SEVERAL YEARS OF ROBUST economic growth of around 5 per cent, growth dropped to 3.1 per cent in 2008. Economic activity was adversely affected by severe energy shortages, slowing domestic consumption and the worsening world recession. In 2009, growth is expected to weaken further to 1.1 per cent while inflation should be curbed as the oil- and food-price increases of the first half of 2008 are reversed. Although its banking system was not directly affected by the international financial crisis, South Africa was affected by the fall in global demand for its mineral exports. Depreciation of the rand and the decline in the price of oil, however, are expected to ease pressure on the trade balance in the medium term.
The prudent macroeconomic policies of the last decade have provided room for more expansionary monetary and fiscal responses to the slow-down and for continued increases in public investment in infrastructure and social services. If the rebalancing between consumption and investment started in 2007 is continued, the growth rate is likely to rise.

The recent slow-down is amplifying South Africa’s development challenges. Infrastructure has suffered from 20 years of under-investment and lack of competition. In addition, unemployment, lack of skills and poverty remain dire problems. The Accelerated and Shared Growth Initiative for South Africa (AsgiSA) launched in 2006 aims at halving unemployment and poverty by 2014. Despite substantial funding, the results of AsgiSA have been limited by the weak capacity of the various ministries and agencies and a lack of co-ordination among them.

In 2008, the economy grew by 3.1 per cent, well below the average 5 per cent rate of the previous three years. The slowing of economic activity was the result of several negative factors: unprecedented power shortages; the hike in global oil and food prices in the first six months of the year; the slow-down of private consumption; and the decline in foreign investment and in exports due to the world financial crisis. Growth is expected to drop further to 1.1 per cent in 2009 due to continued contraction of domestic demand. It is anticipated to rebound to 3.5 per cent in 2010, however, thanks to the stimulus expected from the soccer World Cup.

Good and timely rains boosted agriculture, with output increasing by almost 18.8 per cent in 2008, as against the corresponding period in 2007. Agriculture was led by horticulture, animal products and especially maize, the output of which jumped by around 70 per cent. Rising prices spurred planting and expansion of cultivated land. Although agriculture only accounts for a 3.2 per cent share of GDP and a 5.2 per cent share of employment, it is one of the priority sectors of AsgiSA. The new Land Use Management Bill, designed to simplify the regulatory framework for land use, was finalised in 2007 and should make investment in agriculture more attractive.

The mining sector accounts for 8.4 per cent of total value added and is led by gold (25.7 per cent of total production), platinum (27.6 per cent) and coal (20 per cent). After declines of 20 per cent and 12.4 per cent in real fixed investment in 2004 and 2005, respectively, mining investment increased by 48.2 per cent in 2006 and by about 30.8 per cent in 2007. A marginal 1.2 per cent growth in fixed investment was recorded in 2008 as the impact of electricity-supply curtailment and the unfolding global economic crisis affected that year. Higher levels of investment have not yet translated into increased production and, following an already turbulent 2007, mining output declined by 6.5 per cent in 2008, due mainly to electricity shortages, tighter mine-safety procedures and steeply falling prices. Gold, platinum and diamond output slumped, but iron ore and coal grew moderately. To respond to slowing demand, several mines started cutting production in the last quarter of 2008, while the fall in the international prices for diamonds and platinum also put new investment into question. A new platform for the sector will have to be defined if South Africa wants to take better advantage of the next upward cycle in commodities and boost its exports.
The construction sector is booming because of infrastructure projects under way in transport and electricity, and projects related to the hosting of the soccer 2010 World Cup, including several new stadiums and hotels. On the other hand, residential building has suffered from higher mortgage interest rates and declining demand. Overall, construction grew by 14 per cent in 2008, after a 17.1 per cent growth in 2007, and is expected to remain dynamic in the coming years.

Manufacturing in South Africa remains constrained by low productivity and capacity constraints (near-record capacity utilisation of 85.3 per cent as of September 2008). Manufacturing output increased only by 1.2 per cent in 2008, down from 4.5 per cent in 2007. This somewhat disappointing outcome reflects electricity shortages and declining domestic demand. Manufacturing output fell in the second half of 2008 and is expected to remain weak in 2009. In addition, the automotive sector in particular has suffered from falling domestic demand since mid-2007, as well as from the global crisis in the auto industry. On the other hand, the new Automotive Production and Development Programme ensures continued government support through to 2020, with production subsidies of ZAR 870 million over 2009/11. Depreciation of the rand could also mitigate the adverse consequences of the deterioration of international economic conditions.

