SOUTH AFRICA ECONOMIC NEWSLETTER

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
OCTOBER 22, 2004 ISSUE


1. Summary. Each week, AMEmbassy 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:
- Third Quarter FDI Improves but Still Low;
- November GDP Revisions May Boost Growth;
- Fitch Upgrades Ratings to Stable;
- Moody's Ratings Agency Considers South African Upgrade;
- Improvement but Poverty Still High;
- Study Reveals Negative Employment Trends;
- Leading Economic Indicator Rises;
- South Africa's Poor Are Saving; and
- Economy Should Attract Increased Investment. End
Summary.

THIRD QUARTER FDI IMPROVES BUT STILL LOW
--------------



2. BusinessMap Foundation said third quarter foreign
direct investment (FDI) into South Africa at R27.8 billion
($4.3 billion using 6.5 rands per dollar) improved over
second quarter's disinvestment primarily due to Barclays'
announced plans to obtain a majority share in ABSA bank.
The rise in the third quarter followed a R10.6 billion
disinvestment in the second quarter because of Thintana
consortium's announced plans to sell its R 6.1 billion
share in Telkom. Subtracting the R1.8 billion of
disinvestment that occurred (primarily in the consumer
goods sector),net FDI during the third quarter was R26.1
billion. In 2003, Africa attracted 2.7 percent and South
Africa accounted for 1 percent of total FDI in the world.
Quarterly FDI into South Africa is small, volatile, and
impacted by a few large transactions that can affect
quarterly and yearly averages. Source: Business Day,
October 21; BusinessMap FDI Third Quarter, October 20.


3. Comment. BusinessMap Foundation collects foreign
direct investment data by using press accounts to count
both FDI intentions as well as actual investments. It
uses the same FDI definitions as the South African Reserve
Bank (SARB) by including only long-term investment, and
cases with more than 10 percent ownership as well as
reinvestment activity; however, it includes intentions to
invest when they are announced as well as actual
investment. Therefore, this method captures the
investment mood, but does not measure actual inflows.
The timing of recording streams of investment leads to the
primary difference in investment numbers between
BusinessMap and SARB. In addition, BusinessMap's database
also allows aggregation by industry, unlike the SARB data.
End comment.

NOVEMBER GDP REVISIONS MAY BOOST GROWTH
--------------


4. On November 30, Statistics SA (Stats SA) will revise
gross domestic product (GDP) figures upwards, after new
data suggested higher levels of economic activity than
previously stated. GDP figures from 1998 to 2004 will be
revised. GDP grew 1.9 percent in 2003, but has since
accelerated gradually following a recovery in the
manufacturing sector. The latest figures show that GDP
increased at an annualized rate of 3.9 percent in the
second quarter, the fastest growth experienced since 2002.
Updated every five years, the base or reference year for
the GDP figures will be changed from 1995 to 2000. The
GDP figures will also be benchmarked, an annual process
that combines high-frequency data with less frequent, but
more accurate, data. After making improvements to some of
its surveys, Stats SA found that it had underestimated the
size of the manufacturing sector by 17 percent, while
retail sales had been underestimated by 20 percent before
the revisions were made. It is unlikely that the
underestimation of total GDP will be of the same
magnitude, because not all industries had increased
economic activity. Source: Business Day, October 21.

FITCH UPGRADES RATINGS TO STABLE
--------------


5. Fitch Ratings revised its outlook on South Africa's
sovereign ratings to stable from positive with the ratings
for its long-term foreign and local currency unchanged
from its March 2004 rating of BBB and A- respectively.
Fitch cited improvements in external liquidity, reduced
external debt, and improved prospects for sustaining
growth above 3 percent over the medium-term as primary
reasons for the sovereign ratings upgrade. South Africa's
gross international reserves, currently $12.5 billion,
increased by $4 billion since February 2004. Net external
debt (debt owed to foreigners less the foreign assets of
the banking system) is projected to fall to 5 percent of
GDP in 2004, compared to 17 percent in 2002. Fitch's
announcement of the upgrade comes several days after
Moody's announcement of putting South Africa on review for
a possible upgrade. Source: I-Net Bridge, October 21;
Business Day, October 22.
MOODY RATINGS AGENCY CONSIDERS UPGRADE
-------------- --------------


