(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000707050001-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: January 12, 2017
• Document Release Date: March 7, 2011
• Sequence Number: 1
• Publication Date: February 4, 1986
• Content Type: MEMO

Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
I I
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
4 February 1986
I- Ale
DATE b ~e Ica I C C.
Doc D/ LA M 94 - ~ooo (
oc R 3
'&PD
South Africa: Short-term Economic Prospects
Summary
The South African economy, like those of Industrializing countries, is divided
between modern and traditional sectors, but its dualism is more pronounced
and corresponds closely to racial divisions. Apartheid and its impact on South
Africa's international status deny Pretoria the option of addressing its
economic challenges without reference to broader political issues. Sustaining
this year's likely recovery through 1987 probably will require successful
negotiations with foreign creditors to reschedule $14 billion in suspended debt
repayments. Even with a debt agreement and a relaxation of international
pressure, we believe that the average annual growth rate is unlikely to exceed
3 to 4 percent for the remainder of this decade--a rate too low to keep black
unemployment from rising. The growth outlook would prove even worse if
internal political developments intensified external pressures that
economically isolated South Africa from the industrial world. Economic reforms
that might eventually boost manufactured exports and raise South Africa's
economic growth potential would require massive foreign investment that
is unlikely so long as the unrest continues.
This typescript was prepared for the Secretary of State's Advisory Committee on South
Africa by he Office of African and Latin American
Analysis. It has been informally coordinated with counterparts at State, Treasury,
Commerce and DIA, all representatives of the Interagency Information and Coordination
Group on South Africa. Comments and queries are welcome and should be addressed to
the Chief, Africa Division, Office of African and Latin American Analysis,
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
Despite having many accoutrements of a modern economy--an advanced
telecommunications system, well-developed transport infrastructure, and a wide array of
consumer goods--South Africa is an industrializing nation with most of the
characteristics associated with developing economies, such as a sharp division between
modern and traditional sectors, a dependence on commodity exports, and a legacy of
heavy government intervention.* The economy has been buffeted in recent
years by numerous shocks--drought, lower-than-anticipated export prices, and a debt
crisis that threatens to isolate it from international credit markets. As a result of these
shocks, real economic growth has averaged less than 1 percent per year since 1981, a
rate insufficient to keep per capita income from declining. We believe that the brunt of
this mediocre economic performance has fallen on blacks, and, in our view, has
contributed significantly to the serious unrest of the past 16 months. In an effort to
boost economic growth and coopt urban blacks, Pretoria has publicly commited itself to
liberalizing its economic policies.
Modern Versus Traditional Sectors
Academic studies and government data show that South Africa's 5 million whites
enjoy an average per capita income and lifestyle similar to that of Western Europe. By
contrast, the 13 million blacks who live in the rural "homelands" lead lives of grinding
poverty. Conditions for them are generally not much different from those in the poorest
African countries. Most of the other 11 million blacks, along with the 4 million Indians
and mixed-race Coloreds, provide cheap labor for the modern economy, mostly in the
urban area. They have an average per capita income closer to that found in
middle-income countries, such as Turkey. The differences between living conditions are
reflected in infant mortality rates that are 7 times higher for blacks than for whites,
according to government data.
The disparity in economic development also manifests itself in food production and
population growth. The output of commercial white agriculture has grown at a rate of 4
percent per year compared to a white population growth rate of under 2 percent,
according to government data. For blacks, however, food production has stagnated, while
population growth has averaged 3 percent per year. As a result, the black homelands
have become increasingly dependent on food aid or purchases from white commercial
agriculture.
A rising unemployment rate among semiskilled and unskilled workers coexists with a
shortage of skilled manpower, according to an IMF study of South Africa. In mid-1985,
registered unemployment among whites, Coloreds, and Indians was relatively low--for
example, white unemployment was less than 2 percent--and was limited largely to the
* With a population of 33 million and a GDP of $74 billion, the South African economy is
roughly comparable in size and per capita income to the economies of South Korea and
Argentina, according to IMF data.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
semiskilled. On the other hand, a number of academic studies have estimated that black
unemployment is running at 25 to 30 percent; and, in parts of the eastern Cape Province,
US Embassy sources calculate the figure exceeds 50 percent.
