Outlook for 2011-15

• The president, Jacob Zuma, will try to strengthen the ruling party, the African National Congress (ANC), and deliver socio-economic development, but popular impatience and political in-fighting will make this a formidable challenge.
• No major economic policy shifts are envisaged. Boosting economic growth, jobs and investment will remain the government's primary focus. There is a risk of rising populism and state intervention if unemployment worsens.
• Real GDP growth will quicken from 2.8% in 2010 to 3.7% in 2011 and 4.6% in 2012, helped by stronger external demand and looser fiscal policy. Growth will ebb in 2013-15 because of persistent structural constraints
• Inflation will rise in 2011-12, spurred by rising electricity prices and wage growth. Inflation is forecast to moderate in 2013-15, helped by more stable global commodity prices.
• The rand remained strong in 2010, buoyed by capital inflows, before gradual depreciation in 2011-15, driven by the need for external financing. The rand is expected to slide from R7.3:US$1 in 2010 to R9.5:US$1 in 2015.
• The current-account deficit is forecast to rise from 3.9% of GDP in 2010 to 5.6% of GDP in 2011 and to 6.2% of GDP in 2012 as the recovery sucks in imports, before receding in 2013-15 as earnings growth quickens

Monthly review

• South Africa started a new two-year stint on the UN Security Council in January, and has been invited to join the BRIC grouping, highlighting the country's standing as a key leader in Sub-Saharan Africa.
• Draft labour law amendments to clamp down on labour brokers have angered both trade unions (for not being strict enough) and agencies (for being too harsh).
• A long-delayed new company law and a consumer protection law are now scheduled to come into force in April, but further delays are possible.
• South Africa's matric exam results improved unexpectedly for 2010, despite the disruption caused by teachers' strikes, but key skills remain in short supply.
• Inflation edged up to 3.6% year on year in November because of higher fuel and power prices, but the strong rand is helping to constrain the pressure.
• The current-account deficit widened to 3.7% of GDP in the third quarter owing to a larger invisible shortfall. However, the gap was comfortably financed by strong capital inflows.

Eighteen months into his five-year term, the president, Jacob Zuma, will find it increasingly difficult to maintain the cohesion of the tripartite alliance because of growing divisions between its members-the ruling African National Congress (ANC) and its partners in the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). The president will endeavour to keep together the "broad church" of the ANC and its allies, but his attempts to placate all wings of the party will continue to raise doubts about his leadership skills. Mr Zuma's backing for economic policy continuity and for centrists such as the finance minister, Pravin Gordhan, will please markets but will continue to anger the left, especially COSATU, which could spark fresh strikes.

Apart from long-standing disputes between the centre and the left on economic policy (which the centre has largely won so far), Mr Zuma faces bitter divisions between the ANC Youth League (ANCYL) and the ANC's alliance partners, which could escalate. The ANCYL backs left-style policies-such as nationalisation-but is deeply opposed to the SACP and its influence on the ANC, and is best described as "nationalist" (or even right-wing). The faction aims to oust key communists from the ANC leadership, including the secretary-general, Gwede Mantashe, at the party's 2012 electoral conference. However, the ANCYL's controversial leader, Julius Malema, was disciplined in 2010 and ordered to apologise for insulting the president-and failed to get the punishment overturned at the ANC's national general council in September. This has weakened Mr Malema and bolstered the president, but the fault lines in the party are expected to remain.

Mr Zuma's main strength is his status as a unifier and a facilitator, although his direct involvement in policymaking is minimal (for better or worse). However, the president's attempts to please all the factions that brought him to power suggest indecisiveness-when firm leadership is required-and his personal indiscretions have not helped. Any further erosion of his credibility could fuel in-fighting and slow the implementation of policy. Mr Zuma is by no means a "lame duck" president-and felt confident enough to carry out a significant cabinet shuffle in October-but his position is not totally secure. He could become a one-term rather than a two-term ruler as factional battles escalate in the run-up to the ANC elective conference in 2012, although it seems highly unlikely that the ANC will ditch him.

How the government deals with judicial independence, press freedom and corruption will be watched closely, especially given Mr Zuma's past links to alleged graft and his long legal battle to clear his name. The charges against him were dropped (just before the election) because of supposed executive interference in the prosecution, but the claims have not been fully tested in a court of law. The eruption of any major scandals during Mr Zuma's presidency would therefore be particularly damaging, but despite the launch of new anti-corruption initiatives the government will struggle to contain the problem. The conviction in July of a former police chief, Jackie Selebi, on bribery charges suggests that high-profile figures are not completely immune, but the decision in October to scrap a probe into a questionable arms deal in the 1990s sends a different message. The ANC's latest proposals to muzzle the press and restrict access to official information have serious implications but will probably be watered down. Mr Zuma's initial legal appointments-a new chief justice and four members of the Constitutional Court-did not threaten judicial independence, but his subsequent appointments, including that of Menzi Simelane to head the National Prosecuting Authority, have been partisan and will continue to generate suspicion.