Tertiary industries account for almost 65 per cent of GDP led by financial services, and wholesale and retail trade. Following a growth rate of 5.4 per cent in 2007, the tertiary sector grew by only 1.5 per cent in the first three quarters of 2008, with weak performances in the leading sectors as well as in insurance, real estate and business services.

The year 2008 was characterised by a continued rebalancing between investment and consumption, a process started in 2007. At the current pace, the objective of reaching an investment-to-GDP ratio of 25 by 2014 is likely to be achieved earlier than expected. Household-consumption growth slowed sharply as a result of higher interest rates, high indebtedness and tighter lending conditions triggered by the 2007 National Credit Act and exacerbated by the international credit crunch. A negative growth rate in household consumption will likely be recorded in 2009 as a consequence of decreasing disposable income due to rising unemployment and is projected to rebound to 2.8 in 2010. Public investment expanded by 15 per cent in 2008 and is expected to continue expanding briskly at 12.5 per cent on average in 2009-10, led by preparations for the 2010 World Cup and large infrastructure projects. Representing 72 per cent of total investment in 2008, private investment grew at a solid 4 per cent in 2008 but is expected to suffer from international liquidity restrictions in 2009 before recovering in 2010. Exports and imports both stalled in 2008 and are projected to remain weak in 2009 due to low foreign and domestic demand.

South Africa’s prudent fiscal policy since the end of Apartheid has resulted in a strong revenue base and low levels of public debt, allowing expansionary responses to the current slow-down in the form of increased social spending and public investment.

Total revenue and grants increased to 27.1 per cent of GDP in 2007/08 from 23.8 per cent in 2000/01 thanks to rising incomes, improvements in tax collection and the widening of the tax base, particularly for income taxes. In 2008/09, decreasing incomes are expected to cause a decline in revenues to 26.4 per cent of GDP.

Expenditure in 2008/09 is expected to increase to 27.4 per cent of GDP, with social grants, wages and recruitment increasing by 17 per cent, in step with nominal GDP. Social spending, representing 53 per cent of total expenditure, is expected to increase by 17 per cent; investment spending, mainly led by state-owned enterprises (SOEs), represents 8 per cent of total expenditure and is expected to increase by 37 per cent.

As a result of the expansionary policy implemented since the end of 2008, the 2008/09 fiscal balance is likely to record a 1 per cent deficit instead of the planned surplus of 0.1 per cent of GDP, following a 0.9 per cent surplus in 2007/08.

The new budget law announced in February 2009 confirmed the priorities for macroeconomic policy set in 2004 and renewed in the October 2008 Medium Term Budget Policy Statement (MTBPS), which are to boost economic growth and employment while increasing funding for poverty reduction.

Given the worsening economic conditions, the surplus forecasted in the 2007 MTBPS for the period 2008/10 seems unattainable. In 2009/10, South Africa is expected to have a fiscal deficit of 3.7 per cent of GDP due to continued increases in social spending, job creation and investment in infrastructure. Spending will slow down in 2010/11, reducing the expected deficit slightly to almost 3 per cent of GDP. South Africa’s deficits are not a major concern, given the state of the economy and the moderate level of public debt, at around 23 per cent of GDP in 2008, suggesting ease of financing in the domestic markets.

In 2007, 12.4 million people benefited from social-assistance grants. Thanks to the recent measures included in the 2009 budget involving an increase of ZAR 13.2 billion, the number of beneficiaries will exceed 13 million. The government is planning to introduce a new social-security system, to be financed by a mandatory tax. The current economic situation, however, might delay its implementation to 2010.

Despite an expected overall budget execution of over 90 per cent, execution remains erratic at local and provincial levels, especially for capital investment, with huge under-spending as well as over-spending. In order to improve the efficiency of public expenditure, a monitoring and evaluation system was introduced in 2008. The government is also pursuing devolving expenditure management to municipalities and provinces.