Urbanization. The large gap between the average per capita incomes of blacks
living in the homelands and those in major urban centers acts as a strong magnet
encouraging migration to "white" South Africa. As a result, the percentage of all blacks
living in urban areas is expected to grow from 38 percent in 1980 to 60 percent in 2000,
according to an academic study.
South African economists generally view the movement of blacks to the cities as
essential for the country's economic development, but Pretoria--in common with the
governments of most developing nations--clearly regards uncontrolled migration to the
cities as a potential security threat. The government has admitted that the so-called
influx laws have failed to stem black urbanization, and has promised to replace these laws
with controls based more directly on the availability of employment and housing. White
fears that sprawling slums of discontented blacks would threaten white rule probably will
keep Pretoria from eliminating all controls on the movements of blacks to the cities. n
Freeing the Black Economy. We believe that the Botha government wants to
improve the living conditions of urban blacks in an attempt to coopt them into accepting
his program of limited racial reforms, but that it will not jeopardize its carefully crafted
consensus for reform within the white electorate by massively redistributing income in
the face of poor economic growth. Pretoria thus has only gradually dismantled economic
apartheid to provide new opportunities for black advancement. According to government
statements and US Embassy reporting, for example:
Expenditure for black education has risen sharply during the 1980s,
although spending for whites on a per student basis remains seven times
larger.
Pretoria in 1979 gave black labor units official recognition and the right to
participate in collective bargaining.
Nonwhites working in white areas as executives, managers, or technical or
administrative employees are no longer subject to the legislative "color
bars" that restricted them to jobs where they worked under the fulltime
supervision and control of a white employer.
Pretoria has announced that it will promote the development of small
businesses by reducing government red tape, providing low-cost loans,
and opening parts of some central business districts to all races;
cumbersome licensing procedures, legal impediments and limited access
to finance currently stifle black business initiative.
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
Although these measures will help some blacks in the short run, Pretoria probably
believes that over the long haul only higher GDP growth rates will create the larger
economic pie necessary to make income redistribution more palatable to whites.
According to a recent South African government study, the economy's real GDP
growth potential over the remainder of this decde is 3.6 percent per year in the absence
of new foreign capital inflows or a sharp rise in world gold prices. The study held that
economic growth will be constrained by stagnant gold production, limited prospects for
further import substitution, and only fair-to-good opportunities to increase traditional
While 3.6 percent real growth would represent an improvement over the economy's
recent performance, many private and government economists in South Africa consider it
disturbingly low. Although a 3.6 percent real growth would slightly raise per capita
incomes--the overall population growth rate is estimated to be 2.3 percent per year--it is
insufficient to provide jobs for all new entrants to the job market. According to a recent
academic study, a real economic growth rate of at least 5.4 percent per year would be
needed to absorb new job-seekers into formal sector employment. Erasing current black
unemployment levels of 25 to 30 percent, of course, would take much higher growth
Dependence on Commodity Exports
According to official trade statistics and our estimates, South Africa depends heavily
upon raw mineral and agricultural exports, which together with semiprocessed minerals
and food products account for 87 percent of the country's export revenues (see Figure 1).
Overall, the economy is fairly export intensive. Total export earnings in 1984 were $20
billion, equivalent to 27 percent of GDP. These funds are used to purchase vital imports,
especially oil and capital goods (see Figure 2).
Mining. The backbone of South Africa's exports--and its economy--is the mining
industry, which accounts for some 76 percent of export revenues. Gold alone accounts
for nearly half of total export revenues. The country's mineral exports are important not
only to its own economic development, but also to world markets. Based on international
statistics and data from the US Bureau of Mines:
-- South Africa accounts for 60 percent of world gold production,
and is a major source of gem diamonds.
