south africa full pdf country note

8/13/2019 South Africa Full PDF Country Note

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www.africaneconomicoutlook.org

South Africa2012


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South Africa

The South African economy is estimated to have grown by 3.1% in 2011, up from 2.9% in 2010, but growthis expected to slow to 2.8% in 2012 because of the continued weakness in the global economy anddomestic structural constraints.

The business regulatory environment remains conducive, although lack of capacity in the public sector and

deepening divisions within the governing coalition over the governments policy direction present adownside risk in the medium term.

In spite of a comprehensive approach to eradicating extreme poverty and hunger through social protectionmeasures, poverty and inequality still remain high and the country remains one of the most unequalsocieties in the world.

Overview

Gross domestic product (GDP) growth is estimated to have increased to 3.1% in 2011, up from 2.9% in 2010.Growth is expected to slow to 2.8% in 2012 mainly because of domestic structural weaknesses and the fragileglobal economic recovery. GDP growth is expected to rise to 3.6% in 2013, subject to global recovery takingplace and an orderly resolution of the Eurozone fiscal and financial crisis during 2012.

The fiscal deficit rose from 4.2% in 2010 to 4.8% in 2011 and is expected to fall to 4.4% in 2012. The ReserveBanks repo rate remained flat at 5.5%, a 30-year low, throughout 2011. The average annual inflation rateremained at 5.0% for 2011. It is expected to rise to 6.2% in 2012 before easing to 5.4% in 2013.

Consumption registered an estimated 3.5% growth rate in 2011 while investment grew by an estimated 5.2%.Foreign direct investment (FDI) into South Africa increased to USD 4.5 billion in 2011 from USD 1.2 billion in2010. As domestic expenditure improves with the expected increase in fixed investment in 2013, South Africasimport intensity is expected to rise, putting some pressure on its trade balance over the next two years. This,together with increased outflows in service income and current transfers, is likely to raise the current accountdeficit to 3.9% in 2012 and 4.3% in 2013.

Borrowing from abroad by public corporations, which hold about 21% of external public debt, to financeinfrastructure improvements and development of new projects led to a significant rise in foreign debt in fiscalyear 2010/11 compared to the previous period. However, the debt burden indicators do not show any risk of

debt servicing difficulties in the immediate term. Foreign debt remains less than 10% of total public debt whilethe government is able to borrow locally with relative ease.

Unemployment fell to 23.9% at the end of 2011, down from 25.0% in the third quarter. Over 1 million jobswere lost between the fourth quarter of 2008 and the third quarter of 2010. In a welcome development,365 000 additional jobs were created in 2011. The governments broad strategy against unemployment is partof the New Growth Path (NGP), with an objective of creating 5 million jobs over a decade. A draft NationalDevelopment Plan: Vision for 2030 drawn up by the National Planning Commission is currently undergoingpublic comment.

African Economic Outlook 2012 2 | AfDB, OECD, UNDP, UNECA


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Figure 1: Real GDP growth (Southern)

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

Table 1: Macroeconomic Indicators

2010 2011 2012 2013

Real GDP growth 2.9 3.1 2.8 3.6

Real GDP per capita growth 2.1 2.4 2.2 3.1

CPI inflation 4.3 5 6.2 5.4

Budget balance % GDP -4.2 -4.8 -4.4 -4.2

Current account % GDP -2.8 -3.1 -3.9 -4.3


Real GDP growth (%) Southern Africa - Real GDP growth (%) Africa - Real GDP growth (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-2%

0%

2%

4%

6%

8%

10%

RealGDPGrowth(%

)

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Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

2006 2011

Agriculture, forestry, fishing & hunting 2.9 2.4

Mining and quarrying 8.4 9.8

of which oil - -

Manufacturing 17.5 13.4

Electricity, gas and water 2.3 2.9

Construction 2.9 4.5

Wholesale and retail trade, hotels and restaurants 13.7 14.5

of which hotels and restaurants - -

Transport, storage and communication 9.8 8.2

Finance, real estate and business services 21.6 21.2

Financial intermediation, real estate services, business and other service activities - -

General government services - -

Public administration & defence; social security, education, health & social work - -

Public administration, education, health 14.6 16.3

Public administration, education, health & other social & personal services - -

Other community, social & personal service activities - -

Other services 6.2 6.9

Gross domestic product at basic prices / factor cost 100 100


GDP growth is estimated to have increased to 3.1% in 2011, up from 2.9% in 2010. Growth in 2011 was helddown by strikes, especially in the mining and manufacturing sectors, and the effect of the global slowdown onexports, but household expenditure, government expenditure and fixed capital formation provided somesupport.

