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South Africa is the most prosperous country in Southern Africa, consisting of a developed First World and a developing Third World component interacting with economies of developing countries close by. South Africa is ranked as one of the best emerging markets as it is showing stronger economic output, the nation is politically stable and relatively wealthy in comparison to rest of continental Africa. Unfortunately in year 2001, South Africa’s national currency the ‘rand’ collapsed in value garnering the title as the world’s worst performing currency as it fell upwards of 55 percent in value versus the US-dollar (USD). But what was even more stunning was the rand’s dramatic reversal in exchange value over the last three years by appreciating 112 percent against the USD. At present, the rand has stabilized after a difficult few years. Today, South Africa is a dynamic growing emerging market economy with the likes of Mexico and Brazil, but the South African rand (ZAR) remains a volatile currency. Confidence has reversed dramatically to the positive as there is great praise for the government’s management of fiscal affairs and the South African central bank’s handling of monetary policy.

POLITICS: now stable. President Thabo Mbeki of the governing party African National Congress (ANC) is most likely to remain in power for a quite sometime as the opposition parties are fragmented. The main opposition Democratic Alliance (primarily supported by whites) is splintered as the opposition as a whole in South Africa is badly divided. President Mbeki in April 2004 won ANC’s third consecutive election since 1994 and this will be his second and last term. Historically, South Africa in many was a nation living in fear, poverty and brutality. Since apartheid ended in 1994 with the peaceful transition of power to Nelson Mandela as President, South Africa has become more globally integrated as the world welcomed South Africa’s historic political winds of change. South Africa is a nation that is healing, racial tensions are not a disaster as perceived in the media. In fact, a larger concern for the ANC is the challenge in developing a black middle class and sharing the nation’s wealth. Whites account for 10 percent of the total population of 44.3 million.

Overall, South Africa is very stable politically with sound honest leadership both under former President Mandela and now with current President Mbeki who is clamping down on corruption and graft. Under Mr. Mbeki’s leadership, the ANC has embraced market and business friendly economic policies. In May 2005, the ruling African National Congress called for a more competitive exchange rate to be achieved by aggressive buying of USD assets and/or liberalization of exchange rates. Of further interest, a Tax Amnesty for 2005 is expected to raise $7.5 billion USD from undeclared offshore assets.

Politically, risks to the South African government includes social inequality, economic structure weakness, income disparity, high unemployment which is fostering a crime society, widespread poverty, HIV/AIDS, etc. The miracle of ending apartheid as of yet has not resulted in giving many South Africans, particularly the blacks an economic lift that they have been seeking. For the ANC, unemployment is the number one political and economic challenge.

ECONOMY: successfully stabilized, economic shift from mining to services, prudent economic management, economic reforms to continue. The South African economy is a free market economy that is performing well with relatively strong macro economic figures including lower inflation levels from previous years, declining debt, lower taxes, sound fiscal & monetary situation, an improvement in the current account with a modest trade surplus, a declining fiscal account with the shortfall ranging 1 to 2.5 percent of GDP over the last few years due to increased social spending.

For year 2005 and beyond, economic growth is forecasted to be steady in a low interest rate environment with monies directed to infrastructure. Tourism is now presently one of the country’s largest foreign exchange earners as the industry is valued at 7 percent of GDP. Arms manufacturing particularly in military guns makes South Africa one of the world’s top producers. The country is a major exporter of wheat, corn and sugarcane. Major industries include chemicals, iron & steel, machinery, agriculture, mining (world’s largest producer of gold, platinum, chromium). The informal economy is booming with an estimated 2 million jobs been created since 1994. However, lower levels of foreign direct investment (FDI) is hindering South Africa’s future economic growth.