-- It is the major non-Communist supplier of several strategic
minerals, including more than 90 percent of Western production of
platinum group metals, some 60 percent of vanadium, one-half of
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
Figure 1: Estimated South African Exports
by Commodity Group, 1984
Other minerals, base metals, and mineral products
28%
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
Figure 2: Estimated South African Imports
by Commodity Group, 1984
Other minerals and mineral products
4%
Chemicals and chemical products
Base metals and fabricated metal products
5%
Crude oil
15%
_ _ Agricultural Products
Machinery and equipment
45%
Other
18%
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
chromium, and one-fourth of manganese.
It is a major source of industrial minerals such as antimony,
asbestos, fluorspar, vermiculite, andalusite, and titanium.
It is the world's third largest producer of uranium and a major
coal producer.
Processing of minerals--particularly the production of ferro-alloys--has progressed
significantly, and processed minerals now account for some 40 percent of nongold
_I_
mineral experts
by
In contrast to other parts of the economy where South Africa depends almost
entirely on imported technology, the country is an acknowledged world leader in
deep-mining technology. Expertise developed in the country's gold mines, which extend
as far as 2 miles or more below surface level, has given South African mining
corporations the wherewithal to invest in mining operations in southern Africa, the United
States w_d L
-
atin meri
Agriculture. Although the agricultural sector makes a much smaller contribution to
GDP and export earnings than does mining, academic studies note that South Africa is
one of a handful of African countries that are food self-sufficient in nondrought years,
and that it supplies grains to much of southern Africa. South African farmers, however,
do face significant problems. Rainfall is unreliable, and the country suffers from recurring
and prolonged droughts. Moreover, the financial press reports that the severe drought
that gripped South Africa's major grain-producing region from 1982 to 1985 and high
interest rates have left the country's corn and wheat farmers overburdened with debt.
Even with good rains, we believe it may be years before the country can match its record
A Legacy of State Intervention
The South African Government openly advocates market-oriented principles and is
decidedly anti-Communist, yet its actions demonstrate a penchant for statist solutions to
the country's social and economic challenges. This interventionist approach is notorious
for the limits it has placed on black economic activity, but white businessmen, farmers
and consumers also have been affected. Examples of government intervention include
state-run corporations and markets, and policies intended to channel private-sector
industrial
devel pment
State-Run Companies and Markets. According to South African data, state-owned
companies dominate several industries and hold some 15 percent of the country's
physical capital. The South African Transport Services (SATS) operates the country's
railroads, major airline, largest road freight service, and harbors. The South African
Broadcasting Corporation (SABC) and post office dominate the communications field,
operating television, radio, telephone, and postal services. The Iron and Steel Corporation
(ISCOR) is by far the largest producer in its market. Other monopolies owned wholly or
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
partially by the government include ESCOM (electricity), FOSKOR (phosphate), ALUSAF
(aluminum), UCOR (uranium enrichment), SOEKER (oil exploration), Atlantis Diesel Engines,
and ARMSCOR
----`
(wea
Even when government companies do not dominate an industry, Pretoria often sets
the price or markets the product, according to US Embassy reports. Some academic
studies have estimated that approximately one-third of South Africa's consumer price
index consists of prices controlled by the government or its companies. The government
also is the sole overseas purchasing agent for South African oil companies, and regulates
domestic energy prices. Some 70 percent of farm output is sold to 29 agricultural
marketing boards. The central bank markets gold overseas on behalf of the mining
companies, and is heavily involved in the local foreign currency market. Overall, we
estimate that the government sells more than half of the country's exports, and buys
h
more t
an one-quarter of its imports.
Relations with Private Sector. Despite significant government intervention,
academic studies and IMF reports indicate that the economy has a healthy private sector
with a small, but reasonably sophisticated, financial market. The Johannesburg Stock
Exchange is dominated by a handful of corporate groups, most notably Anglo American
Corporation and Barlow Rand, which are involved in South African mining, property,
manufacturing, and insurance. Foreign-based multinational corporations also play an
i
mportant role in the economy, often in joint ventures with local corporations.