Over the forecast period high unemployment, income inequality, slow land reform and poor service delivery are likely to spark regular protests by disgruntled shanty-town dwellers and other disaffected groups, some of which may turn violent. Most unrest will be at a low level, but some could become more serious, echoing the xenophobic attacks on foreign Africans in 2008, caused in part by the Zimbabwe refugee crisis. Other potential flashpoints include labour unrest and strikes, and conflict between the ANC and the opposition Democratic Alliance (DA) in the Western Cape. However, South Africa's strong institutions, established democratic traditions and widely respected constitution will curtail the risk of instability. Furthermore, Mr Zuma's appointment of loyalists to key security portfolios signals his intention to respond firmly to significant threats.

The next key event on the electoral calendar will be municipal polls in 2011, by June at the latest, which will test the standing of the president, the ANC and the tripartite alliance, especially given widespread demands for improvements in the delivery of basic services such as housing, health, education and jobs. The DA, which won control of the Western Cape in 2009, is likely to make further inroads into ANC support, but faces the perennial challenge of attracting more black voters to build on its core of white and coloured supporters. The Congress of the People, formed in 2008 by ANC rebels, will lose support and seems likely to split because of a bitter power struggle between its two founding leaders, Mosiuoa Lekota and Mbhazima Shilowa. The ANC will convene an electoral conference in 2012 to select a leadership team for the 2014 election, but although some leadership changes are possible, Mr Zuma is likely to remain in charge (unless the local elections in 2011 are a disaster). The ANC, under Mr Zuma or otherwise, will be well placed to win another term in 2014, given mass support for the party, although victory would not be a foregone conclusion if the tripartite alliance were to break apart. There has long been speculation that the "broad church" will not hold and that the left will break away, leading to a realignment of the political spectrum and forcing thousands of members to choose sides. However, a split is unlikely, as COSATU and the SACP have consistently preferred to fight for influence within the alliance, while the ANC will remain reliant on their votes.

South Africa, with the largest and most advanced economy in Africa, will continue to play an important role in world affairs, and started another two-year stint on the UN Security Council in 2011, just two years after finishing an earlier term. Although Mr Zuma is less active on the world stage than his predecessor, Thabo Mbeki, he is becoming a well-travelled leader. The country will remain deeply engaged with Africa, particularly Southern Africa and, above all, Zimbabwe, where the socio-political crisis has produced a flood of refugees to South Africa. An enforced power-sharing agreement appears to be holding between Zimbabwe's president, Robert Mugabe, and his main rival, Morgan Tsvangirai, the leader of the main faction of the opposition Movement for Democratic Change, although significant tensions persist, owing partly to Mr Mugabe's intransigence. An enduring settlement in Zimbabwe would give a substantial boost both to Mr Zuma's credibility and to regional integration. South Africa will seek to build closer "south-south" ties (especially with China, India and Brazil) and maintain close relations with the EU and the US. Gaining a permanent African seat on the Security Council is a key aim.

The main challenge facing policymakers in the short term (2011-12) will be to expedite the country's recovery from its first recession since 1992 by maintaining stimulus measures (including a budget deficit and cheap money), while guarding against macroeconomic imbalances. The main test in the medium term (2013-15) will be to overcome the structural barriers (such as skills shortages) that are preventing South Africa from entering a phase of faster, more labour-intensive growth. However, the policymaking environment will become more cluttered during the forecast period following the creation of two new policymaking centres, the National Planning Commission and the Department for Economic Development, to add to the Treasury, the South African Reserve Bank (SARB, the central bank) and the Department of Trade and Industry. Although new initiatives are needed, especially to deal with deep-rooted problems such as high unemployment, stark inequality, skills shortages, crime and AIDS, there is a risk of conflict and inertia in the absence of decisive leadership. The expected completion of major infrastructure projects will facilitate business activity, but there will be new challenges in the form of stricter anti-competition laws and steep rises in electricity tariffs.

