South African Economy
South Africa has a two-tiered economy; one rivaling other developed countries and the other with only the most basic infrastructure. It therefore is a productive and industrialized economy that exhibits many characteristics associated with developing countries, including a division of labor between formal and informal sectors, and uneven distribution of wealth and income. The formal sector, based on mining, manufacturing, services, and agriculture, is well developed.
Annual GDP growth between 2004 and 2007 averaged 5.0%, but fell to a rate of 3.1% in 2008 because of higher interest rates, power shortages, and weakening commodities prices. GDP contracted by 1.8% in 2009 as South Africa experienced its first recession in 18 years. The government estimates that the economy must achieve growth at a minimum of 6% to offset unemployment, which was estimated at 24.3% in December 2009. The economy is expected to grow by 2.3% in 2010, as South Africa emerges from its recession.
Increasing food and fuel prices pushed inflation above the upper end of the South African Reserve Bank’s (SARB’s) 3%-6% inflation target range for the better part of 2007 and 2008; inflation averaged 11.3% in 2008. Inflation started to decline in 2009, averaging 7.2% for the year. The SARB’s most recent central inflation forecast projects that it will continue its downward trajectory and return to the 3%-6% target range in the second half of 2010. Inflation is expected to average 5.8% and 5.6% in 2010 and 2011, respectively.
The SARB reduced interest rates at regular intervals from December 2008. The cumulative reduction through August 2009 was 500 basis points, bringing the prime overdraft rate to 10.5%. Over late 2009 and early 2010, the Reserve Bank left interest rates unchanged. The government managed to eliminate the fiscal deficit in FY 2007 and FY 2008. However, a fiscal deficit of 1.2% of GDP was recorded in FY 2009, mainly due to the impact of weak domestic demand and the global economic crisis on tax revenues. The fiscal deficit is expected to increase to 6.7% of GDP in 2009-2010, according to the Finance Minister's February 2010 budget speech.
South Africa has a sophisticated financial structure with a large and active stock exchange that ranks 17th in the world in terms of total market capitalization. The South African Reserve Bank performs all central banking functions. The SARB is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks. Quantitative credit controls and administrative control of deposit and lending rates have largely disappeared. South African banks adhere to the Bank of International Standards core standards.
The South African Government has taken steps to gradually reduce remaining foreign exchange controls, which apply only to South African residents. Private citizens are now allowed a one-time investment of up to 2,000,000 rand (R) in offshore accounts. During 2007, the shareholding threshold (the percentage of shareholding that must be South African) for foreign direct investment outside Africa was lowered from 50% to 25% to enable South African companies to engage in strategic international partnerships. In addition, South African companies involved in international trade were permitted to operate a single Customer Foreign Currency (CFC) account for all international transactions. Permission was also granted to the Johannesburg Securities Exchange (JSE) to establish a rand currency futures market, in order to deepen South Africa’s financial markets and increase liquidity in the local foreign exchange market.