Since the ANC came to power in 1994 and has ruled ever since with this return to democratic elections, the economy has improved tremendously with sound fiscal management as taxes and protective tariffs have been cut, less bureaucratic red tape but business still complains that there is still too much, inflation has fallen from 15 percent to single digits and the budget is close to balance. Corporate South Africa is in good shape, little debt and high liquidity levels. In November 2001, Moody’s upgrade South Africa’s sovereign risk rating. South Africa should redirect resources from its very large army into education and infrastructure programs. Game parks & general tourism (including casinos & gaming) along with the film industry, security business and domestic real estate are industries that are poised to continue to do well.

Economic Statistics
GDP as measured by purchasing power parity stands at $490 billion USD (2004) with corresponding GDP/Capita at approximately $11,000 USD. Real GDP growth for 2005 is projected at 4 percent and 2006 at 3.5 percent, year 2004 came in at 3.5 percent, year 2003 at 1.9 percent, 2002 at 3.6 percent. CPI inflation averaged 11.3 percent from 1997 – 2001. Recent inflation quotes include year 2004 at 4.5 percent, April 2003 at 11.2 percent. Inflation projections include year 2005 at 4.5 percent and 2006 at 5 percent. The current account is in slight deficit, year 2000 recorded a shortfall of 470 million USD. The trade position shows a modest surplus. Gross external debt is at $45 billion USD (March 2005). Unemployment is chronically high at 27 percent officially although the actual rate is closer to 40 percent with many of those unemployed being inflicted with HIV/AIDS. Services represent 65 percent of GDP, and the country is a net oil importer.

POSITIVE: rich in natural resources (gold, diamonds, platinum, manganese, vanadium, chrome ore, etc.), extensive energy sector and net energy exporter of coal/liquid fuel, electricity, modern infrastructure – telecommunications, diversified economic base, lower corporate taxes, growing middle class, labor reforms. CONCERN: a murder rate that is ten times higher than in the United States and one of the world’s highest incidence of rape making South Africa one of the most violent places on earth. Crime is prevalent with the world’s highest murder rate at 55 per 100,000 citizens, 200 police killed/year within this gun culture society although new tough gun laws may help to decrease violence. Militant labor movement, unemployment & poverty are a problem with approximately 50 percent of the population living below the poverty line, life expectancy is 51 years.

STOCK MARKET: Johannesburg Stock Exchange ‘JSE’ is Africa’s largest and is considered world class. It is now modernized with an electronic trading system helping to slow the migration of South African companies to foreign exchanges. Over the last several years, five of South Africa’s largest companies have listed on the London Stock Exchange (LSE) which impacted capital inflows providing downward pressure on the rand including some of South Africa’s largest gold producers (2001). Gold producers make up a large share of the JSE, this is bullish going forward as predicts a much higher gold bullion price.

BANKING SYSTEM: the financial & monetary system are modern, sound, sophisticated and well regulated with the “big 4” South African banks being well capitalized. As of year-end 2004, the South African Reserve Bank (SARB) had $11.7 billion USD in foreign reserves and in gold. It is also SARB’s policy of targeting inflation to an annual rate of 3 to 6 percent. In 2003, capital controls were loosened to make for a more open capital market and banking system. Majority of black South Africans do not have bank accounts. Since June 2003, interest rates started to fall in South Africa by upwards of 6 percentage points to the current level of 7 percent. Recent 10-year South African government bonds are yielding 7.85 percent.

REGIONAL and GLOBAL ANALYSIS: Zimbabwe, Congo – DR, Europe –EU
Neighboring Zimbabwe is an economic and political disaster with the current incompetence of its government, particularly the ruling party’s policy of government redistribution of white owned commercial farms. Zimbabwe is now in a food crisis and in complete disarray. When Zimbabwe’s President Mugabe was re-elected in a controversial vote in March 2002, the rand fell to 11.88 ZAR to 1 US dollar (USD). Of immediate pressure to South Africa is immigration challenges from Zimbabwe with many Zimbabweans fleeing their country in search of jobs and economic survival in surrounding countries. South Africa borders six countries also including Botswana, Zambia and Nigeria of which it exports crime and drugs. Regionally, the analysis is very volatile with great inherent risk. Current threats include famine in Malawi to Zimbabwe, history of conflict with wars in the Congo – DR to unstable and politically corrupt governments. Europe is a key export market for many of South Africa’s agricultural and commodity products.