Real GDP growth is projected to slow to 2.8% in 2012. By 2013 real GDP growth should rebound to someextent to 3.6%. This acceleration in growth assumes that a recovery of the world economy takes place in 2012and that the European Unions (EU) sovereign debt crisis is resolved in an orderly fashion.

Growth of real value added in the mining sector slowed to 0.2% in 2011 as a result of strikes, accidents,logistical problems, plant maintenance, increases in electricity tariffs and wage rises above the rate of inflation.Production of coal, gold and manganese ore declined while output of industrial commodities and platinumweakened because of waning global demand. Dim prospects for the global economy, a strong rand (ZAF), andtransport and energy constraints make for a lacklustre outlook for the mining sector.

In the broad agriculture sector, real value added contracted by 0.4% in 2011 as crop yields failed to match thebumper harvest of 2010, in part as a result of flooding early in the year. The modest output gain was due toanimal products and field crops. Maize production in particular was again substantial during the 2010/11 seasonand reached 10.6 million tonnes but that was down from the 12.8 million tonnes in the previous season.

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By contrast, the manufacturing sector grew by 2.4% in 2011, although this was significantly less than the 5.4%growth rate recorded in 2010. The sector got off to a strong start in the first quarter with real value addedgrowing by 12.8% quarter-on-quarter (annualised rate). However, activity in the sector subsequently fell victimto weakening global demand and to a loss in competitiveness linked to the appreciation of the rand in the firsthalf of 2011. Demand for residential and non-residential buildings declined but civil construction grew, drivenby public sector investment. Overall, the construction sector increased by a mere 0.8% in 2011, a continuation

of the sluggish growth of only 0.9% in 2010 (in 2009, the sector expanded by 7.8% thanks largely toinfrastructure spending for the 2010 Football World Cup).

Tertiary sectors grew consistently faster than overall GDP with the exception of personal services, led by trade,government and financial activities, in spite of soft conditions in the banking sub-sector. Motor trade activity alsocontributed to growth, thanks to strong demand from the household sector and the car rental industry. Thetransport sub-sector slowed but the communications sector stayed on its steady growth path, leading to acombined 3.3% growth for the sector. Finally, general government experienced an annual growth rate of 3.9%in 2011.

Consumption expenditure by households and by the general government combined registered an estimated3.5% growth rate in 2011, while investment grew by an estimated 5.2%. Private consumption is estimated tohave grown by 3.4% in 2011, led by spending on durable goods such as cars and computers, and services suchas recreational and entertainment goods. Spending on services also grew, led by spending on communicationswhile expenditure growth was slow in respect of food items, fuel and other household consumer goods,

following the sharp price increases in the corresponding categories. Private consumption is projected to slow to1.2% in 2012 but pick up in 2013 to 2.2%. Public consumption is projected to remain subdued, growing at 0.7%in 2012 and 2013. FDI increased to USD 4.5 billion in 2011 from USD 1.2 billion in 2010, with China and theUnited States the leading sources.

In 2011 real gross capital formation was estimated to have grown by 5.2%, a sharp recovery from the 1.6%contraction in 2010. Private businesses, public corporations and general government all contributed to this rise.Private investment is estimated to have increased by 5.0%. The pace of investment was especially strong inagriculture, communications, storage and transportation. As a result of spare production capacity and insufficientdemand both locally and abroad private investment is projected to slow to 4.0% in 2012 before recoveringsharply by 8.0% in 2013.

Public gross capital formation is estimated to have grown by 5.5% in 2011. State-owned enterprises raised theirinvestment substantially: the electricity sub-sector invested in vehicles, machinery and equipment for the

Medupi, Kusile and Ingula power stations, while Transnet (transport) invested in machinery, equipment andconstruction for its new multi-product pipeline. In 2012, public gross capital formation is expected to slow to4.5% and to recover in 2013, with 8.5% projected growth.



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Macroeconomic Policy

Fiscal Policy

Two years before the 2009 recession, South Africa adopted a counter-cyclical fiscal policy stance, which favoursexpanded public spending during economic slowdowns and vice versa. Fiscal policy thus became expansionaryfrom 2009 onwards and remained so amid the continued weakness in the global economy and the fragiledomestic recovery. Broadly, South African fiscal policy is guided by three principles: long-term public debt

sustainability, counter-cyclicality, and intergenerational equity.

