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Viewing cable 05PRETORIA4743, SOUTH AFRICA ECONOMIC NEWSLETTER December 2 2005

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Reference ID Created Released Classification Origin
05PRETORIA4743 2005-12-02 11:50 2011-08-24 01:00 UNCLASSIFIED Embassy Pretoria
VZCZCXRO3374
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4743/01 3361150
ZNR UUUUU ZZH
R 021150Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0314
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 04 PRETORIA 004743 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER December 2 2005 
ISSUE 
 
 1. Summary.  Each week, Embassy Pretoria publishes an 
 economic newsletter based on South African press reports. 
 Comments and analysis do not necessarily reflect the 
 opinion of the U.S. Government.  Topics of this week's 
 newsletter are: 
 
 -  3rd Quarter Growth Slows, Economy Still Strong; 
 -  Manufacturing Activity Slows in November; 
 -  Monthly Current Account Deficit Widens; 
 -  Inflation Less than Expected; 
 -  Possible Weakening of Rand in 2006; 
 -  October Credit Demand Slows; 
 -  Business Confidence High but Stable; 
 -  SA Government Will Publish Official Poverty Measure; 
 -  Mutual Funds to Offer Accounts to Low-Income Market; 
 and 
 -  Recent Research Shows Poverty has Fallen Past Two 
 Years; 
 End Summary. 
 
 3RD QUARTER GROWTH SLOWS, ECONOMY STILL STRONG 
 --------------------------------------------- 
 
 2.  South Africa's economic growth slowed sharply in the 
 third quarter of 2005, but this was mainly due to upward 
 revisions to previous data.  With November's release of 
 Gross Domestic Product (GDP), Statistics SA (Stats SA) 
 included revisions of the past three years, which showed 
 the economy was larger than previously thought.  Gross 
 domestic product (GDP) grew by 4.2% on a seasonally 
 adjusted and annualized basis in the third quarter, down 
 from 5.4% in the second quarter.  A Reuters poll of 
 economists had forecast that GDP would slow to 4.4%. 
 Manufacturing, retail trade, finance, transport and 
 construction were the main sources of third quarter growth 
 fueled by strong domestic spending.  The mining sector, 
 contributing 6.4% of GDP, declined by 0.7% its first 
 contraction since the fourth quarter 2004.  Stats SA's 
 revisions to GDP showed that the economy expanded by 4.5% 
 in 2004 and 3.0% in 2003, substantially higher than 
 earlier official estimates of 3.7% and 2.8%, respectively. 
 Stats SA revised GDP upwards using new surveys and data. 
 Nominal 2004 GDP increased 0.9% to R1,387 billion ($215 
 billion, using 2004's average exchange rate at 6.45 rands 
 per dollar).  Source:  Investec, GDP Update; Reuters, 
 November 29. 
 
 MANUFACTURING ACTIVITY SLOWS IN NOVEMBER 
 ---------------------------------------- 
 
 3.  The Purchasing Managers' Index (PMI) slowed 
 considerably in November, reaching 50 and indicating that 
 continued growth in the manufacturing sector would not 
 happen.  November was the fourth consecutive month the PMI 
 has fallen and the lowest level reached in the past two 
 years.  In October, the PMI was 54.1.  All the components 
 of the PMI index fell in November, but the sharpest drop 
 was in the employment index, which dropped 8.4 points to 
 45.0.  Business activity and new sales orders declined 
 substantially as well.  The PMI index has been above 50 
 since the end of October 2003, when it was 47.7 and near 
 the end of a period of contraction in the manufacturing 
 sector.  The PMI price index continued to increase in 
 November, rising to 68.6 from 66.7 in October.  Forty-five 
 percent of survey respondents anticipated improved 
 conditions near-term, while 16% expected worsening 
 conditions.  Source:  Business Day, December 1, 2005. 
 
 MONTHLY CURRENT ACCOUNT DEFICIT WIDENS 
 -------------------------------------- 
 
 4.  According to monthly South African Revenue Service 
 statistics, the trade deficit widened to R5.5 billion. 
 Exports fell 11% to R3.3 billion ($510 million), mainly 
 due to a decline in exports for vehicles, aircraft and 
 vessels, and mineral products.  This is the third 
 consecutive month in which the trade deficit has widened 
 unexpectedly, and over the past 12 months South Africa has 
 posted a deficit nine times.  Although the monthly figures 
 are volatile, a widening current account deficit is 
 expected for 2005.  A 4.2% deficit as a percent of GDP is 
 expected by the end of 2005, compared to 2004's 3.2% of 
 GDP.  Exports were weaker even though the rand depreciated 
 during October.  The rand averaged R6.58 against the 
 
PRETORIA 00004743  002 OF 004 
 
 
 dollar in October, and R6.36 in September.  Imports 
 declined as well, falling 4.5% in October.  The main 
 reason for the decline in imports was the fall in the oil 
 price from $70 a barrel to about $50, resulting in a 
 decline in the value of mineral product imports of more 
 than R2 billion ($310) during the month.  Source: 
 Business Day, December 1. 
 