The Afrikaner-dominated government often has had cool relations with the business
community, which is-dominated by English-speaking South Africans and foreign
companies. In fact, the Afrikaner leaders historically have used their control over the
country's political system to improve the economic lot of their people. Based on public
statements, this attitude seems to have changed somewhat in recent years as more
Afrikaners have moved up in South African business, and as the National Party has sought
business sector support for its racial reform program. Nonetheless, a mutual wariness is
still the norm in government-business relations.
Import Substitution. As with many developing nations, the South African
Government has sought to guide private-sector industrial development towards strategic,
as well as economic, goals. In particular, it has used stiff tariffs and import controls to
promote local production of goods previously imported. Import substitution probably has
made South Africa less vulnerable to certain types of economic sanctions, but it also has
created a manufacturing base that is largely uncompetitive in world markets, especially in
industries where high technology and long production runs are important in keeping costs
down. As a result, much of South Africa's manufacturing industry consists of high-cost
companies producing consumer or industrial goods for domestic use under the protection
of tariffs that exclude cheaper foreign substitutes (see Figure 3). Only 15 percent of the
'
country
s industrial output is exported.
The automobile industry provides good example of the problems facing South
African manufacturing. According to the financial press, the industry grew rapidly during
the 1960s and 1970s under heavy government protection from foreign competition. The
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
Figure 3: South Africa Manufacturing Sector Sales, 1984
Textiles, clothing
8%
Wood, paper, and publishing
Chemicals, rubber, and plastic
22%
Basic metals and metal products
17%
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
rising affluence of whites and government ceilings on interest rates created a ready
market that numerous companies entered. More recently, however, saturation of the
automobile market for whites--combined with recession and high interest rates--has
triggered a precipitous decline in sales. The industry is operating at less than 50 percent
of capacity, and more than 30,000 workers have been laid off during the past two years.
Although there are some minor exports of motor vehicle parts to West Germany, the
industry is too high-cost to expand its potential market through exports. A painful series
of mergers and withdrawals of producers has begun and appears likely to continue.=
Pretoria's policy of import substitution has not been without its successes, most
notably the three synthetic crude oil facilities, which use domestic coal reserves as
feedstock to produce about 40 percent of South Africa's liquid fuel needs, according to
academic studies. The first coal-to-oil plant began operation in 1955, and has been
expanded over the years to a capacity of about 14,000 barrels per day of synthetic
petroleum products. The second and third plants started operation in 1980 and 1982,
respectively, and each has a capacity of about 45,000 barrels per day. Although the
construction of these facilities initially was undertaken by the government for strategic
reasons, a subsequent rise in world oil prices and fall in the value of the rand has made
the facilities profitable, and they are now privately owned, receiving only a small subsidy
in the form of a tax break.
Prospects for further import substitution generally are poor, in our judgment. Two
or three additional synthetic crude oil facilities are planned, including one that would use
natural gas as a feedstock, but they probably will do little more than offset the growth in
energy demand that will have occured by 1991 when the new facilities are expected to be
in operation. Some import substitution for capital equipment may well occur, but the
small domestic market will not permit the scale of operation enjoyed by high-volume
foreign producers, which will lead to high unit costs that must be offset by government
subsidies or passed on as higher prices.
We believe concern over the country's mediocre long-term growth prospects has
been reflected in Pretoria's effort since 1979 to liberalize its economic policies in order to
promote manufacturing exports, and boost domestic savings. attract new foreign
investment. A key element in this strategy has been the removal of selected import and
foreign currency controls that were intended to protect high-cost domestic industry from
foreign competition. In addition to allowing the rand to float against foreign currencies,
the monetary reforms eliminated ceilings on domestic interest rates. Some selective
promotion of exports also is envisaged, but as a signatory to the General Agreement on
Tariffs and Trade, South Africa is limited in the types of export subsidies that it can use.