6. International credit ratings agency Moody's placed
South Africa's current Baa2 sovereign rating on review for
a possible upgrade, committing the agency to a decision
within three months. A further incremental upgrade by
Moody's would place South Africa in the 'upper' investment
grade category of Baa1, two levels above investment grade.
Other international ratings agencies, such as Standard &
Poor's and Fitch currently rank South Africa at one level
above investment grade: however, Moody's has traditionally
been the first to upgrade. Upgrading South Africa's
credit rating will put the country in a better position to
attract significant capital inflows, while reducing the
cost of borrowing in the offshore markets. Countries such
as China, Malaysia and Thailand have Baa1 rankings; with
higher economic growth rates, they have attracted more
foreign direct investment (FDI). Moody's imminent
upgrade of South Africa's rating is another endorsement of
the country's minimal reliance on foreign debt, improved
external liquidity position and its macroeconomic
policies. Moody's cited South Africa's weak economic
growth relative to other emerging market countries and low
levels of foreign reserves as constraints to its rating.
Moody's did note the strong economic performance this
year, particularly a strong upturn in investment spending
and robust demand, and South Africa's improved
international liquidity position. Source: Business
Report, October 17.

IMPROVEMENT BUT POVERTY STILL HIGH
--------------


7. Research Survey's 2004 poverty index ranking improved
to 39, up from 43 last year. The poverty index ranks
poverty levels on a scale of 100 with 100 representing
extreme poverty and 0 representing complete affluence.
Details of the survey, conducted among a sample of 3,504
citizens, concentrated on a special poverty index based on
the provision of basic services, access to
telecommunications and transport, and adequacy of
nutrition. Three groups fared the worst in the rankings,
including: (1) those living in rural farm workers'
quarters at 70; (2) those living in urban squatter shacks
at 63; and (3) those living in rural villages at 60. The
quality of life improved once people had formal dwellings.
People in formal houses in the former townships scored 30.
The survey highlighted the inequalities which exist
between the various population groups, with blacks living
in townships and informal settlements scoring an overall
average of 47 (improving from 51 last year),while those
living in mostly white suburbs scored a high ranking of
eight. By province, the poorest were the Eastern Cape at
50 (improving from 53),Limpopo at 48 (improving from 50)
and Mpumalanga at 47 (improving from 56). The wealthiest
live in the Western Cape and Gauteng, scoring 22 and 27
respectively. One in five adult South Africans said they
could not afford to eat the correct foods. This figure
rose to one in four people for the over 50 population, and
one in three for those at the bottom end of the income
ladder and the unemployed. Source: SAPA, October 18.

STUDY REVEALS NEGATIVE EMPLOYMENT TRENDS
--------------


8. The Development Policy Research unit of University of
Cape Town's School of Economics released an employment
study commissioned by the President's Office. Its
findings described employment trends between 1994 and

2002. The South African economy created 1.6 million jobs,
however, the labor force increased by 5 million. For
every 100 South Africans seeking employment, only 32 found
work of some kind. In addition, unemployment among
university graduates has, proportionally, increased more
than in any other education sector -- with African
graduates hit the worst. The study cited possible reasons
for high unemployment among African university graduates
including the perceived quality of the tertiary
institution that students attended, the public sector
restructuring with public sector being a major source of
black African employment, and training in fields with less
employment potential. Source: Cape Argus, October 15.
LEADING ECONOMIC INDICATOR RISES
--------------