As investment in network infrastructure (energy, transport, and information, communications and technology(ICT) remains central to governments development plans, public sector spending on infrastructure reached7.5% of GDP during the first half of 2011 and is expected to rise further to 7.8% of GDP during the next twoyears, gradually declining thereafter. The bulk of infrastructure investment was accounted by state-ownedenterprises, particularly Eskom (electricity) and Transnet (transport). Improvements in public service pay andincreases in employment raised the wage bill to 12% of GDP, or 42% of government revenue, up from 31% in2008, making it the fastest growing component of current expenditure.

The budget deficit declined significantly from 6.3% of GDP during fiscal year 2009/10 to 4.2% during 2010/11,as a result mainly of restraint in non-interest spending growth and a modest improvement in tax revenue,before widening slightly to 4.8% of GDP in fiscal year 2011/12 , as growth in national government spending,underpinned by higher current payments together with transfers and subsidies, exceeded the moderate growth

in revenue collection. The deficit is expected to fall slightly to 4.4% in 2012/13 and to 4.2% in 2013/14, chieflybecause of moderation in primary spending growth. The primary deficit declined substantially from 4.0% in2009/10 to 1.8% in 2010/11. Total government revenue for 2012/13 is estimated at ZAF 905 billion, or 27.4% ofGDP, while total government expenditure is put at ZAF 1.1 trillion, or 32% of GDP, for the same year. The fiscalstance is expected to remain moderately expansionary for 2012 and 2013.

Table 3: Public Finances (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Total revenue and grants 23.2 26.3 27 29.7 27.2 27.5 27.7 27.8 28

Tax revenue 22.7 25.7 26.4 25.9 23.4 23.8 23.9 24.1 24.3

Oil revenue - - - - - - - - -

Grants 0 0 0 0 0 0 0 0 0

Total expenditure and net lending (a) 25.5 25.7 26 30.6 33.5 31.7 32.5 32.2 32.3

Current expenditure 25.9 25.7 26.1 28.2 31 29 30.1 30 29.8

Excluding interest 223 22.8 23.5 25.9 28.6 26.6 27.6 27.3 27

Wages and salaries 9.3 8.4 8.5 9.2 10.2 11.2 11.6 10.6 10.3

Interest 3.6 2.9 2.5 2.4 2.3 2.4 2.6 2.7 2.9

Primary balance 1.3 3.5 3.5 1.5 -4 -1.8 -2.2 -1.6 -1.4

Overall balance -2.3 0.6 0.9 -0.9 -6.3 -4.2 -4.8 -4.4 -4.2


Monetary Policy

Average annual consumer price inflation remained within the target range of 3% to 6% in 2011, at 5% for theyear. However, headline inflation breached the upper limit, reaching 6.1% in November and December 2011.

The rise was driven primarily by increases in the prices of food and non-alcoholic beverages and transport. Coreinflation remained at around 3.9%. Both regulated and non-regulated prices administered by policy-makers



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continued to remain well above the policy range for nearly two years and were at 16.1% and 8.2% year-on-year, respectively, in November 2011. Inflation is expected to remain outside the upper end of the target rangefor the whole of 2012, returning to within the target range in 2013. Inflation is expected to average 6.2% in2012 and 5.4% in 2013.

A 150 basis points cut in the repo rate in 2010 brought the policy rate to 5.5%, its lowest level in 30 years, andprovided additional stimulus to the economy throughout 2011. In real terms, the repo rate remained at about1.2% in 2010 before shrinking to 0.5% in 2011. South Africa operates a freely floating exchange rate system. A

sudden reversal in capital flows since the second quarter of 2011, coupled with heightened investor riskaversion towards emerging markets, led to a gradual depreciation of the rand, beginning in the third quarter of2011, posing a further upside risk to inflation.

In spite of historically low interest rates, demand for credit by the private sector remains subdued, increasing by6% year-on-year in November 2011, compared to 5% in January 2011, while growth in broad money supply(M3) declined from 8.2% in January 2011 to 7.26% in October 2011. Private sector investment in 2011 grew atan estimated 5.0%, down from 12.0% in 2010.

Given the gloomy outlook for growth and other key macroeconomic indicators, with employment, investmentand exports remaining well below their pre-crisis levels, early monetary policy tightening could harm therecovery. The continuation of the current accommodative monetary policy stance through 2012 and 2013 is,therefore, crucial for the recovery of private investment and consumption, which are critical for sustainedgrowth and job creation. However, given the Monetary Policy Committees statement in January 2012, it isunlikely that the repo rate will be cut in 2012, unless global conditions deteriorate substantially and start visibly

curtailing growth.

Economic Cooperation, Regional Integration & Trade

Given the shift of global power towards developing countries, South Africas trade policy would be underpinnedby deepening functional integration in the region, on the continent, and with emerging economies, particularly,the BRICS (Brazil, Russia, India, China, South Africa), which the country joined in 2011.