 INFLATION LESS THAN EXPECTED 
 ---------------------------- 
 
 5.  October's producer and consumer inflation continued to 
 increase less than expectations, showing little second 
 round impacts of higher oil prices.  Consumer prices 
 excluding mortgage costs (CPIX) increased 4.4% compared to 
 market expectations of 4.6%, and producer prices rose by 
 4.2% with market expectations at 4.5%.  Consumer and 
 producer prices showed a small monthly increase of 0.1%, 
 with October's consumer prices rising due to higher 
 transport costs, and producer prices increasing as a 
 result of higher agricultural and petroleum prices with a 
 moderation in electricity prices.  In October, consumer 
 prices (CPI) rose by 4.0% compared to September's 4.4%, 
 while producer prices rose in October and September by 
 4.2% and 4.6%, respectively.  Most analysts expect that 
 interest rates will remain unchanged, given that oil 
 prices have moderated and inflationary pressures seem to 
 be concentrated in the transport and petroleum-using 
 sectors.  Source:  Standard Bank, CPI Alert, November 23; 
 Investec, PPI Update, November 24. 
 
 POSSIBLE WEAKENING OF RAND IN 2006 
 ---------------------------------- 
 
 6.  Even with strong capital inflows, a continuing current 
 account deficit above 3% will continue to weaken the rand 
 in 2006, according to Azar Jammine, the Chief Economist at 
 the financial consultant firm Econometrix.  Jammine 
 believes the rand could reach R8 per dollar by the end of 
 2006 due to South Africa's increasing current account 
 deficit.  The Department of Trade and Industry (DTI) and 
 the Economist Intelligence Unit (EIU) took different views 
 about the future direction of the rand.  EIU expects the 
 rand to depreciate in 2006 like Jammine, under pressure 
 from falling prices for metals such as gold and platinum. 
 DTI has forecasted a much stronger rand due to faster 
 economic growth and the country's macroeconomic and fiscal 
 policies.  South Africa's current account deficit posted 
 3.4% of GDP in the second quarter of 2005 compared with 
 3.8% in the first quarter, despite a relatively strong 
 rand.  However, the shortfall in the current account has 
 largely been offset by healthy inflows in the capital 
 account.  So far in 2005, the rand has lost about 13% of 
 its value against the dollar.  Source:  Business Report, 
 November 28. 
 
 OCTOBER CREDIT DEMAND SLOWS 
 --------------------------- 
 
 7.  Demand for credit by the private sector was below 
 expectations at 19.5% (y/y) in October, compared to 
 September's rise of 22.3%.  October's broadly defined M3 
 measure of money supply grew by 16.4%, in line with 
 forecasts, after increasing by 16.9% in September.  The 
 Reuters consensus poll forecast showed that private sector 
 credit demand, which is driving a consumer spending boom, 
 was likely to rise by 21.3% y/y.  Annual growth in M3, 
 pointing to inflation pressures building in the economy, 
 was expected to show an annual growth rate of 16.4% during 
 October.  Source:  Reuters, November 29. 
 
 BUSINESS CONFIDENCE HIGH BUT STABLE 
 ----------------------------------- 
 
 8.  For most of 2005, business confidence has remained 
 close to the 24-year high of 88, which was attained in the 
 fourth quarter 2004.  The business confidence index, which 
 is compiled by the University of Stellenbosch and 
 sponsored by Rand Merchant Bank, fell slightly to 85 in 
 the fourth quarter 2005, compared to 82 and 86 during the 
 second and third quarter 2005, respectively.  The fourth 
 quarter 2005 survey was the fifth consecutive quarter with 
 results above 80, which means that 8 out of 10 businesses 
 surveyed feel positive about the economic environment. 
 
PRETORIA 00004743  003 OF 004 
 
 
 Before 2003, survey results above 80 would last only 
 several quarters before dropping.  As the survey has 
 remained above 80 for the past 15 months, respondents 
 perceive better economic fundamental changes may last. 
 The index showed a dip in three out of the five surveyed 
 sectors:   new vehicle sales, building contractors and 
 retailers.  The wholesaler index rose by 6 points while 
 manufacturing confidence remained steady, possibly 
 reflecting that producers had adjusted to the rand's 
 strength.  Source:  Reuters, November 28. 
 