Due to a weakening economy and a deteriorating external position coupled with uncertainty linked to the 2009 elections, Moody’s and Fitch, two major credit-rating agencies, revised South Africa’s outlook from stable to negative but have so far kept their ratings unchanged. During the first three quarters of 2008, the country risk premium on South African government bonds over US Treasury bonds widened, but then narrowed by 25 per cent from July 2008 (681 basis points) to end-November 2008 (519 basis points).

Average inflation rose sharply in 2008 to 11.5 per cent and has remained well above the upper limit of the 3-to-6 per cent target range since April 2007, mainly due to domestic pass-through of the surge in world oil and food prices. Increases in excess of 20 per cent in administrative prices, wage increases, a weaker rand and capacity constraints have also contributed to inflationary pressure. In the last months of 2008, inflationary pressure eased, thanks to the moderation of the prices of oil and other commodities, and to the slow-down of aggregate demand.

Monetary policy continued to be restrictive in early 2008, with the repurchase (repo) rate increasing 1 percentage point to 12 per cent, bringing the cumulative increase in interest rates to 5 percentage points since 2006. In December 2008 and February 2009, the South African Reserve Bank (SARB) lowered the repo rate by a cumulative 1.5 percentage points to 10.5, reflecting the fact that lower growth replaced inflation as the primary concern. Further cuts are likely.

In 2009, the inflation rate is likely to continue edging to lower levels thanks to a moderating domestic demand and falling oil and commodity prices, and despite wage increases and increased administrative prices for energy. Inflation is expected to average 6.7 per cent in 2009 and 5.9 per cent in 2010. In February 2009, the national statistical office, StatSA, rebased and reweighted the reference index from the CPIX (consumer-price index – CPI – excluding mortgage-interest cost for metropolitan and other urban areas) to the CPI to include mortgage costs. Projected inflation could decline by 0.9 per cent during the first quarter of 2009 due to this adjustment.

If inflationary pressure continues to recede, the SARB will probably institute further interest-rate cuts during the first half of 2009 to stimulate economic activity. Household indebtedness remains at all-time record highs at around 76 per cent of disposable income in 2008, although it has been declining due to high lending interest rates.
The growth of credit to the private sector slowed to 17 per cent in September 2008, down from 21.3 per cent in June due to the decline in demand for mortgages and stricter consumer-credit rules dictated by the 2007 National Credit Act. In contrast to 2007, credit to the corporate sector has also contributed to the reduction of private-credit growth in 2008.

The 12-month growth rate of broad money (M3) was halved to 15.5 per cent in September 2008 as a consequence of shrinking credit. The rand was volatile in 2008. The heightened risk aversion in global markets put downward pressure on the rand, which depreciated by around 30 per cent against the US dollar between July 2008 and December 2008.

High oil and food prices during the first half of 2008 drove up the import bill. Export volumes were adversely affected by the energy shortages in early 2008, which cut mining production drastically, preventing South Africa from taking full advantage of the high prices of gold, platinum and diamonds. The effect of the fall in oil prices on imports in the second half of 2008 was more than offset by the fall in prices of export commodities. The price of platinum, the largest export, fell by about 60 per cent between March 2008 and January 2009. As a result, the current account continued to deteriorate, despite the sharp depreciation of the rand to 7.8 per cent of GDP from 7.5 per cent in 2007, driven by the worsening trade balance. Income and service balances deteriorated marginally, due to rising repatriations of dividends, and payments for technical and other production-related services.

The current-account deficit is projected to remain high in 2009 and 2010, with a slight improvement in 2009 due to a temporary drop in profit repatriations. The service deficit will decline in 2010 thanks to tourism inflows linked to the soccer World Cup. The surplus in the capital account has been largely sufficient to finance the shortfalls in the current account. In the first 9 months of 2008, however, South Africa experienced a net portfolio outflow of ZAR 0.9 billion, against a net inflow of ZAR 107.4 billion in 2007. This has been compensated by new loan financing and repatriation of foreign assets by the banking sector, making it possible to maintain the balance in surplus and to raise international reserves to almost USD 34.1 billion at the end of December 2008, covering more than twice the country’s short-term foreign-currency-denominated external debt. However, at the end of January 2009, this level had fallen to USD 30 billion.

South Africa remains overly dependent on volatile portfolio flows and has been less successful than similar emerging economies in attracting long-term external financing such as foreign direct investment (FDI), which represents only 20 per cent of total financial flows. In 2008, FDI inflows increased thanks to the sale of Vodacom, the second largest mobile operator, to the British Vodafone.