South Africas trade profile has evolved significantly. At the end of 2010, 36% of South Africas exports went toAsia, 27% to the EU, and 18% to sub-Saharan Africa; and exports of manufactured goods to Asia and Africaincreased markedly, unlike those to Europe and America. A 17% trade-weighted depreciation of the rand in2011 contributed to improved external competitiveness, raising the value of merchandise exports by 3.3% inthe third quarter of 2011. On the other hand, imports increased by 4.6% during the third quarter of 2011,buoyed by increased domestic demand for consumer and capital goods.

The trade balance is estimated to have declined to 0.8% of GDP in 2011 from around 1.0 % in 2010. For thefuture, South Africas import intensity is likely to continue to rise as domestic expenditure improves, especially ifthere is a pick-up in fixed investment into 2013, putting some pressure on the trade balance over the next twoyears. This, plus increased outflows in service, income and current transfers, is likely to lead to the currentaccount deficit of over 3.9% in 2012 and 4.3% in 2013.

FDI, mainly in mining and retail trade, reached USD 4.5 billion in 2011 from USD 1.2 billion in 2010. FDI toSouth Africa had declined by 70% in 2010 as investors shifted to other resource-rich countries and/or countrieswith larger domestic markets in Africa.



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Table 4: Current Account (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Trade balance 2.1 -1.7 -2 -1.6 0.1 1 0.8 0.9 0.3

Exports of goods (f.o.b.) 22.9 25.3 26.5 31.1 23.2 23.5 24.3 25.1 24

Imports of goods (f.o.b.) 20.8 27.0 28.5 32.7 23.1 22.5 23.5 24.3 23.8

Services 0.2 -0.8 -0.9 -1.5 -1 -1.2 -1.2 -1.5 -1.5

Factor income -2.7 -2.0 -3.4 -3.3 -2.2 -2 -2.2 -2.5 -2.4

Current transfers -0.6 -0.9 -0.8 -0.8 -0.9 -0.6 -0.5 -0.8 -0.8

Current account balance -1 -5.4 -7.2 -7.2 -4 -2.8 -3.1 -3.9 -4.3


Debt Policy

Public debt increased significantly in 2011 but debt sustainability remains generally sound. Between the first andthe third quarters of 2011, the domestic debt stock increased from ZAF 878 billion to ZAF 966 billion. Thisaccounted for 89.5% of total national government debt while foreign public debt accounted for the remainingbalance. The national governments foreign debt reached ZAF 113 billion at the end of the third quarter, largelybecause of the weakening of the rand. As a result of the liquid and efficient nature of the domestic money andcapital markets, the primary source of deficit financing remained domestic borrowing, through a combination of

Treasury bills as well as fixed-income and inflation-linked bonds.

Foreign debt rose to 28.5% of GDP at the end of June 2011 from 25.6% of GDP in June 2010. The countrysoutstanding foreign debt expressed in rand increased from USD 94 billion at the end of December 2010 toUSD 111 billion at the end of June 2011, driven mainly by the currencys depreciation. About 45% of foreign

debt is public while the remainder is held by the private sector. Borrowing abroad by public corporations, whichhold about 21% of external public debt, to finance infrastructure improvement and development led to asignificant rise in foreign borrowing in 2011 compared with the previous period. At the end of March 2011, theoutstanding foreign debt of public corporations was USD 10.5 billion compared to USD 5.3 billion in March 2010.However, the current level of external indebtedness by both public and private sector is well below the 40%sustainability threshold recommended by the International Monetary Fund (IMF) and theWorld Bank.

Total national government gross loan debt, i.e. domestic plus foreign debt, rose from USD 139 billion at theend of March 2011 to ZAF 1.1 trillion (USD 175 billion) at the end of September 2011, increasing from 35.4% ofGDP during the first quarter to 37.3% of GDP during the third quarter of 2011. However, the debt burdenindicators do not signal significant risk of debt servicing difficulties. Foreign debt is less than 10% of total publicdebt while the government is able to raise public and publicly guaranteed debt in local currency with relativeease. Total net government debt is expected to reach ZAF 1.35 trillion (USD 175.5 billion), or 36% of GDP, bythe end of 2012/13, rising to ZAF 1.54 trillion, or 38.5% of GDP, by the end of 2014/15.