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
The Debt Crisis
Pretoria usually has practiced conservative foreign debt management to assure
continued access to credits despite foreign criticism of its racial policies. The country's
economic record shows that on several occasions the government has clamped down
hard on growth to reduce import demand. South African economic performance thus has
risen and fallen in response to swings in export prices, especially as a result of
fluctuations in the world price of gold. In the past seven years, the annual average price
of gold has ranged from under $300 per ounce to over $600 (see Figure 4). During the
same period, real economic "growth" has ranged from a negative 3 percent to a positive
7 percent.
Origins of Debt Troubles. In our view, the most recent economic upturn--which
lasted roughly from April 1983 to July 1984--stemmed from Pretoria's expansionary
policies that were based on expectations of higher gold prices and of an end to the
southern African drought, and from consumer purchases that ultimately were funded by
short-term trade credits. By the middle of last year, it was becoming clear that the
country's trade balance was getting out of hand (see Table 1). As it had in the past,
Pretoria reacted to a $1 billion current account deficit for the first 9 months of 1984--as
well as continued high inflation and a fall in the exchange value of the South African
rand--by clamping down hard on the economy. As a result, the current account jumped
back into surplus in late 1984, and real GDP fell by 2.5 percent between second quarter
1984 and second quarter 1985, according to government data.
Although the growth in debt relative to GDP during the 1983-84 miniboom was not
unprecedented, South Africa became more vulnerable to a cutoff in foreign credits.
According to Bank for International Settlements data, the maturity of the foreign
commercial debt shifted from 38 percent short-term debt in 1979 to 66 percent in
1984--a trend which meant that a larger fraction of the debt needed to be paid off or
reborrowed each year. Meanwhile, Pretoria's foreign currency and gold reserves fell
relative to imports. Whereas these reserves were sufficient in 1980 to pay for 5 months
of imports, by 1984 they could buy only 2 months worth.
According to the financial press, growing international nervousness over South
African political uncertainties led some foreign banks to trim their credit lines in the first
half of 1985, causing significant downward pressure on the rand. With floating exchange
rates, the rand plummetted as South African companies scrambled for foreign currency
commitments to cover future transactions in the self-fulfilling expectation of further
declines. From an average of $1.30 in the first quarter of 1980, the rand sank to $0.40 in
the third quarter of 1985. Political events, such as the declaration of a state of
emergency in major black townships in July 1985 and a hardline speech by President
Botha in August, triggered near-panic runs on the rand.
Pretoria suspended trading on South African foreign currency and stock markets for
four days in August 1985, pointing publicly to the slide in the value of the rand, an
acceleration of the withdrawal of foreign credit lines, and an apparent bunching of foreign
debt repayment commitments as key reasons behind the decision. Pretoria then
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
South African Balance of Payments, 1980-1985
1980
1981
1982
1983
1984
1985 a/
Current Account Balance
3.6
-4.6
-3.0
0.2
-0.7
3
Merchandise Trade Balance
-5.6
-9.8
-7.3
-5.1
-5.7
-2
Merchandise Exports, F.O.B.
12.6
11.0
9.4
9.3
9.1
11
Merchandise Imports, F.O.B.
18.2
20.8
16.6
14.4
14.8
13
Net Gold Output
13.0
9.6
8.0
8.9
8.1
8
Net Services and Transfers
-3.8
-4.3
-3.7
-3.6
-3.1
-3
TOTAL RESERVES, YEAREND b/
7.7
4.3
4.0
4.1
3.1
Long-term Capital Movements
-0.6
0.6
2.2
-0.4
1.9
Change in Liabilities Related
to Reserves c/
0.0
2.1
0.3
1.0
0.4
Other Short-term Capital
Movements d/
-2.3
0.7
0.3
0.1
-2.1
Gold Valuation Adjustments and
SDR Allocations
1.3
-0.6
0.1
-0.4
0.9
Changes in Gross Gold and Other
Foreign Reserves
1.9
-1.8
0.0
0.6
0.2
a/ Estimated.