South Africa’s total outstanding foreign debt increased from 26.6 per cent of GDP at the end 2007 to 29.6 per cent at the end of 2008 and is expected to exceed 32 per cent of GDP by 2010. The ratio of rand-denominated debt to total debt increased slightly in 2008, from 42.0 per cent to 43.4 per cent.

The trade-liberalisation programme pursued by South Africa since 1994 has resulted in a more open economy. In 2007, total exports and imports of goods and services amounted to 31 per cent and 35 per cent of GDP, respectively, compared to 23 per cent and 22 per cent of GDP in 1995. Between 1994 and 2002, import penetration and export-orientation ratios rose in all 28 sectors of the standard industrial classification; in 10 of these sectors export orientation more than doubled. Nonetheless, South Africa has not yet experienced the long-hoped-for export-led growth boom in labour-intensive manufacturing

About half of South Africa’s imports enter duty free, and the unweighted average applied tariff (excluding rebates) was only 8.2 per cent in 2006, rendering the tariff regime on aggregate reasonably liberal by developing-country standards. South Africa’s tariff structure does remain complex, however, with 10 per cent of tariff lines classified as tariff peaks (those exceeding 15 per cent) and 9 per cent representing more than three times the average applied rate. These high rates are residues of the import-substitution strategy of the Apartheid era. Under the aegis of the new National Industrial Policy Framework (NIPF) adopted in 2007, a review of the tariff structure is under way. This exercise is apparently oriented towards reducing tariffs on upstream inputs in sectors identified as strategically important and on raising tariffs to bound levels for some final goods. Details are scarce, as the trade-policy reference group advising the Department of Trade and Industry is conducting its work behind closed doors. Critics, including some in the Treasury Department, argue that such a strategy would increase effective rates of protection for final goods, exacerbate the complexity of the system and impede export growth. The Treasury’s position is that additional trade liberalisation and greater labour-market flexibility to enhance South Africa’s export diversification would be more beneficial than protectionism and costly subsidies. The change of administration is likely to affect the industrial-policy strategy.

In 2008, the only concrete measure to implement the NIPF was the Automotive Production and Development Programme (APDP). The APDP will be in effect from 2013 to 2020 and will replace the Motor Industry Development Programme (MIDP), which expires at the end of 2012. The APDP removes the MIDP export subsidies, banned by the WTO, and replaces them with production subsidies, import-duty exemptions and protective tariffs. Although successful in fostering production and exports, MIDP was costly. The cost of the new APDP is difficult to determine due to its complexity.

In February 2007, South Africa joined the negotiating body of the Southern Africa Development Community (SADC) as a participant in the negotiations with the European Union (EU) over an Economic Partnership Agreement (EPA), with the understanding that South African access to the EU market would remain distinct from that of the rest of the SADC group, owing to the country’s status as a more developed economy. South Africa’s trade with Europe is currently governed by a bilateral trade, development and co-operation agreement. In negotiating the EPA, South Africa put up a strong resistance to the inclusion of so-called “new generation” issues, consisting of services trade, investment, competition policy and government procurement. By the interim deadline of mid-December 2007, all members of the SADC group except South Africa and Angola had signed the interim EPA. As Botswana, Lesotho, and Swaziland have opted to negotiate the new-generation issues, notably services, the EPAs have put an intense strain on the viability of the South African Customs Union, which included these three countries and South Africa.

Some improvement has occurred in the business climate. In the World Bank’s 2009 Doing Business indicators, South Africa ranks 32nd, up from 35th in 2008. While public monopoly persists in transport and energy, court decisions finally launched the long-delayed liberalisation in telecommunications, opening the sector to private competitors. In addition, amendments to the competition law are under way, giving authorities more power to prosecute anti-competitive behaviour.