There are unlikely to be any major policy shifts in 2011-15, as key moderates are likely to remain in powerful positions. The influence of the left wing will increase, but the Economist Intelligence Unit expects the centrist view to prevail, especially in light of the country's reliance on foreign capital. As a result, inflation-targeting will remain in place and fiscal policy will be prudent, although there is a risk that in-fighting between the centre and the left will impede policymaking and implementation. Policy towards private enterprise will remain accommodating, but parastatals will continue to play a key role. Privatisation opportunities will be limited and public-private partnerships will continue to confront regulatory hurdles. There is a risk of increased state intervention, such as the formation of a new mining parastatal. An official commitment to tackling high levels of crime and AIDS is welcome, but land reform will need to be handled very carefully to avoid damaging agriculture and scaring investors. Black economic empowerment will remain a key objective, but there will be a drift towards broad-based deals that spread the benefits more widely.

Policy will remain loose during fiscal year 2010/11 (April-March) before tightening gradually in 2011/12, followed by deeper consolidation thereafter, although the budget will remain in deficit throughout the forecast period because of heavy investment in infrastructure. The government now expects the shortfall to narrow to 5.3% of GDP in 2010/11, which is better than expected, because of a recovery in revenues, and to continue falling, to 4.6% of GDP in 2011/12 and 4% of GDP in 2012/13. The deficits will push up public-sector borrowing, mainly from domestic markets, although several years of prudence mean that South Africa's public debt ratio is relatively low and can tolerate the increase without threatening the country's creditworthiness: the public debt burden will remain below 50% of GDP, which is low by global standards. The fiscal position will be more challenging towards the end of the forecast period because deeper consolidation will be needed to stem the rise in debt-service costs and protect investor confidence. The government will therefore need to make some tough spending choices in the face of persistent pressure to spend more on infrastructure, social welfare and wages-especially in the run-up to the 2014 election. We nevertheless expect the Treasury to maintain fiscal discipline and predict that the budget deficit will edge down to 3.2% of GDP in 2013/14, to 3.1% of GDP in 2014/15 and to 2.7% of GDP in 2015/16.

Monetary policy will remain focused on trying to keep annual inflation, as measured by the consumer price index (CPI), within the official target range of 3-6%. The SARB's monetary policy committee has cut rates aggressively in the past two years, most recently in November 2010, when it sanctioned another 50-basis-point reduction in the repurchase (repo) rate to 5.5%, the lowest level for 35 years. Another reduction in early 2011 remains a possibility, depending on monetary trends in the interim. Policy may tighten a little in the second half of 2011 or in 2012 as inflation edges back up towards the 6% ceiling, making the SARB nervous, but rates will remain relatively stable throughout the forecast period. The SARB governor, Gill Marcus, will maintain a disciplined approach and there are no changes in prospect to the inflation target range. The SARB's mandate now encompasses growth and employment as well as prices, but this is unlikely to make much practical difference, as the central bank has consistently interpreted its mandate with a degree of flexibility.

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Real GDP, after growing by an estimated 2.8% in 2010-held back by consumer and business caution in the aftermath of recession-is forecast to stage a more significant recovery in 2011, with growth accelerating to 3.7% as a result of higher consumer spending, more business investment and stronger external demand. Although growth will be too slow to make an impact on unemployment, higher wages for those in work will support consumer demand, as will low interest rates and subdued inflation. Business, which has been cautious about investing in the wake of the recession, will regain confidence in line with the wider upswing and increase the pace of investment in new capacity. The government will also remain supportive of growth via an ongoing fiscal stimulus, directed in particular towards investment in infrastructure.

The outlook for 2012 is brighter, and we expect growth to quicken to 4.6% as the country rebuilds momentum following the recession, helped by a more favourable global environment and ongoing public and private investment. Job creation, a lagging indicator, will also pick up, boosting household demand, especially in the expanding middle-class segment. Credit availability will improve as banks adopt less conservative lending policies. Growth in both 2011 and 2012 will benefit from spin-offs from the 2010 football World Cup such as extra tourism, although there is a risk of electricity shortages re-emerging (especially in 2012, when growth quickens) until new base-load power stations come on stream in 2013-15, which will constrain energy-intensive sectors. Electricity prices are set to rise sharply, raising costs and fostering energy efficiency. The roll-out of new submarine fibre-optic cables in 2011-12 will improve South Africa's connectivity and boost the telecommunications sector.

Prospects thereafter are a little gloomier, and we expect growth to retreat to 3.8% in 2013 and 3.6% in 2014 because of persistent structural constraints, including skills shortages, high unemployment, crime, corruption and inefficient parastatals, while uncertainties in the build-up to the 2014 election will act as an additional constraint. Both household and government consumption will feel the impact of fiscal consolidation, although private and public infrastructure projects will underpin investment. Growth will recover marginally, to 4% in 2015, helped by the start-up of new power stations and transport networks, but other structural constraints will persist.