b/ Total reserves are not the sum of changes in reserves and the previous year's
total reserves because of year-to-year changes in exchange rates.
c/ Liabilities related to reserves are short-term foreign liabilities of the South
African Reserve Bank and short-term foreign obligations of commercial banks.
d/ Includes errors and omissions and supplier credits.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
E
Estimated
P
Predicted
Figure 4: Selected Economic Indicators
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
announced on September 1 a four-month suspension of principal repayments on $14
billion of South Africa's $24 billion in foreign debts. Foreign currency controls also were
tightened in an effort to slow the capital outflow, reversing its previous policy of
economic liberalization.
Negotiations with foreign creditors so far have not yielded a debt rescheduling
agreement, and the moratorium has been extended to 31 March. According to press
reports, Pretoria has proposed to major creditor banks that the moratorium be extended
to 1990. Not surprisingly, the initial creditor reaction ,to the proposal has been
unfavorable. In addition to the economic considerations, foreign banks also face the
dilemma of balancing a solution to South Africa's financial crisis against a desire to avoid
being viewed as cooperating with Pretoria.
Implications. Failure to resolve the debt crisis amicably would reduce significantly
South Africa's future access to foreign capital, in our view. Not only would overseas
commercial banks be unlikely to make major new loans, but retention of the tighter
foreign currency controls recently reimposed also would discourage foreign investment.
The short-run impact of a decline in foreign investment should not be overstated.
According to government data, South Africa's industrial development has received little
financial help in recent years from foreign investment and has been funded largely
through domestic savings of revenues earned through the export of gold and other
commodities. Indeed, government data reveal that net foreign capital inflows, including
loans and investment, have accounted for only 12 percent of gross domestic investment
since 1977.
Although foreign capital inflows have played a comparatively small role in South
Africa's recent economic growth, over the long haul the loss of foreign capital from loans
and investment would hurt the country's ability to diversify exports and boost black
employment prospects. Based on our review of past periodic episodes of heavier foreign
investment and borrowing, we believe that capital inflows have served principally either to
fund major development projects or to sustain temporarily an economic upswing at times
when the gold price has declined unexpectedly:
In the mid-1970s, state-run corporations undertook major
infrastructural projects that required foreign funds, including port
development and improvements, expansion of iron and steel plants,
establishment of television service, and more rapid electrification.
By contrast, 1981 and 1982 were years of little new investment, but
South African banks and the central government borrowed abroad to
finance current account deficits totaling $7.5 billion; gold prices
had fallen from an average of $608 per ounce in 1980 to $460 in 1981
and $376 in 1982, according to IMF data.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
25X1
In the absence of new capital inflows--and especially if sanctions cut markedly into
export earnings--we believe that Pretoria will be unable over time to boost South Africa's
economic growth potential significantly above 3.6 percent despite its economic
liberalization drive. According to an academic study, the country over the next five years
will need capital to fund proposed infrastructural projects such as the two proposed
synthetic petroleum facilities, as well as normal expansion of productive capacity. Internal
sources of funds exist, but without inflows of foreign capital the capacity of the economy
to buy the imports that it needs for growth soon will be reached, according to US
Embassy analysis. Even the sale of state-owned companies will have limited benefit as
these corporations tend to be unprofitable.
Despite the potential implications of the debt crisis for the future availability of
funds to South Africa, the government has reacted to the debt crisis by easing its credit
policies. Banks have lowered the prime lending rate from 21 percent at the time that the
debt moratorium was declared to a prevailing 15.5 percent, and restrictions on consumer
borrowing have been relaxed. In our view, Pretoria chose to ease credit in order to boost
domestic business confidence and promote a gradual economic recovery that would
reduce tensions in black townships.