The Black Economic Empowerment (BEE) initiative was launched following the end of Apartheid in order to provide greater opportunities for black South Africans and redress the legacies of Apartheid. BEE requires businesses to have representation of disadvantaged groups in higher-level positions but has been criticised as primarily benefitting a small group of well-connected people. BEE was revised in 2003 with the Broad-Based Black Economic Empowerment (BBBEE), increasing emphasis on affirmative action, corporate responsibility and skills development. Common codes of conduct were formulated in 2007, with precise criteria and methods to measure corporate-compliance efforts and a requirement for all firms to comply by 2009. Sectoral charters, elaborated in 2002, are currently under revision and should be adopted by March 2009. While necessary and widely accepted by the private sector, compliance with BBBEE remains costly and complex, and the government has failed to provide firms with adequate assistance to ease the process. Small and medium-sized enterprises (SMEs) are exempt from some of the BBBEE requirements.

South Africa’s banking system is well-regulated and has limited exposure to the toxic assets damaging financial firms in developed countries. Capital controls have been liberalised but still remain in effect and have helped to insulate the South African economy from the turmoil in global financial markets. Although bad debts have gone up from 1.1 per cent in 2007 to 3 per cent in 2008 due to household over-indebtedness and rising borrowing costs, they are still manageable, and debt/income ratios are now declining. Introduced in 2007 and including new prudential rules in line with the Basel Capital Accord (Basel II), the National Credit Act constrains risk taking by financial institutions. The slow-down in private-credit expansion in the last part of the year (to 17.5 per cent in October, down from 24 per cent at the beginning of the year) has reduced the profitability of banks.

The government initiated a large-scale USD 56.8 billion infrastructure-development plan through to 2010, related to the upcoming 2010 soccer World Cup and the electricity shortages. At the beginning of 2008, power blackouts paralysed the economy for several weeks. Although it had been foreseen some 10 years ago, the current energy crisis reflects lack of investment combined with rising demand, which has eroded South Africa’s relatively developed infrastructure.

State-owned Eskom dominates the electricity sector, producing about 96 per cent of the electricity used in South Africa. The rest derives from self-producers and municipalities. Distribution networks are also owned by Eskom and the municipalities. With a large surplus capacity until recently, Eskom’s prices were among the world’s lowest for many years. New investment in plants and grid by Eskom was forbidden for almost a decade, however, in a failed attempt to foster private-sector participation. With low prices and a difficult business climate, foreign investors did not find South Africa’s electricity market attractive. The situation deteriorated sharply in 2007 and 2008, when power cuts increased and there were forced cutbacks in mining and manufacturing output, typical in much of Africa, but shocking in South Africa.

The government has now elaborated an accelerated development plan for the energy sector, including greater use of renewable energy, strengthening of the grid, efforts to attract Independent Power Producers (IPPs) and government investment in energy production. Prices increased by over 52 per cent in 2008, and further increases are slated for 2009. However, a 2 100 MW deficit is expected to persist until 2012.

Unfortunately, the global financial crisis has made it difficult for Eskom to secure financing for its investment plan. Following the downgrade of its credit rating in August 2008, Eskom has been forced to scale down its projects. In early December 2008, the company announced that it had cancelled a USD 5 billion project for a new nuclear power station. A USD 346 million loan from Germany’s KfW IPEX-Bank and a USD 500 million grant from the African Development Bank were secured, and a USD 5 billion loan from the World Bank is under consideration. Additional funds have been allocated to Eskom by the government 2009 budgetary law, but a shortfall remains.
Although transport infrastructure is still the best in the continent, it suffers from uneven geographic coverage dating from the Apartheid era and exacerbated by two decades of under-investment. Insufficient rail connections to the coast, the gateway to the rest of the world, overburden the already stressed road network, while ports lack the capacity to handle rising trade. As a result, freight transport costs are high, at 15 per cent of GDP, frustrating South Africa’s ambition to be the region’s central logistics hub and impeding the export-led growth strategy.

Transnet, the parastatal enterprise responsible for rail and maritime transport, has received ZAR 78 billion from the Treasury to invest in rail and ports in the next three years. Transnet Freight Rail (TFR) alone spent ZAR 9.2 billion on capital investment in 2008. Currently, more than 80 per cent of all freight transport within South Africa is by road despite the higher costs. The mining sector will be one of the biggest beneficiaries of improved rail transport. The recently announced Sishen-Saldanha rail project of ZAR 7.3 billion over the next five years will expand capacity and develop the Saldanha iron ore terminal.