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


Debt/GDP Debt service /Exports

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

Percentage



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Economic & Political Governance

Private Sector

The private business regulatory climate is regarded as one of the most conducive in Africa. The World Banks

Doing Business report 2012 ranks South Africa 35th. In 2011, the country implemented its new company lawwhich eliminated the requirement to reserve a company name, i.e. the obligation to submit the proposedcompanys name for regulatory approval, and simplified incorporation procedures. However, historical and new

barriers to growth and formalisation of microenterprises remain high. The main obstacles to the growth andformalisation of small-scale enterprises are limited access to finance; crime; and problems of access to land andtransport, while the three most problematic factors for doing business in the country for formal businessesremain inefficient government bureaucracy; an inadequately educated workforce; and what some perceive tobe restrictive labour regulations.

The product market regulation is regarded as relatively onerous partly because of the presence of a significantnumber of parastatals which enjoy near-monopoly positions. According to the Doing Business report 2012,

trading across borders is also among one of the most difficult in the region, with South Africa ranking 144 thoutof 183 countries. However, the country performs well with regard to paying taxes, involving 9 payments and200 hours, well below the regional average of 28 payments and 210 hours, and in dealing with constructionpermits which involves 13 procedures and 127 days, again well below the regional average of 17 proceduresand 288 days.

South Africas labour laws are viewed by some to be excessively rigid in respect of the hiring and firing ofworkers. According to the Global Competitiveness Report 2011/12, a minimum wage for a 19-year-old workerand the ratio of minimum wage to value added is almost three times the average for other BRICS countries.Private ownership of land is legally guaranteed. However, the current willing buyer-willing seller model of landredistribution has been largely ineffective in ensuring the transfer of a significant proportion of land topreviously disadvantaged groups.

Financial Sector

The financial sector in South Africa is well developed and comprises 17 banks, two mutual banks, and a numberof foreign bank branches and offices, non-banking financial institutions (including state-owned development

finance institutions (DFIs), smaller financial intermediaries and the Johannesburg Stock Exchange, the 18th

largest in the world in 2011. The banking sector is resilient to shocks and has survived the financial crisisrelatively unscathed, although it currently faces low credit demand and rising costs. Domestic banks are already

capitalised above the new Basel III levels and are currently operating with an average capital adequacy ratio of15%, or 12% for Tier 1 capital, which includes issued ordinary share capital and retained earnings, well abovethe minimum prudential capital adequacy requirement of 10%. In spite of this, they do not presently meet thenew global liquidity standards. Because of sluggish economic recovery the ratio of non-performing loansreached 5.5% of gross loans at the end of November 2011 but is expected to stabilise at this level.

Following the 650 basis points cut in the policy rate between 2008 and 2010, the prime lending rate declined to9% in 2011 while the average savings rate by five major banks on one-year deposits was 5.34%, leading to aninterest rate spread of 4.66% at the end of 2011. The bank loans-to-deposits ratio improved to 93% in June2011 from 100% in March 2008, providing a significant buffer against liquidity pressures.

In spite of the high level of financial sector development, about 37% of South Africas 33 million adults did nothave access to banking services in 2010. The majority of informal businesses have limited access to formalfinancing. The government has created alternative channels of small- and medium-sized enterprises (SMEs)

financing, including the provision of credit guarantees to commercial banks which are willing to lend to smallbusinesses, and direct lending by specialised SME financing entities. Three state-owned development fundingagencies operating in the micro-, small- and medium-sized enterprise segments will be merged into a singleentity as a subsidiary of the countrys largest DFI, the Industrial Development Corporation in April 2012.

Public Sector Management, Institutions & Reform

The South African legal system provides effective protection to property rights, and contract rights areadequately respected and enforced. Laws and regulations affecting businesses and individuals are uniformlyapplied. Both foreign and domestic investors are allowed to participate in all sectors of the economy withoutany discrimination. Transfer of land ownership to the previously disadvantaged group remains slow and newlegislation has been proposed in 2011 to replace the current willing seller-willing buyer model. The legislation isexpected to be enacted in 2012.



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In December 2011, the Department of Trade and Industry published the Broad-Based Black EconomicEmpowerment (B-BBEE) Amendment Bill to align the existing B-BBEE Act with other related legislation andprovide for the establishment of the B-BBEE Commission tasked with monitoring and evaluating black economicempowerment interventions in the country. The Bill also proposes stronger penalty against businesses involvedin fronting i.e. falsely claiming black people as having a leadership position in a company, and other abuses ofthe Act.

Local governments continue to face challenges in delivering basic services primarily because of a lack of skills

and limited institutional and revenue management capacities. In December 2011 the government placed fivedepartments in Limpopo and some others in two other provinces under central government administration as aresult of weaknesses in financial management. Recruitment to the public service is to some extent governed bymerit-based principles; however, public services face a policy dilemma of righting the racial imbalances createdunder apartheid while avoiding the weakening of government capacity and undermining its trust and credibility.

