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South African Economy Declines for First Time in 10 Years

Africa's largest economy – South Africa - has declined for the first time in 10 years, fueling fears that South Africa will not be able to avoid a recession.

VOA Correspondent Scott Bobb in Johannesburg explains what the latest economic figures mean.

"The latest statistics issued by the South Africa Bureau of Statistics indicate that the economy shrank for the first time in 10 years during the fourth quarter of last year. It shrank by 1.8 percent, which was more than many analysts had felt it would do. In the third quarter, the economy grew by a mere 0.2 percent. So many felt that the South African economy eventually would show some decline as a result of the global downturn," says Bobb.

There are several reasons for the economic downturn. "Two of the hardest hit sectors are manufacturing, in particular, automobile manufacturing, and mining, in particular, diamond and platinum and some of the other precious metals. These have declined for different reasons – mining because of a drop in demand for the commodities and motor manufacturing, that is, vehicles, has declined dramatically because of a trend of rising interest rates on loans… The rise in interest rates was due to high inflation over the past year or so,' he says.

There's talk the government may put together some financial packages to help the auto and banking industries, although South African banks have not been plagued by the same problems troubling US banks. South African banks did not engage in speculative lending practices. "Nevertheless, they have been hit in some cases. Some were exposed to some of the Western banks and others just by the drop in economic activity," Bobb says.

On February 5, Central bank Governor Tito Mboweni had announced a full percentage point cut in a key interest rate, known as the repo rate, to 10.5 percent. Asked whether another cut could be expected, Bobb says, "Yes, the bank is due to meet in April again and many analysts are expecting another full…point cut in the rate. But with this economic data…some believe that the Central Bank might meet as early as in a week or two and have an emergency meeting and cut rates again to further stimulate the economy."

There have already been layoffs and closings in the auto and diamond mining industries as a result of the slowdown. Tuesday, Lonmin, the world's third largest platinum producer, said that up to 5,500 jobs would be lost in its Marikana and Limpopo operations.

Elections are being held in April and a new South African president will be chosen. Bobb believes the economy will be a major campaign issue. "It has been a major issue in the inability of the government to deliver some of this prosperity that's been seen in South Africa to the poorest of the poor," he says.