Transnet’s National Port Authority is budgeting ZAR 28 billion for improvements in South Africa’s major ports over the next five years. Ports handle approximately 98 per cent of merchandise trade. Container vessels serviced by South African ports are small, as the ports do not have the capacity to handle bigger cargos. This, together with high inland transport costs, forces shipping lines to make multiple calls in several ports, raising overall costs and risking delays. Projects include ZAR 2.6 billion to widen and deepen the entrance channel of the port of Durban (currently handling 65 per cent of total vessels) to increase its capacity by 42 per cent; the development of Ngqura, a new deep-water port at the Coega Industrial Development Zone near Port Elizabeth; the expansion of the port of Cape Town, doubling capacity by the end of 2012; the Richards Bay coal terminal completed ahead of schedule and within budget; and new works are foreseen.

The World Cup in 2010 has also increased attention to the problem of passenger public transport. The first phase of the ZAR 25 billion rapid rail project, the 80-kilometre-long Gautrain, linking O.T. Tambo International Airport, Johannesburg and Pretoria, is nearly complete. The first trains should start running by 2010 and the project will be completed by 2011, dramatically reducing the commuting time between Pretoria and Johannesburg. Another intervention on the same axes, a toll highway replacing the current N1 freeway, is slated for completion in 2009. The first phase of the Johannesburg Bus Rapid Transit (BRT) system is scheduled to start in June 2009, but may be delayed as the tender for bus suppliers was postponed to the end of 2008. An expansion of major South African airports is also ongoing. South African Airlines, whose restructuring is expected to end in March 2009, will open new international and intercontinental routes.

Telecommunications infrastructure in South Africa is good by African standards, in particular for mobile phones. Penetration rates are among the highest in the continent for all types of telecommunications and the Internet. While the mobile-subscriber growth rate was extremely high in the last few years, growth in fixed-line subscriptions, hence in Internet availability, was much lower. Mobile-line penetration rates approach 100 per cent, while fixed lines are below 55 per cent. The Apartheid regime built the fixed-line backbone to reach the white population, but limited progress has occurred in extending it to the rest of the population.

National telecommunications policy objectives were defined in the 1990s by the Department of Communications. These objectives include access to telephones within 500 metres of residences, availability of fixed-line or cellular services in every household by 2010 and access to the Internet for at least 25 per cent of the population, also by 2010. The first two objectives were reached thanks to the growth of mobile telephones, but the number of Internet users was estimated at only 4 million in 2007, about 8.2 per cent of the population. The Universal Service and Access Agency of South Africa (USASA) was created in 1997 to increase Internet use but has not been effective, nor have their community-centre projects.

Despite the continued growth experienced by the sector, the potential of ICT to contribute to growth and development has not yet been realised, as it is hampered by policy failures and regulatory burdens. If access does not seem to be a problem for most of the country, at least in the area of telecoms, the structure of the market and its regulation has kept communication prices unnecessarily high.

South Africa has adopted a policy of managed liberalisation, with gradual liberalisation and limited competition. This has also reflected AsgiSA’s emphasis on the role of the state and of SOEs in driving economic growth, as a consequence of the view that the market alone was unable to redress the distortions introduced by the Apartheid regime. As a result, there have been high levels of state ownership and control.

Skill shortages and poor co-ordination, including between the regulator and the Competition Commission, prevented the state from delivering the expected results. After several waves of reforms, there were still gaps in the regulatory framework (no wholesale regulation), a slow fixed-network extension and the creation of private monopolies, resulting in very high communication costs. The regulator, Independent Communications Authority of South Africa (ICASA), set up in 2000, suffers from a lack of capacity and from interference from the Department of Communications, resulting in procedural complexity and delays in licensing.

Nevertheless, some liberalisation has occurred, starting with the 1996 Telecommunications White Paper. The partial privatisation of Telkom, the state-owned incumbent for fixed-line voice services and network (public switched telephone network) occurred one year later. As part of a second wave of reform, the Telecommunications Amendment Act of 2001 gave Telkom exclusive control over all fixed-line telecommunications until end of 2003, after which a competitor for service provision and network building was to be introduced. Nonetheless, several failed licensing rounds and delays in granting and issuing the licence to a second network operator, the Indian-owned Neotel, postponed Neotel’s entry to 2006, and Telkom still holds a dominant position in 2009.

The government did not intend to provide Telkom with a monopoly on Internet-service provision, but the company was the only one allowed to own and build its own network, requiring any Internet-service provider to lease network connections from Telkom. The limited expansion of the fixed network, moreover, constrained the introduction of enhanced and broadband services.