 9.  Comment.  Most analysts expect that the South African 
 Reserve Bank (SARB) will not change interest rates at the 
 December meeting.  October inflation still shows second- 
 round oil price inflationary pressures absent and private 
 sector credit demand has leveled to 20%, an increase high 
 enough that would not support future reductions in 
 interest rates.  SARB Governor Mboweni and Finance 
 Minister Manuel continue to warn about building inflation, 
 making sure that inflationary expectations do not 
 increase.  End comment. 
 
 SA GOVERNMENT WILL PUBLISH OFFICIAL POVERTY MEASURE 
 --------------------------------------------- ------ 
 
 10.  The South African government will publish an official 
 poverty benchmark, according to Lesetja Kganyago, the 
 Director General of National Treasury.  The poverty 
 measure would use not only income, but also access to 
 basic services such as water, sanitation, health and 
 education facilities.  According to the World Bank's 
 poverty indicator, households that survive on less than $2 
 (about R13) a day are considered to be living in poverty. 
 However, Kganyago said that although the World Bank 
 measure was useful for international comparisons, South 
 Africa needed to create its own poverty index that 
 incorporated more than just income.  Kganyago felt that it 
 was too early to comment on the frequency or other details 
 of the poverty survey, but confirmed that Statistics SA 
 would publish it.  A bid related to the development of the 
 official poverty measure would be advertised within the 
 next few weeks.  The poverty benchmark is developed at the 
 same time the government was starting a new national 
 income dynamic study, which would examine the effect of 
 government interventions on households.  The study will be 
 done early in 2006 and a pilot project will be carried out 
 in the second half of 2006.  Source:  Business Report, 
 November 28. 
 
 MUTUAL FUNDS TO OFFER ACCOUNTS TO LOW-INCOME MARKET 
 --------------------------------------------- ------ 
 
 11.  The South African mutual funds (unit trust) industry 
 is planning on offering savings accounts aimed at the 
 lower income market, similar to the banking sector's 
 Mzansi accounts.  According to Di Turpin, the Chief 
 Executive of the Association of Collective Investments, a 
 proposal submitted to the government for the industry as a 
 whole creates and markets a single mutual fund as an 
 additional way to save.  Provisionally called Fundisa, 
 meaning "learning" in Nguni languages, the fund would 
 attract lower fees than normal mutual funds and invest 
 only in fixed interest-bearing assets to reduce capital 
 loss risks.  This recent announcement brings the mutual 
 fund industry in line with the Financial Sector Charter, 
 requiring signatories to provide low income market with 
 access to affordable products.  The life insurance 
 industry has indicated that it will provide lower-income 
 products early in 2006.  The South African mutual fund 
 industry, manages assets worth more than R450 billion ($69 
 billion, using 6.5 rands per dollar).  Source:  Business 
 Day, November 29. 
 
 RECENT RESEARCH SHOWS POVERTY HAS FALLEN IN PAST FOUR 
 YEARS 
 --------------------------------------------- ------------- 
 
 12.  Poverty has decreased since 2000 because of the 
 expansion of government grants and accelerated job 
 creation, according to Servaas van der Berg and Megan 
 Louw, researchers at the University of Stellenbosch.  The 
 research paper mapped poverty trends in South Africa from 
 1993 to 2004.  Using household income data from the annual 
 or semi-annual All Media and Product Surveys (AMPS) 
 
PRETORIA 00004743  004 OF 004 
 
 
 collected by the South Africa Advertising Research 
 Foundation with national account household income data and 
 setting the poverty line at an annual R3,000 ($460, using 
 6.5 rands per dollar, or $1.26 per day) per capita, the 
 authors found that poverty has declined more rapidly since 
 2000.  The proportion of the population living below the 
 poverty line rose slightly from 40.6% to 41.3% between 
 1993 and 2000, as a result of poor economic growth and 
 labor market prospects, but then declined to 33.2% by 
 2004.  This brings the total number of poor people down to 
 15.4 million in 2004 from 16.2 million in 1993.  The 
 average per capita income of an individual belonging to 
 the poorest 20 percent of the population has risen from 
 R855 ($130) to R1,185 ($182) between 1993 and 2004 (all 
 monetary values are given in 2000 rand terms).  Van der 
 Berg and Louw attributed the large reduction in poverty 
 levels since 2000 to expansion in social welfare grants 
 and faster economic growth, but argued that sustainable 
 poverty reduction cannot depend on grants alone, needing a 
 large-scale expansion in jobs.  The research also showed 
 that the black middle class has been growing very rapidly. 
 The number of black people who are members of households 
 earning more than R40,000 ($6,150) per person a year has 
 increased threefold in the past decade.  Source:  Business 
 Report, November 29. 
 
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