South Africa is rich in natural resources and has a world-class infrastructure. It has a large domestic market and is being well-positioned technologically to be able to compete in the global marketplace.The country has witnessed strong economic growth in recent years and the trend is expected to continue, although at a slower pace due to, among other factors, weaker global growth and the impact of the country’s electricity shortages on domestic industry.

The strong growth was until recently based largely consumer demand driven by the low interest rates and inflation that prevailed in the economy until recently. Other factors have included the strong Rand and firm growth in personal disposable income and private fixed investment.

A different growth scenario has, however, been emerging since 2006. There has been a gradual shift from consumer demand-led growth to more sustainable production and investment-led growth. Although expected it expected to maintain its strength, domestic spending is now expected to be led by the corporate private and public sectors, rather than consumer demand.

Development Policy

The impact of South Africa’s electric power shortage on production, especially in the mines and other energy intensive industries, has led to a significant downward revision to the economic growth forecasts. Although the medium- to long-term growth outlook remains robust, higher input costs, arising from higher domestic inflation and higher international commodity prices, coupled with higher cost of borrowing and growing energy crisis could portend fragile growth outlook in the short- to medium-term. In spite of this of these challenges, foreign investors remain confident of South Africa’s growth potential. Foreign investment continues to play an important role in the South African economy.

Support for infrastructure services, especially energy, is a major focus of the African Development Bank’s Country Strategy Paper for South Africa. The Bank will seek to address the energy problem not only by providing assistance to South Africa but also regional approaches.

The Bank’s 2008-2012 Country Strategy Paper (CSP) for South Africa was been developed in collaboration with the National Treasury, the Bank’s principal counterpart in South Africa, and through consultations with other country stakeholders. It is built around three main pillars, private sector development, regional integration and capacity building.

Bank lending has included a Credit Risk Sharing Line to NEDCOR of Rand 1 billion (about UD$170 million) to promote the development of SMEs, natural resources, Black Economic Empowerment (BEE) and infrastructure projects.

The Bank has also provided a US$100 million non-sovereign regional line of credit to the Development bank of South Africa (DBSA) to finance competitive infrastructure development, expansion, and rehabilitation projects in the Southern African Development Community (SADC) sub-region. In 2004, the Bank approved a Rand 45 million programme to develop SMEs through franchising.

More recently, the Bank has also approved a US$500 million loan to Eskom Holding Limited, South Africa’s electric power utility and has invested ZAR 1 billion in the Nedbank’s 10 year Domestic Medium Term Note Programme to facilitate the expansion of Nedbank’s community development activities. The Bank has disbursed the amount of its participation and reporting on the facility is on track.

The Bank’s operations in South Africa will continue to face some major challenges. Of note is that South Africa has made limited use of development assistance and donor resources because it has ample internal resources and is also abile to easily access international capital markets at relatively competitive prices. The South Africanm government has thus directed the Bank to focus its lending operations on the SMEs and the private sector. Other factors that have constrained the Bank’s operations in South Africa include competition from other donors, especially those offering concessionary resources and the lack of a local presence in the country.

To make its operations in the country more effective, the AfDB in the last quarter of 2008 concluded an agreement with the Government of South Africa for the opening a Bank regional office in Pretoria. The South Africa Field Office will cover Botswana, Lesotho, Namibia, South Africa, Swaziland, Zimbabwe, and the Southern African Development Community Secretariat, previously covered by the Bank’s Mozambique Field Office.