The government has created a number of initiatives and structures to fight corruption and has implemented acomprehensive conflict of interest policy. However, perceived corruption is rising in the country, as South Africa

ranks 64thout of 183 countries surveyed in Transparency Internationals 2011 Corruption Perception Report, a

record low, from 54thin 2010.

Natural Resource Management & Environment

Within the framework of the overall environmental management policy, the cabinet approved a new National

Climate Change Response Policy in October 2011, which seeks to balance the objectives of job creation,economic growth, environmental sustainability and reducing greenhouse gas emissions. The policy envisagescutting CO2 emission by 34% over the next decade by introducing emission caps among the major polluters.

In 1990 South Africa acceded both to the Vienna Convention for the Protection of the Ozone Layer and theMontreal Protocol on Substances that Deplete the Ozone Layer. The Department of Environment Affairs iscurrently in the process of developing a national strategy for phasing out ozone-depleting substances.

South Africa has made some progress on Millennium Development Goal (MDG) 7 (environment), includinghalving the proportion of people without access to drinking water. However, it is unlikely to meet thetimetable for ensuring environmental sustainability. The country is lagging behind in a number of areas, such asCO2 emission levels, over-exploitation of fish stocks, access to basic sanitation and the persistence of a largenumber of people living in informal dwellings. Currently about 1.2 million households live in informalsettlements. Moreover, monitoring systems for water flows and quality, air quality, deforestation, and otherland degradation are inadequate. Sustained investment in strengthening environmental monitoring systems will

thus be essential.

The proportion of land area covered by forest, a key indicator for environmental sustainability, is 36.6%,although indigenous forest cover is only 0.4% of the total land area, the rest of forest areas being planted withspecies introduced from 1880 onwards. South Africa is a water-stressed country and equitable waterconservation remains crucial.

Political Context

The 57.7% turnout at the May 2011 municipal elections was the highest since the first such elections in 2000.The ANC continues to dominate, with just under 62% of the vote, although support declined in some provinces.The ability of the government, at both national and local levels, to deliver essential social services such as waterand sanitation remains a critical leadership challenge. Service delivery was a major determinant in the politicalfortunes of the smaller parties during the municipal elections.

In December 2011, the ANC endorsed the Protection of Information Bill (PIB) in the lower house of Parliamentdespite strong opposition from civil society organisations, the media and trade unions, who viewed the bill as athreat to democracy. The Bill is likely to be the object of further amendments in early 2012 before it becomesan Act in the course of the year.

In November 2011, the ANCs vocal and controversial Youth League president, Julius Malema, was suspendedfor five years for acts deemed to be detrimental to the party and the country. In March 2012, the suspensionwas elevated to a full dismissal from the party following an appeal by Mr. Malema. Fears that his dismissal wouldwiden divisions in the party did not materialise. Major policy differences, however, remain within the party andamong its coalition partners of organised labour, the Congress of South African Trade Unions (COSATU) and theSouth African Communist Party. These differences are expected to come to a head when the ANC holds itspolicy conference in June.



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Social Context & Human Development

Building Human Resources

South Africa has the necessary policies and resources to improve human resource indicators such as under-fivemortality and maternal mortality. However, it lacks the implementation capacity to translate these policies intobroad-based results. Decline in both measures of human welfare has been slow. Substantial progress, however,has been made in fighting malnutrition, mother-to-child transmission of HIV, as well as increased immunisation

coverage and access to free health care. The national mother-to-child HIV transmission rate fell to 3.5% in 2010from 8.5% in 2009.

South Africa has effectively scaled up the implementation of national HIV and AIDS initiatives, includingvoluntary counselling and testing (provided in more than 95% of health facilities), the distribution of condoms,an increase in the provision of anti-retroviral (ARV) therapy, and the introduction of a dual therapy policy in2008 for the prevention of mother-to-child transmission. However, although it has the largest ARV treatmentprogramme in the world, the country has not achieved the goal of universal access to ARV treatment. As aresult, it is unlikely to achieve MDG 6, that of halting and reversing the spread of HIV and tuberculosis by 2015.

Malaria is not endemic in South Africa, and does not therefore pose a major health risk except in some parts ofthe Limpopo, Mpumalanga and KwaZulu-Natal provinces. The death rate due to malaria in South Africa hasremained very low at 4 to 10 per thousand since 1999.