9. South Africa's August 2004 leading economic indicator,
compiled by the South African Reserve Bank (SARB),
increased 10.7 percent (y/y) compared to July's 11 percent
increase. Contributing positively to growth were average
manufacturing hours worked, job advertisements,
manufacturing orders, building plans approved, business
confidence, the interest rate spread between the money
market and capital market instruments, equity prices, and
real M1 money supply. Negative factors were the
inventory/sales ratio, commodity prices, and the leading
indicator of major developed countries. The SARB in March
2004 revised its leading and coincident business cycle
indicators, the second revision since it first published
business cycle indicators in 1983. The leading indicator
has been pared down to 13 components from 21, while the
coincident indicator has been cut to 5 from 7. The new
indicators are also less volatile than the old indicators,
while the lead time for the leading indicators has been
extended to 15 months from the previous 11.5 months.
Source: I-Net Bridge, October 18

SOUTH AFRICA'S POOR ARE SAVING
--------------


10. Research by FinMark Trust, presented to the annual
South African Savings Institute's symposium, highlights
how low income households save. The informal savings
industry is fairly well developed already, with burial
societies (where monthly payments are made to cover
funeral costs) and stokvels (where members deposit monthly
and withdraw annually) often the most popular forms of
community-based savings schemes. 5.6 million people in
the lowest income categories try to save regularly and
many poor people demonstrate a propensity to save.
However, most South Africans would prefer a bank account
to informal savings schemes, with confidence in bank
accounts fairly high, even among the poor. Bank accounts
are the most popular form and the preferred method of
actual savings with 10.3 million out of 13.2 million
savers in South Africa holding bank accounts. This
finding holds with people in the lowest income brackets as
well. The informal and formal parts of the financial
services industry are interlinked. FinMark Trust says
about 75 percent of stokvels have group bank accounts. It
also appears that, as incomes improve, savers do not
abandon informal methods of savings, such as burial
societies and stokvels. Ross Esson, a Cape Town
postgraduate student, presented research at the conference
showing that burial societies were the most popular forms
of savings among people in Cape Town's largest townships,
Khayelitsha and Mitchell's Plain, particularly among those
who earned relatively high wages. Bank savings as a
proportion of total savings increased as incomes grew, but
stokvel savings remained relatively stable across all
income categories surveyed. Females, although 41 percent
more likely than men to save, would tend to save less than
males, mainly because their income levels were lower.
Source: Business Day, October 19.


11. Comment. Historically, the major South African banks
have ignored servicing the low-income population. South
African banks earn more from bank charges than from
returns of investment capital. Servicing the 'unbanked'
population and increasing the savings rate are current
government objectives. Approximately 30 percent of South
Africans (over 13 million) are without a bank account.
Next week, the government will announce a low-cost banking
initiative that should improve access to banking in all
geographic areas. The new national bank account, or
'Mzansi' account, will be launched on October 25th by the
big four South African banks as well as Postbank, the
South African Post Office's savings institution. The
Black Economic Empowerment (BEE) financial sector charter
drove this banking initiative. In addition, the National
Treasury has recently introduced a retail bond in order to
encourage a savings culture among the population. End
comment.

ECONOMY SHOULD ATTRACT INCREASED INVESTMENT
--------------

12. Increased local and foreign direct investment will
lead to improved growth as the benefits of inflation-
targeting begin to impact South Africa's economy,
according to Martin Jankelowitz, head of market and
economic research at Investment Solutions. A virtuous
circle will impact the economy as rand strength, leading
to lower inflation, facilitated by declining nominal
interest rates, will provide strong returns on local
assets and expanding business opportunities. Spending by
consumers, the primary beneficiaries of the low inflation,
low interest-rate environment, has increased by over 4
percent during the last three quarters. Private fixed
investment increased by 5.4 percent, supporting the view
that the benefits of inflation targeting are starting to
be felt. The South African Investec PMI, essentially a
manufacturing activity index, indicates that manufacturing
is expanding at its fastest pace in almost two years, with
all the underlying sub-indices strong, notably business
activity and new sales orders. Significantly, the
Employment Index has remained above 50 (indicating
expansion) for six consecutive months. With business
confidence indicators at a record high, expectations
remain optimistic. Source: I-Net Bridge, October 20.