SOUTH AFRICA and GOLD: the gold industry in South Africa represents 20 percent of exports as South Africa is the world’s largest producer of gold with 428 tonnes in year 2000 alone in addition to platinum. The gold industry accounts for 8 percent of domestic GDP and 12 percent indirectly. For every 15 percent depreciation of the rand, South Africa gold miners double their profits in rand valuations. However, during year 2004 with the higher rand valuation, 80 percent of South African gold producers operations were unprofitable. They prefer to see a rising bullion price since South Africa is a relatively high cost gold producer with deep underground gold mines and quickly depleting cost effective high grade reserves. Mines are now going deeper thus becoming more expensive to extract the precious mineral. Gold bullion was quoted at $435 USD per ounce for August 2005 (see write-up on GOLD within this BI.C currency index) and is forecasting a significant break-out in the USD and ZAR gold price in the near term to over $500 USD/ounce for 2006. Many of the large South African gold producers include AngloAmerican, Harmony Gold, Durban Deep, Gold Fields Ltd, AngloGold, Rand Gold to name just a few. A significant concern to the South African mining industry is the re-writing of the mining code thus redistributing mining wealth to blacks over the next 10 years to fulfill the government policy of black empowerment (BEE). This kind of policy may swing to the extreme would could impact rand capital flows to the negative. A much higher gold price will help to offset the recent rise in energy prices (ie. Petroleum) which is raising many producers cost structures. The rand has a correlation of 0.8 price movement to the price of gold. Other minerals and metals are important for mineral production including platinum by the likes of South African producer Implats, others minerals account for a further 20 to 25 percent of South African exports. Of major importance is the fact the world economies are now experiencing a strong global commodity bull market underway now fuelled by demand from countries like China and India, South Africa may experience greater capital inflows going forward for its minerals and metals.

KNOWLEDGE: HIV linked to the AIDS disease is a serious problem throughout much of continental Africa. AIDS in South Africa will represent 40 percent of adult deaths by year 2010 hereby killing between 5 and 7 million South Africans. AIDS figures are in dispute as some estimates have upwards of 10 percent of the South African population being infected with HIV/AIDS. Some analysts believe the AIDS crisis in Africa is overblown by the media, thus providing greater hysteria to order to gain financial support to many including non-government organizations. In fact, diseases like malaria may even be a bigger problem in several parts of Africa compared to AIDS. Today in South Africa, many are more fearful of rampant crime such as home invasions or carjackings. President Mbeki has suggested that crushing poverty kills more than AIDS and improving the economics of South Africa will help to contain this disease. President Mbeki in a decision flip is now however in support of programs to educated and change behaviour. In addition, he is now confronting AIDS with free drugs for many. AIDS for the most part in South Africa is hitting the impoverished black unemployed particularly in rural townships. It is here where many black South Africans live in a cultural of survival where unemployment reaches 75 percent, wages are incredibly low and where AK-47 machine guns sell for 10 USD.

The actual end result is indeed a terrible tragedy socially, but not devastating to South Africa’s economy. Ironically, South Africa may in the long term result in a stronger economy with a lower population say in the 35 million range down from the current 44.3 million after AIDS kills many of the unproductive n South Africa. However, this is not the case for other countries with higher AIDS statistics such as Zimbabwe, Botswana or Zambia, these economies will be crushed financially from the AIDS epidemic where upwards of 35 percent of the population are infected. With that said, the economic impact of AIDS to South Africa is immense for the next 10 years until the disease levels off and starts its decline. It is estimated that is the South African government provided anti-retroviral drugs to all of the approximate 5 million HIV infected citizens, it would cost 15 percent of annual national spending to cover these medical expenses.