Prospects for 1986 and Beyond
South Africa is poised for a modest economic recovery this year. Our economic
model forecasts roughly 3.5-percent real GDP growth, around a 15-percent yearend
inflation rate, and a little over a $1 billion current account surplus. This compares with
private sector forecasts of South African economic growth which in general are in the
low 3-percent range. In our judgment, the recovery would be export-led, with the
domestic economy remaining fairly depressed and black unemployment rising slightly. As
a result, we expect private investment in plant and equipment to decline further. Key
assumptions that underlie our forecast include a continuation of current
heavily-expansionary policies, an average gold price of $350 per ounce, continued good
rains though February in the corn-growing region, progress in the debt negotiations
(though not necessarily a final resolution), and little significant change in foreign
economic sanctions against South Africa.
Sustaining the upswing beyond 1986, in our view, will require at a minimum
successful negotiations with foreign creditors to reschedule the $14 billion in debts that
are now frozen. Failure to do so, or to avert tougher sanctions, will lower growth
prospects in 1987 and beyond. Although political developments in South Africa may
derail the debt talks, we believe that at least a tacit one-year debt rescheduling is
likely--if not a formal, multi-year agreement. The banks have little to gain by breaking
off debt talks as long as public pressure is manageable and South Africa remains current
on its interest payments. On the other hand, creditors probably believe that a one- or
two-year rescheduling would have the advantage of appearing to keep Pretoria on a tight
leash. Pretoria, for its part, probably recognizes bankers' political sensitivities and may be
willing to negotiate on the basis of a one- or two-year rescheduling.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
In the absence of major new political reforms, we expect South Africa's economic
isolation to increase over time. Continued unrest is likely to spark new calls for tougher
Western economic sanctions. These sanctions, in turn, probably would push growth
below 3 percent in 1987 and beyond, and seriously erode any current account surpluses.
By contrast, economic reforms intended to boost manufactured exports eventually may
raise South Africa's economic growth potential, but the necessary infusion of foreign
investment implies some internationally-accepted resolution of the country's political
dilemma--an unlikely scenario--which, in any case, would take years to affect
significantly economic growth.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1
25X1
SUBJECT: South Africa: Short-Term Prospects
Original -- Ambassador William Kontos, Executive Director
Advisory Committee on South Africa
1
--
Donald Gregg, Office of the Vice President
1
--
Phillip Ringdahl, Director, African Affairs, NSC
1
--
Chester Crocker, Assistant Secretary of State
African Affairs
fo
r
1
--
Frank G. Wisner, Deputy Assistant Secretary o
for African Affairs
f
State
1
--
Robert Cabelly, Special Assistant to the Assist
Secretary of State for African Affairs
an
t
1
--
Anthony S. Dalsimer, Director, African Affairs,
St
ate/INR
1
--
Noel Koch, Deputy Assistant Secretary for Def
International Security Affairs
en
se for
1
--
Jeffrey S. Davidow, Director, AF/S, State Depa
rt
ment
1
--
Peter W. Lando, Director, Economic Policy Sta
Department of State
ff,
1
--
John Clingerman, United States Information A
ge
ncy
1
--
Mark Edelman, Agency for International Develo
p
ment
1
--
Margaret Greenwood, Acting DIO for Africa, DI
A
1
--
James L. Woods, Assistant, ISA/OSD
1
--
Alan Van Esmond, South Africa Working Group
Department of State
,
1
--
Ashley Wills, AF/S, Department of State
1
--
Director of Central Intelligence
1
--
Deputy Director of Central Intelligence
1
--
Executive Director
1
--
Deputy Director for Intelligence
1
--
National Intelligence Council
1
--
NIO for Africa
1
--
Chief, Africa Division, DDO
1
--
Intelligence Liaison Staff
1
--
Chief, Production Evaluation Staff, DDI
1
--
Director of African and Latin American Analysi
s
1
--
Research Director, ALA
1
--
Production Staff, ALA (one sourced copy; one
c
lean copy)
5
--
OCPAS/IMD/CB
4
--
ALA/AF
2
--
ALA/AF/S
4
-- ALA/AF/8
2
-- ALA/SS
ALA/AF/S:I I (4 February 1986)
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP86T01017R000707050001-1