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Inflation, measured by the new CPI benchmark, edged up for the second month running in November to 3.8% year on year, driven by costlier fuel and power, but it remains firmly within the SARB's 3-6% target range. Sound policies, a strong rand, modest consumer demand and spare industrial capacity will help to keep inflation in check. However, hefty wage increases and the sharp, 25% annual rises in electricity tariffs in 2010-12 will stoke inflation across the price spectrum. Trends in global food and fuel prices pose additional risks. Inflation is now estimated to have subsided to an average of 4.4% in 2010 before edging higher, to 4.5% in 2011 and 5.3% in 2012. However, inflation will stay within the SARB's target range throughout the period (barring shocks) and will dip back below 5% in 2013-15, helped by more stable commodity prices, slower growth in the domestic economy, stricter competition policy and efficiency gains arising from investment in infrastructure.

The rand strengthened to R6.81:US$1 in December, a three-year high and 8.8% stronger than a year earlier, driven by robust investor appetite for emerging-market assets, including South African bonds, because of the much higher yields on offer compared with rich-country markets. The authorities, believing the rand to be overvalued, will try to stem the appreciation by building foreign-exchange reserves and loosening some capital controls, but direct intervention is not in prospect, as rand strength reflects global forces beyond local control. The rand will stay stronger for longer than had been predicted earlier, and is estimated to have averaged R7.3:US$1 in 2010, but gradual depreciation remains the most likely outcome for the forecast period, given South Africa's fairly high inflation and current-account deficit, and political uncertainty in the run-up to the 2014 election. We therefore expect the rand to drift to R7.6:US$1 in 2011 and R8.4:US$1 in 2012, and to continue weakening to R9.5:US$1 in 2015, although exogenous shocks or unwelcome policy shifts could lead to a faster decline.

South Africa's current-account deficit is expected to widen from an estimated 3.9% of GDP in 2010 to 5.6% of GDP in 2011 as faster GDP growth sucks in imports of goods and services. Exports will benefit from the global recovery but will not keep pace with imports owing to fragility in key OECD markets. The trade deficit will widen in 2011. The far larger invisible deficit (comprising services, income and current transfers) will also increase. Service inflows will weaken after the World Cup while income outflows to foreign investors will rise in line with higher capital inflows. Current transfers will remain negative throughout the forecast period because of payments to fellow members of the Southern African Customs Union. Similar trends will be evident in 2012 as faster GDP growth-and South Africa's strong demand for capital goods-pushes up imports more quickly than exports. The invisible shortfall will remain large, leading to a rise in the current-account deficit to 6.2% of GDP in 2012. The picture will change in 2013-15, as a slowdown in the economy (and investment in import substitution such as oil refining) weakens import demand, while more rapid global growth and brisk demand from other emerging markets (including Africa) boost exports. We therefore expect the current-account deficit to narrow from 5.8% of GDP in 2013 to 3.8% of GDP in 2015.

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South Africa has returned to the international spotlight after being elected to serve another two-year stint as a non-permanent member of the UN Security Council, starting in January 2011 (alongside other new members Colombia, Germany, India and Portugal). This comes just two years after South Africa completed a previous term, in 2007-08, and underlines the country's status as an African leader, especially in terms of economic size but also (to a lesser extent) in political influence. South Africa will prioritise African and emerging-market issues during its new term and will back the case for reforming and expanding the council, including a permanent seat for Africa. Apart from South Africa, the continent's other current representatives on the council are Nigeria and Gabon, whose terms expire at the end of 2011.

South Africa's earlier term in 2007-08, when the former president, Thabo Mbeki, was at the helm, was not a great success. The country was criticised for supporting regimes with poor human rights records and for a softly-softly approach to Zimbabwe's internal crisis that made little headway. South Africa's new stint may run more smoothly, helped by the preference of the current president, Jacob Zuma, for pragmatism over ideology and a desire to make a more positive impression. In a promising sign, the new South African delegation has already backed proposals to include sexual orientation in a new human rights resolution, retreating from earlier objections and winning rare praise from local human rights groups: a veteran activist, Zakie Achmat, described it as a "major change". Some of the key African issues likely to confront South Africa at the UN include the crisis in Cote d'Ivoire, the possible creation of Southern Sudan, Somalia-based piracy around the Horn of Africa and the perennial Zimbabwe question.