ISO Symbol ‘ZAR’, South African rand. At time of review on August 11, 2005, the rand was valued at 6.346 ZAR to the US-dollar (USD) and/or 7.9425 ZAR to the Euroland euro (EUR). Floating exchange rate regime is in place. The rand collapsed in value in late 2001 where it declined 37 percent versus the USD after October 2001 to year-end 2001. For the year in total for 2001, the rand declined for a total of 55 percent from a level of 7.6 ZAR in January 2001 to a low of 13.86 ZAR at the end of 2001. President Mbeki said the currency collapse in year 2001 had nothing to do with the economy, rather it was a manipulation by large financial institutions or currency speculators targeting an illiquid currency market in South Africa? The currency crash was a culmination of several events all hitting the rand at coincidentally the same time. Just as spectacular was how the rand recovered since the low in 2001. By year 2002, the rand dramatically increased by 39.6 percent to the USD and by another 30.1 percent in 2003. As of year 2004/early 2005 the rand was approximately 20 percent undervalued to the USD as measured by purchasing power parity.

CURRENCY HISTORY: the rand was introduced in 1961, replaced the South African pound. The exchange valuation for the ZAR remained stronger than the USD up until 1982. From 1982-84, the exchange rate was at 1 to 1.3 ZAR to the USD, July 1985 at 2 ZAR to the USD, August 1985 at 2.4, 1986-88 at 2, 1989 at 2.5, November 1992 at 3, year 1993 at 3.26, 1994 at 3.55, year 1995 average at 3.62, January 1996 at 3.64, January 1997 at 4.63, January 1998 at 4.94, January 1999 at 6, January 2000 at 6.12, January 2001 at 7.77, December 2001 at a record low of 13.86, January 2002 at 11.59, June 2002 average at 10.17.

CURRENCY FORECAST: the outlook for the rand is for continued modest appreciation in the medium term of approximately 15 to 20 percent versus the USD particularly with the fundamentals looking very bullish for gold bullion and quite negative for the USD on a 3 to 5 year horizon. forecasts another leg down for the USD in 2006 with an upcoming U.S. domestic real estate correction, high oil prices mixed in with a U.S. current account deficit position that is unsustainable. With improving economic fundamentals coupled with the government moving ahead with privatization programs, South Africa will continue to grow although at a nice steady pace. Based on today’s South African economy, has a ceiling value for the rand in the next few years at 5.50 ZAR to the USD although a lower rand valuation (ie. 7 to 7.50 ZAR to the USD may result from the inherent risk associated to regional & domestic policy risk in addition to the national AIDS tragedy that may peak by year 2010).

Major credit rating agencies have raised South Africa’s long term foreign currency rating to BBB+ which is investment grade along with a positive outlook. Currency negatives for the rand include higher oil prices (net oil importer), dividend outflows from South African companies listed on foreign stock exchanges, AIDS, Zimbabwe and other regional disasters including famine, capital flight, delays in privatization and misguided fiscal policies at aiming to redistribute wealth to the black communities in ill-flawed ways. Short term risks include a narrowing interest rate differential with the United States as the US Federal Reserve Bank is in a tightening mode while SARB has been lowering interest rates over the last couple of years.

With a renewed more favourable investor perception of South Africa, steady economic growth, declining debt levels amongst fairly high real interest rates, best educated guess is for the rand to increase in value to the USD over the medium term. The full impact of the upcoming USD crisis remains uncertain, but their has been much commentary for increased diversification out of the USD by country’s such as Saudi Arabia. Conversely, it may only take a small amount of re-directed capital flows to greatly support the rand exchange value.’s view is for the rand to decline over the medium term to the euro (EUR), China’s yuan (CNY), Japanese yen (JPY) and gold. We support this view as South Africa’s cost structure is higher than many industrialized countries. Overall, South Africa is a success story.

UPDATED: August 11, 2005

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