A third wave of reforms was launched in 2006, with the Electronic Communications Act (or Convergence Bill), superseding previous legislation and setting up a regulatory framework and licence regime intended for the convergence of broadcasting and telecommunications infrastructure. According to these new regulations, conversion to universal licences is necessary because of a new horizontal market structure now allowing Internet service provision, network building and broadcasting. The process stagnated, however, until 2008, when several court decisions mandated that ICASA issue licences to all sector operators, finally introducing more competition and paving the way for more investment.

It was decided in 1998 that a duopoly would be permitted for mobile phones, with a third additional licence to be issued within two years. The duopoly consisted of Vodacom, originated in the 1980s and partially owned by Telkom, and MTN, a private South African provider. In 2001, a third operator, Cell C, owned by a Dubai-based company, was licensed after protracted disputes around alleged irregularities in the bidding process.

Vodacom controls 51 per cent of the mobile market; MTN has 35.8 per cent and Cell C 12.3 per cent. Cell C’s late entry has made it difficult for it to increase its market share because of insufficient infrastructure coverage and high interconnection fees. In 2006, a joint venture between Cell C and British Virgin Group gave birth to Virgin Mobile South Africa, which is still small, but expanding steadily.
The technology employed for mobile telecommunications has rapidly evolved from early analogical technology to Global System for Mobile communications (GSM) with international roaming capacity. Today, South Africa is the only country in the continent to have begun deployment of third-generation Universal Mobile Telecommunications System (UMTS) technologies, allowing faster connections and data transmission.

Access to the Internet is available through mobile phones, satellite, Assymetric Digital Subscriber Line (ADSL) and fibre-optic cable. South Africa Telkom owns, together with France Télécom, the underwater cable Sat3, running along the west coast of the continent. The price for other countries to buy access to the broadband is well above cost, at around USD 2 000 per megabyte, which inhibits its use. Completion of two new underwater cables in south-east Africa – SEACOM and the Eastern Africa Submarine Cable System (EASSy) – will probably break this monopoly. With the issuing of universal licences, every operator can now lay down its fibre-optic cable, and three more projects are underway.

South Africa has been a pioneer in innovative telecommunications usage, in particular for e-banking. Two important e-banking initiatives exist. Since mid-2005, MTN has offered an e-banking service targeted at the middle class, which allows people to transfer money using a bank account opened at Standard Bank. A pilot initiative is currently under way to reach out to rural areas. WIZZIT offers a similar service targeting the unbanked lower classes, with the support of the South African Bank of Athens. The latter initiative had attracted several hundred thousand clients by early 2009.

The political dispute within the ANC over the succession of Thabo Mbeki ended with the victory of Jacob Zuma in December 2007. President Mbeki was forced to resign in September 2008 over alleged high-level interference in Zuma’s indictment on corruption charges (dropped before elections). The subsequent split within the ANC led to the creation of a new party, the Congress of the People (COPE), in December 2008. Elections are planned for 22 April 2009.

Although Kgalema Motlanthe, serving as caretaker until the elections, is attracting increasing support in the ANC, at the time of going to press Zuma was considered the front runner. A Zuma presidency is not likely to entail a major shift in economy policy, as the importance of fiscal- and monetary-policy discipline is widely recognised.

Although this split in the ANC is introducing a certain degree of instability, it is also indicative of South Africa’s maturing democratic system.

South Africa ranks quite well in Transparency International’s Corruption Perceptions Index, at 54th out of 180 countries. In 2008, anti-corruption actions were reinforced in public tenders, especially in the construction sector. South Africa’s Construction Industry Development Board, the construction sector regulator, began suspending fraudulent contractors from its register of eligible companies. In October 2008, the governance index published by the Mo Ibrahim Foundation ranked South Africa the fifth best-governed African country.

In 2008, the presidency of South Africa produced a review of policies since 1994. In addition to the economic achievements of solid growth while maintaining macroeconomic stability, the review notes progress in democracy building, governance, poverty alleviation, service delivery, skills development and crime prevention. Nevertheless, considerable shortcomings remain in all these areas. In view of this, the new budget law for 2009/10 allocates additional funds to priority sectors.