Mr Zuma's relatively hectic foreign travel schedule confirms South Africa's intention to play a more prominent global and regional role and to position itself as a gateway to the rest of the continent. Since assuming the presidency in mid-2009, Mr Zuma has undertaken 30 official trips-including visits to the US, India, China, Russia, Brazil, the UK, France and several African states-and there is no sign of a slowdown. Mr Zuma has faced some criticism for being out of the country at critical times (for example, he was in China at the peak of last year's strikes), but he is not a "hands-on" president, preferring to leave operational matters to ministers, and therefore his absence is usually not crucial.

The BRIC grouping, comprising Brazil, Russia, India and China, invited South Africa to join in December, cementing the rise in the country's-and Africa's-global standing. While South Africa's population and economy are far smaller than the big four-and also much smaller than other candidates with a potential claim to membership, such as Mexico, Turkey or Indonesia-the invitation reflects South Africa's dominant position in Africa (at least in economic terms), its vast mineral wealth and BRIC's desire to represent all of the key emerging-market regions. South Africa hopes that BRIC membership will bring trade and investment benefits, but the impact may be relatively small, as the BRIC group is an informal term without a definitive agenda. The bilateral arena-and South Africa's membership of the longer-standing India, Brazil, South Africa (IBSA) forum-will continue to be more important, although joining the BRIC group (which may now have to be renamed) and taking part in summits is unlikely to do any harm.

The Economist Intelligence Unit's updated democracy index for 2010 ranks South Africa 30th out of 167 countries (up one position from two years ago), putting it among the 53 countries considered to be "flawed democracies". South Africa achieved full democracy status in three categories-electoral process, civil liberties and government functioning-but fell short in two others: political participation and political culture. The deterioration in South Africa's overall score, from 7.91 in 2008 to 7.79 in 2010, coupled with its rise in the league table, illustrates a global retreat from democracy. South Africa has held a series of competitive elections since 1994, which have been undisputedly free and fair, while democratic institutions are robust, underpinned by a well-written constitution. Government functioning is improving, as public-sector capacity increases, while the private sector (including business and civil society organisations) has a significant voice.

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Opposition parties fail to pose a major challenge for the ruling party

South Africa scored reasonably well across all the categories, but the country's long-term development of democracy may be under threat. The country's democracy is flawed because of the dominant position held by the African National Congress (ANC), which retained power with a massive 67% of the vote in April 2009. Despite a small loss of support since 2004 (when its support topped 70%), the party continues to dominate most levels of government, and opposition parties struggle to make an impact. This means that most crucial debates take place within the party-and within the tripartite alliance with the communists and trade unions-rather than in the public arena, which is bad for transparency and accountability. The ANC is also sensitive to criticism and is contemplating new curbs on information and the media, potentially threatening the country's democratic standing. The official opposition, the Democratic Alliance, is making some gains and controls the Western Cape, but it mainly relies on white and mixed-race supporters and struggles to appeal to the black majority. The Congress of the People, which broke away from the ANC in 2008, has failed to offer an effective alternative because of bitter in-fighting. However, the emergence of a major opposition party is crucial to the development of full democracy.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy. Free and fair elections, and satisfying other aspects of political freedom, are clearly essential. However, our index is based on the view that measures of democracy that concentrate on the state of political freedom and civil liberties leave out some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are often ignored by other measures.

Our index of democracy covers 167 countries and territories. The index is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are interrelated and form a coherent conceptual whole. Each category has a rating on a 0-10 scale, and the overall index of democracy is the simple average of the five category indexes.

The category indexes are based on the sum of the indicator scores in the category, converted to a 0-10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the ability of the civil service to implement policy.

The index values are used to place countries within one of four types of regime:

• Full democracy-scores of 8-10
• Flawed democracy-scores of 6-7.9
• Hybrid regime-scores of 4-5.9
• Authoritarian regime-scores below 4.

The government's proposed changes to labour laws, including those covering the controversial topic of labour broking, could spark a new wave of industrial action in 2011. The Congress of South African Trade Unions (COSATU) thinks the reforms are inadequate and is threatening "the mother of all battles" in a bid to ban labour broking, whereby temporary workers are hired and placed by middlemen. However, those in the labour broking industry-comprising 3,000 agencies and 500,000 workers-think the changes are draconian and could effectively wipe out the sector, damaging job creation. The labour brokers' umbrella agency, the Confederation of Associations in the Private Employment Sector, may challenge the final bill in the Constitutional Court, although a similar contest in Namibia was unsuccessful. Other critics contend that the laws are poorly drafted, with the potential to create uncertainty and long legal battles.