South Africa has achieved the goal of universal access to primary education before the year 2015, coveringchildren up to the age of 13 who constitute nearly 30% of the countrys population. School attendance for thoseaged 7-13 reached 98.4% for boys and 98.8% for girls in 2009, while the functional literacy rate also rose from88% in 1999 to 91% in 2009.

Poverty Reduction, Social Protection & Labour

The governments anti-poverty strategy identifies the most vulnerable and the poorest sections of the societyand provides a comprehensive social security programme that combines income support with a social wagepackage. In 2011 social welfare grants supported about 15.2 million South Africans, up from 2.5 million in 1998.

The grants have been expanded in recent years by raising the threshold for the child support grant until a

childs 18thbirthday. In 2010/11 government spent 10.9% of the total budget, or 3.4% of GDP, on social grantswhile spending on education, grants, health clinics, hospitals and subsidised housing increased from 10% of GDPin 2006 to 15% in 2009.

As a result of active government intervention in poverty alleviation, the proportion of people living on less thanUSD 1 per day fell from 11.0% to 5.0% between 1994 and 2010. With this achievement, South Africa more thanhalved the population living in extreme poverty, thus meeting MDG 1. The fall in poverty at higher levels ofincomes, such as USD 2.50 a day, has been slow.

The government adopted a comprehensive approach to eradicating extreme poverty and hunger through asafety net programme. In 2010 the no-fee school policy was extended from the poorest 40% of pupils to thepoorest 60%, and as a result 8.1 million students in 20 000 schools had access to free education. Moreover,about 2.8 million and 11.5 million housing units received free basic electricity and water services respectivelyduring the 2008 financial year. In spite of these measures, the country remains one of the most unequalsocieties in the world as measured by the Gini coefficient of household income, which, according to anOrganisation for Economic Co-operation and Development (OECD) report, increased from 0.66 in the early1990s to 0.7 in the late 2000s.

Since 1994 South Africa has ratified 12 International Labour Organization (ILO) conventions, including ILOconvention 182 on the Worst Forms of Child Labour and seven other conventions considered fundamental to therights of human beings at work. The government has passed a number of laws that conform to most of theconventions and ensure that these legislation and conventions are enforced.

Because of structural constraints, job creation has lagged behind the economic recovery that started in 2010.Between the fourth quarter of 2008 and the third quarter of 2010, when the recession bottomed out, theeconomy shed over 1 million jobs, with the overall unemployment rate rising correspondingly from 21.9% to25.3%. Youth unemployment rose steeply from 45.5% to 50.5% between 2008 and 2010. From late 2010,however, the economy began reclaiming some of the lost jobs. Between the fourth quarter of 2010 and thefourth quarter of 2011, the economy added 515 000 net jobs about half of the total lost in the preceding sevenmonths.



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Gender Equality

South Africa has made significant progress in addressing gender disparities in health and education services.Basic antenatal care services were provided in 79.4% of all public health facilities in fiscal year 2010/11. TheNational Health Amendment Bill was enacted in January 2011 to give effect to the core standards and to enforcethem in the health system. The country has also made progress in respect of girls participation in secondaryschooling with the ratio of female to male secondary enrolment reaching 104.8% in 2009. Some progress hasalso been made in tertiary education enrolment.

The share of women in non-agricultural wage employment also increased in recent years from 44% in 2005 to45% in 2010. However, while poverty has been halved for both genders, the proportion of women living belowUSD 1 a day remains high compared to that of males. Approximately 70% of informal businesses are ownedand/or controlled by women.

South Africa has signed and ratified the Convention on the Elimination of Discrimination against Women(CEDAW) and various international human rights instruments, treaties and conventions and enacted a number oflaws to protect women from violence and abuse. Nevertheless, gender violence remains very high. Therepresentation of women in the South African Parliament increased from 27.8% in 1994 to 44.0% in 2009; itrose from 25.4% to 42.4% in provincial legislatures and stands currently at about 40% in local government.



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Thematic analysis: Promoting Youth Employment

The unemployment rate in South Africa in 2011 was 24.9%, considerably higher than the 22.9% in 2008, theeve of the recession. Among the young, the unemployment rate is double the national average, having risenfrom 45.5% in 2008 to 50.5% in 2010. A survey by Statistics South Africa in 2010 offered the following profile ofyouth unemployment in South Africa:

About 42% of young people under the age of 30 are unemployed compared with fewer than 17% of adults

over 30.

Only 1 in 8 (13%) of working age adults under 25 years has a job, compared to 40% in most emergingeconomies.

Unemployed young people tend to be less skilled and more inexperienced: almost 86% do not have formalfurther or tertiary education, while two-thirds have never worked.