Public services have certainly improved, with substantial increases in funding. Despite an annual increase of 14 per cent in the budgetary allocation since 2006, several studies point to the poor performance of primary- and secondary-school systems, which fail to provide useful employment skills, hence prolonging the severe skill gap inherited from Apartheid, and hampering economic development and reduction of unemployment. The gap between disadvantaged (black) and advantaged (white) schools persists, with dramatic differences in repetition and drop-out rates.

The 20 per cent real increase in spending in 2008 for health care since 1998 has translated into an increased number and upgrading of health facilities. As a result, more than 1 600 hospitals were built, and 95 per cent of South Africans now live within 5 kilometres of a health centre. A new strategy was adopted in 2006 to address the chronic shortage of health professionals. Health indicators have improved in some areas, for instance in that of malnutrition of children, but have stagnated for others, such as in that of child and infant mortality, and even deteriorated for some, such as for adult mortality. In addition, huge provincial disparities persist in terms of the availability of medical staff and the quality of services, while the costs of treatment are generally high.

South Africa has one of the highest HIV/AIDS prevalence rates in the world. The results of the national HIV survey among pregnant women released in 2008 do show an encouraging decline in prevalence rates (15.9 per cent in 2005 to 13.5 per cent in 2006 among women younger than 20 years, 30.6 per cent in 2005 to 28.0 per cent in 2006 among those between 20 and 24 years). In KwaZulu-Natal, prevalence is still 39.1 per cent, while in the Western Cape it is 15.1 per cent. After years of government disregard for scientific evidence about the causes of the disease and inadequate efforts to fight the disease, improvements are expected with the departure of Mr. Mbeki and his widely criticised views on the causes of HIV/AIDS. The share of patients with advanced HIV infection receiving anti-retroviral therapy increased to from 46 per cent in 2006 to 55 per cent in 2007. These improvements still fell short of the intermediate objectives of the 2007-11 National Strategic Plan (NSP) of 80 per cent coverage by 2012. Launched in 2007, NSP implementation is already delayed, while Global Fund disbursements were blocked due to the Ministry of Health’s lack of compliance with its selection criteria.

The effective delivery of transfers to over 12 million people in 2007 for child support, unemployment and pensions had an important impact on mitigating poverty. However, using a ZAR 322 poverty line, the poverty rate fell by only 7 percentage points, from 63 per cent in 1995 to 56.3 per cent in 2005. The absence of an official poverty line is at the source of a multitude of statistics and contributes to generating confusion and some frustration. StatSA, the national statistical office, is currently working on the formulation of a national poverty line.

The government established a land-restitution scheme in 1994. The target is to transfer 30 per cent of white-owned agricultural land by 2014. As of 2008, however, only between 5 and 7 per cent of land had been transferred, raising doubts on the achievability of the target. In addition, the absence of post-settlement support has resulted in the failure of many land transfers, in addition to lowering productivity. A further problem is that most urban black South Africans are highly concentrated in suburban townships, far from economic opportunities; high transport costs and crime inhibit job searching in townships.

South Africa has long had to contend with both high unemployment of unskilled workers and shortages of skilled workers. By March 2008, the unemployment rate (narrow definition, not including discouraged job seekers) was still at 23.5 per cent, despite several years of sustained economic growth. The current economic downturn is likely to push up unemployment. The 15-to-35 age group represents two-thirds of the unemployed, most of them being women. Unemployment among black South Africans is as high as 30.5 per cent. Labour absorption in agriculture and manufacturing has been disappointing. The Department of Public Works plans to expand its programmes, set to generate 4 million new jobs in the next five years.

Development of skills is a high priority. Businesses and government agencies are required to conduct skills surveys to determine the education levels of their staff and to institute skills-development plans. Fees that companies contribute to the Skills Development Levy can be rebated when satisfactory training programmes are set up. Despite some shortcomings, these programmes are promising.

Recent demonstrations of discontent, sometimes assuming violent tones, are a reflection of South Africans’ increasing anger about the failure of economic growth to translate into greater employment, higher incomes and improved public services. Xenophobic attacks in the first half of 2008 against several migrants from nearby countries are a dramatic manifestation of the public’s anger. The government response has been slow, and fears of social instability linger despite fewer attacks in the second half of 2008. The economic downturn could exacerbate social tensions.