The proposed amendments put forward in December by the new labour minister, Mildred Oliphant, cover four pieces of legislation: the Labour Relations Act, the Basic Conditions of Employment Act, the Employment Services Act and the Employment Equity Act. The changes are complex but appear to mark a strict crackdown on labour broking, although not an outright ban. This explains COSATU's discontent, although the union federation will continue to study the implications before giving a final verdict. Some reform of labour broking legislation is probably warranted, as the current rules are vague and sometimes exploited, with workers stuck in a temporary role for years because of uncertainty about who has ultimate responsibility for their welfare. The new draft hands this role to the employing firms rather than the brokers, who will be restricted to a "placement" function only, although the distinctions between the different types of brokers and agents-and the related role of sub-contractors-are not clearcut in either the old or new laws. There is a real danger of over-regulation in a bid to appease COSATU, whereas flexibility is likely to create more jobs.

Apart from tackling labour broking, the amendments also propose to criminalise violations of certain labour laws (and impose heavy penalties), tighten rules on child labour, restrict the hiring of foreign workers, establish a new framework for sectoral collective agreements and strengthen the Commission for Conciliation, Mediation and Arbitration. Ms Oliphant has called for final public comments by February 17th, prior to the bills going before parliament. However, unless changes are made, the laws mark a move towards a more restrictive labour market, with potential risks for growth, investment and jobs.

Two important pieces of legislation-a new companies act and a new consumer protection bill-are now scheduled to come into force on April 1st 2011, after repeated delays, although further extensions are possible given the complexity of drafting the laws and the need to publicise the changes in advance. The new companies act, now almost three years in preparation, will bring a host of changes such as restructuring corporate categories, offering alternatives to liquidation and easing financial reporting rules for small and medium-sized companies. Most enterprises will need to submit a new memorandum of incorporation that will define more clearly the roles and responsibilities of the various players such as directors, officers and shareholders. The general perception within South African business is that the act will have a positive effect by helping to streamline and modernise the regulatory environment. However, there are doubts about whether the authorities have sufficient administrative capacity to deal with the changes, and some aspects of the law remain contentious.

The imposition of much stricter corporate governance rules (informed by the three King codes) and far heavier penalties for violations may please investors and shareholders but could deter individuals from taking positions on company boards (especially as the rules apply to both executive and non-executive directors), leading to a loss of expertise. Some technical disagreements also remain, such as the distinction between technical and commercial insolvency, although these may be ironed out in the final drafting process. Part of the reason for the delay in the companies act was the government's decision to synchronise the implementation of the law with a new consumer protection act-which hands greater power to consumers vis-à-vis sellers-as the two bills cover some of the same territory and are complementary. However, the consumer protection act is proving trickier to draft, because of the difficulty in balancing rights and responsibilities and sealing possible loopholes, which could lead to further delay. The government also aims to run a major publicity campaign before the acts come into force, which means that time is running short.

The latest "matric"-level exam results for 2010 (taken at the end of 12 years of secondary schooling) show a welcome and surprising improvement from the previous year, reversing a six-year downward trend, although the challenges facing South Africa's education system remain enormous. The pass rate at matric jumped to 67.8% in 2010 (out of 537,543 students who sat the exam) from just 60.6% in 2009, thereby moving closer to the peak of 73.3% recorded in 2003. The economically powerful Gauteng province (up from 71.8% to 78.6%) captured top spot from the Western Cape (up from 75.7% to 76.8%). There was also a pleasing rise in the proportion of successful matriculants reaching university-entrance standard, from 19.9% in 2009 to 23.5% in 2010-a multi-year high. However, the headline data continue to mask significant failings. More than one-half (55%) of the students who entered matriculation 12 years ago either dropped out or failed, while pass rates in maths and science remain low and a large number of schools had very poor results (50% of passes came from 19% of schools). Not surprisingly, the pass rate in independent school exams (sat by 8,285 pupils) was much higher, at 98.4%.

The government is clearly pleased with the results, especially given the disruption caused by the World Cup in mid-year and a month-long teachers' strike in August/September in the run-up to exams. Officials attribute part of the improvement to growing familiarity with the new syllabus (introduced in 2008), better teacher training and structural reforms in education (including the split of the ministry into separate basic and higher departments in 2009). There are the usual concerns about exam standards slipping (echoing worries in other countries) but there is no real evidence that this is occurring. Standards are maintained by a statutory body, Umalasi, and South Africa's matric exam continues to be widely recognised as a satisfactory qualification. However, fewer than one-half of South Africa's children reach this level, and matric neither guarantees a job nor provides the skills needed in the economy: the tertiary level is far more important for skill building. South Africa's universities are relatively strong (with three in the world's top 500-Cape Town, Witwatersrand and Pretoria), but non-academic and technical tertiary education remains much weaker, despite repeated policy initiatives. Serious challenges remain, although the improvement in matric results offers some hope of gradual improvement.