The problem of youth unemployment was aggravated by the 2008-09 economic recession, which saw SouthAfricas young people accounting for as much as 40.0% of the over one million jobs that were lost between thelast quarter of 2008 and the third quarter of 2010. Among workers aged 15-24 employment levels fell by 21.8%(or 355 000 jobs), compared with an overall decline of 6.4%. The unemployment rate in the last quarter of 2011edged down from 25.0% in the preceding quarter to 23.9%, confirming the hope that the recovery might betaking hold.

Compared to nations at similar stages of economic development South Africa has an unusually highunemployment problem in general and among the young. Only 40% of those of working age have jobs,compared to 65% in Brazil, 71% in China, and 55% in India. The emerging market average is 56%.

In early 2011, government released a discussion paper, Confronting Youth Unemployment: Policy Options forSouth Africa, which identified a number of factors responsible for the high unemployment among young people.

These include low levels of education and skills, which tend to result in a mismatch between existing vacanciesand available labour. A paradox has thus emerged whereby unemployment remains persistently high while thescarcity of critical skills prompted the government to launch an ambitious programme in 2010 to attract 50 000temporary foreign workers per year. However, a report by the Department of Trade and Industry toParliament in August 2011 indicated that, as of the middle of 2011, only 2 497 visas had been issued, implyingthe continuing existence of a gap between vacancies and qualifications.

Besides a shortage of skills, lack of work experience has also tended to impede the job prospects of youngpeople. A recent study by the National Treasury found that the probability of finding a job within six monthsrises with age: an unemployed person aged 18-24 had about an 11% chance of finding a job within six months,compared to a 22% chance for someone aged 25-54, with the difference accounted for mainly by workexperience.

The governments broad strategy against unemployment is contained in the New Growth Path (NGP) documentinaugurated in 2010 by the Department of Economic Development. The objective is to create 5 million jobs by2020 through infrastructure development and housing; agriculture and agro-processing; tourism; and the greeneconomy, among others. A number of policies have been proposed to stimulate the demand for labour (throughincreased economic growth), improve the supply of labour (through better education and skills development),and to strengthen labour markets to ensure an effective interface between employers and job seekers.

The emphasis has been on labour-demand initiatives. A youth employment subsidy has been proposed toencourage employers to hire young workers whom they might otherwise not hire because of lack ofexperience. The experience and training gained during the period of subsidised work will therefore improve the

longer-term career prospects of the beneficiaries. Sections of organised labour, however, have expressedconcern that the scheme might adversely affect experienced workers as firms hire low-wage young people inan effort to save costs. Negotiations are taking place between the government and labour over the issue. AZAF 9 billion (about USD 1 billion) jobs fund has also been proposed to support projects with the potential tocreate large numbers of jobs particularly for younger workers. Between 50 000 and 100 000 jobs areexpected to be created over the medium term. The public works programme is being expanded, based mainlyon infrastructure development as well as social, environmental and community projects administered by variousgovernment departments, municipalities, and partner organisations, with the aim of creating nearly 800 000short-term jobs between 2011 and 2012. This is supplemented by the Community Work Programme, a pilotinitiative to provide an employment safety net.

It is expected that these interventions will draw lessons from previous ones to ensure their success. TheUmsobomvu Youth Fund, for example, which existed from 2001 to 2009, and was later replaced by the National

Youth Development Agency, had created disproportionately few jobs for the number of young people who



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were assisted. While the numbers of young people given employment advisory services grew by 16.2%, thenumber of jobs created and/or sustained declined by 6.6% over the period.

In respect of labour demand initiatives, the Economic Development Department has signed a number ofaccords in 2011 with industry, government and labour, among other things to expand skills in the country tocreate jobs. The department is also working with the Department of Trade and Industry to consolidate andstrengthen financial and other forms of support for small- and mediumsized enterprises. The economy hastraditionally been dominated by large firms and support for SMEs is deemed essential to complementing the job-

creating potential of these firms.

In terms of labour market initiatives, the Department of Labour intends to extend its nationwide labour services,including the registration of job seekers and placement opportunities, matching services, referrals to training,and career information. A debate over labour laws, considered by some too rigid and blamed for highunemployment because firms are supposedly reluctant to hire workers without enough flexibility to fire them, iscurrently going on in various sections of the government and among the governing coalition partners. The draftNational Development Plan Vision for 2030 proposes a range of labour market reforms to facilitate rapid jobcreation while enhancing the countrys international competitiveness.

African Economic O tlook 2012 15 | AfDB OECD UNDP UNECA

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