The latest official demand-side GDP data confirm that South Africa's modest rebound in 2010 (from recession in 2009) was consumption-led and that investment remained weak. Figures for 2009 and the first three quarters of 2010 have been revised upwards in the case of household spending and downwards for investment. For 2009, private consumption fell by 2% (not 3.1%) while investment declined by 2.2% (rather than growing by 2.3%). The overall contraction in 2009 was slightly shallower than feared, with real GDP shrinking by 1.7% rather than 1.8%, while growth recovered to a modest 2.5% in the first three quarters of 2010. However, the weak investment picture remains a concern.

Figures for 2010 show that household consumption (the largest proportion of GDP) rose by 5.8% year on year in the third quarter-the strongest performance since before the recession-and was up by 4.3% in the first three quarters. Consumers are benefiting from looser money and lower interest rates, and from real wage growth in an environment of low inflation. Household debts are still high but have become more manageable, although job creation remains weak. Separate, narrower data for retail sales growth show that real consumer spending remained solid at the start of the fourth quarter, rising by 6.1% year on year in October, up from a strike-affected 4.8% in August and the best performance since the World Cup peak in June and July.

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Gross fixed capital formation (GFCF), by contrast, continued to decline in the third quarter, by 1.2% year on year, marking a fifth consecutive quarter of contraction, although the pace of decline has slowed. For the first three quarters of 2010, GFCF dipped by 5.1% year on year, including a 6.4% fall in private investment (which accounts for 60% of the total) and a 12.8% slide in central government investment, although parastatal investment bucked the trend, rising by 4.4%. Private investment will remain weak until output in key sectors such as mining and manufacturing reaches pre-recession peaks and spare capacity dissipates. Notably, South Africa's inventory rundown now appears to be over: stocks entered positive territory in the third quarter for the first time in three years. For the year, the overall economy is estimated to have recovered by 2.8%. The recovery in household consumption and the slowing decline in investment indicate that the recovery is gaining traction, but South Africa's consumers and businesses will continue to remain cautious.

Consumer price inflation, after dipping to a multi-year low of 3.2% year on year in September, is on the rise again. It climbed to 3.4% in October and 3.6% in November, spurred by costlier oil and electricity, although the strong rand is helping to relieve the pressure by keeping import prices down. The main inflationary drivers at present are administered prices (especially for electricity), which were 9.8% higher in November, and world oil-and local fuel-prices. This upward pressure will continue following an increase in global oil prices to over US$90/barrel in December for the first time in more than a year. Food price inflation currently remains subdued (at just 1.3% in November), helped by a good domestic harvest, but the sharp rise in global prices for many commodities (because of unfavourable weather) poses some risk. The main inflationary danger comes from a potential slide in the rand, although the currency remains robust at present. The rand averaged R6.83:US$1 in December, a three-year peak and 8.8% stronger than a year earlier, and remained at close to this level in the first week of 2011.

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South Africa's current-account deficit widened to 3.7% of GDP in the third quarter of 2010, from a multi-year low of 2.4% of GDP in the second quarter, owing mainly to a rise in the invisible deficit (on services, income and current transfers). This reflects deterioration in the services balance after the World Cup, when tourism climbed, and a rise in income payments to foreign portfolio investors (in line with higher portfolio inflows). Exports (up 22% year on year) and imports (up 21%) both grew quickly in the third quarter, and the trade balance stayed in surplus. Comparing the first three quarters of 2010 with a year earlier, the invisible deficit was largely unchanged while the trade surplus increased, reducing the current-account deficit to 3.4% of GDP (from 4.4% of GDP in the same period in 2009). The gap is therefore much smaller than pre-recession levels (which surpassed 7% of GDP in 2007 and 2008) and remains comfortably financed by capital inflows. This poses a degree of risk, however, as portfolio flows can be volatile and short-term. Portfolio inflows surged by 79% to R118bn (US$17bn) in the first three quarters of 2010, while foreign direct investment (FDI) inflows slipped by 83% to R7bn (US$1bn)-although fourth-quarter FDI will be much higher following the acquisition of an information technology company, Di-Data, by Japan's NTT for about R22bn (US$3.1bn).

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Please see graphic below

Please see graphic below

Please see graphic below

Land area

1,219,090 sq km (Eastern Cape: 169,580; Free State: 129,480; Gauteng: 17,010; KwaZulu-Natal: 92,100; Limpopo: 123,910; Mpumalanga: 79,490; Northern Cape: 361,830; North West: 116,320; and Western Cape: 129,370)

Population

48.7m (2008 estimate, Statistics South Africa)

Main towns

Population, '000 (2001 official estimates); metropolitan areas:

Johannesburg: 3,226 East Rand/Ekurhuleni: 2,480

Durban/Ethekwini: 3,090 Pretoria/Tshwane (capital): 1,986

Cape Town: 2,893 Port Elizabeth/Nelson Mandela Bay: 1,006

Climate

Temperate, warm and sunny

Weather in Johannesburg (altitude 1,769 metres)

Hottest month, January, 14-26°C (average daily minimum and maximum); coldest month, July, 4-16°C; driest month, June, 6 mm average rainfall; wettest month, January, 150 mm

Weather in Cape Town (altitude 17 metres)

Hottest month, February, 16-26°C (average daily minimum and maximum); coldest month, July, 7-17°C; driest month, February, 10 mm average rainfall; wettest month, July, 92 mm

Languages

Official languages: Afrikaans, English, IsiNdebele, Sepedi, Sesotho, Swazi, Xitsonga, Setswana, Tshivenda, IsiXhosa and IsiZulu; other African, Asian and European languages are also spoken

Measures

Metric system

Currency

Rand (R) = 100 cents; average exchange rate in 2009: R8.42:US$1

Fiscal year

April-March

Time

2 hours ahead of GMT

Public holidays

January 1st (New Year's Day), March 21st (Human Rights Day), Good Friday, Easter Monday, April 27th (Freedom Day), May 1st (Workers' Day), June 16th (Youth Day), August 9th (National Women's Day), September 24th (Heritage Day), December 16th (Day of Reconciliation), December 25th (Christmas Day), December 26th (Day of Goodwill); if any of these days falls on a Sunday, the following Monday becomes a public holiday

Official name

Republic of South Africa

Form of state

A federal state, consisting of a national government and nine provincial governments

Legal system

Based on Roman-Dutch law and the 1996 constitution, in force since February 4th 1997

National legislature

Bicameral parliament elected every five years, comprising the 400-seat National Assembly and the 90-seat National Council of Provinces

Electoral system

List system of proportional representation based on universal adult suffrage

National elections

The next election is scheduled to take place within 90 days of April 22nd 2012

Head of state

President, elected by the National Assembly; under the constitution, the president is permitted to serve a maximum of two five-year terms; Thabo Mbeki resigned as president in September 2008, and Kgalema Motlanthe, the deputy president of the African National Congress (ANC), replaced him in a caretaker capacity; Jacob Zuma was sworn in on May 9th 2009

National government

African National Congress

Main political parties

The ANC is the governing party with the support, in a tripartite alliance, of the smaller South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU); other parties include Congress of the People (Cope; recently formed by former ANC members), the Democratic Alliance (DA), the Inkatha Freedom Party (Inkatha or IFP) and the Independent Democrats (ID)

President: Jacob Zuma (ANC)

Deputy president: Kgalema Motlanthe (ANC)

Minister in the presidency, planning: Trevor Manuel (ANC)

Minister in the presidency, performance: Collins Chabane (ANC)

Key ministers

Agriculture, forestry & fishing: Tina Joemat-Pettersson (SACP)

Communications: Roy Padayachie (ANC)

Defence: Lindiwe Sisulu (ANC)

Economic development: Ebrahim Patel (ANC)

Energy: Dipuo Peters (ANC)

Finance: Pravin Gordhan (ANC)

Health: Aaron Motsoaledi (ANC)

Higher education: Blade Nzimande (SACP)

Home affairs: Nkosazana Dlamini-Zuma (ANC)

Human settlements: Tokyo Sexwale (ANC)

International relations: Maite Nkoana-Mashabane (ANC)

Justice & constitutional development: Jeff Radebe (ANC)

Labour: Mildred Oliphant (ANC)

Mining: Susan Shabangu (ANC)

Police: Nathi Mthethewa (ANC)

Public enterprises: Malusi Gigaba (ANC)

Public works: Gwen Mahlangu-Nkabinde (ANC)

Rural development & land reform: GuGille Nkwinti (ANC)

State security: Siyabonga Cwele (ANC)

Trade & industry: Rob Davies (SACP)

Transport: Sibusiso Joel Ndebele (ANC)

Central bank governor

Gill Marcus