Identifier
Created
Classification
Origin
05PRETORIA1304
2005-04-01 08:25:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER April 1 2005 ISSUE

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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UNCLAS SECTION 01 OF 03 PRETORIA 001304 

SIPDIS

DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER April 1 2005 ISSUE

UNCLAS SECTION 01 OF 03 PRETORIA 001304

SIPDIS

DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER April 1 2005 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:

- South Africa Ranks High as FDI Destination for
Transport Equipment Sector;
- IMF Study Points to South Africa's Economic Dominance
in Sub-Saharan Africa;
- Telkom's Rates Among Highest in the World;
- Consumer Prices Increase as Expected;
- Strong Domestic Economy with Reduced Savings; and
- And Warning Signs from the International Sector
End Summary.

SOUTH AFRICA RANKS HIGH AS FDI DESTINATION FOR TRANSPORT
EQUIPMENT SECTOR
-------------- --------------


2. Global car makers and aerospace companies view South
Africa as one of the most attractive destinations
worldwide for foreign direct investment (FDI),according
to global management consulting firm AT Kearney's 2004
annual FDI confidence index. South Africa was ranked as
the seventh most attractive destination globally for
investment in the transportation equipment sector.
According to the survey, the Motor Industry Development
Program has helped South African car exports to increase
nine-fold over the past decade and boosted foreign
confidence. The South African government is also
contemplating assistance for the aerospace industry
similar to that which it gives car makers. Trade and
Industry Minister Alec Erwin said as early as 2002 that
the aerospace industry would get the same kind of state
support that benefited the motor industry. Foreign direct
investment in the South Africa totaled $762 million in
2003, far behind China's $53.5 billion, Mexico's $10
billion and even Chile's $3 billion. AT Kearney expects
foreign direct investment in SA to have risen to $2
billion in 2004, however, citing renewed investor interest

in the country, led by British, Swiss, Italian, French and
Australian investors. SA had also moved up to the top 30s
on the list of countries executives were most likely to
invest in, with China ranking first, followed by the
United States and India. Source: Business Day, March 30.

IMF STUDY POINTS TO SOUTH AFRICA'S ECONOMIC DOMINANCE IN
SUB-SAHARAN AFRICA
-------------- --------------


3. South Africa is an important engine for Sub-Saharan
African growth according to a recent IMF working paper
titled "Implications of South African Economic Growth for
the Rest of Africa". The study shows that, on average,
every one percentage point growth a year in South Africa
generated between 0.5 and 0.75 of a percentage point
increase in sub-Saharan growth. As the data covered the
period from 1960-99, and only five years since South
Africa's first democratic elections, which has seen a
sharp increase in trade, investment, and overall business
ties with the rest of the continent, it was likely,
although not proven by the paper, that SA was an
increasingly powerful engine for growth for the continent.
Another finding of the study was that trade played a
relatively small part in South Africa's role in African
growth. South Africa's influence came as a result of its
economic size. The extent of South Africa's trade with
the continent had been relatively small, reflecting
apartheid-era trade patterns. During 1994-2002, South
Africa's average share of the rest of Africa's external
trade rose to three times its 1970-93 average, although it
was only 2 percent of the rest of sub-Saharan Africa's
total trade with the outside world. In 2003, the South
African economy accounted for 38 percent of the expansion
of the sub-Saharan African economy measured on the basis
of market exchange rates. South Africa's investment in
other African countries in the period 1998-2002 was
equivalent to 5 percent of the gross domestic product of
those countries. Source: Business Day, March 30.

TELKOM'S RATES AMONG HIGHEST IN THE WORLD
--------------


4. A study sponsored by NUS Consulting shows that
Telcom's rates remain the highest among 14 major
economies, despite recent announced price cuts for both
international and national long-distance calls. The
survey encompassed the U.K., U.S., Canada, France, Sweden,
Australia, Belgium, Denmark, Finland, Germany, Italy, the
Netherlands and Spain. Although Telkom announced 49
percent and 10 percent rate cuts for international and
national long-distance calls, these decreases do not match
price reductions made in other competitor countries. The
survey also shows that South African national long-
distance calls (more than 320 kilometers) are the highest
among the countries surveyed, with Spain placed second.
South Africa's local calls are the second highest after
Belgium. The survey shows that 13 of the 14 countries
evaluated operate in a generally deregulated and
competitive environment, with the exception being South
Africa. The study also shows that South African consumers
experienced an average rate increase of 4.7 percent in
cell phone costs last year. Cell call costs in the UK and
Australia are the most expensive among the countries
surveyed, with South Africa being the third most
expensive. Source: Business Day, March 29.

CONSUMER PRICES INCREASE AS EXPECTED
--------------


5. February's consumer prices increased close to market
expectations, with overall consumer prices (CPI)
increasing 2.6 percent (y/y) and consumer prices excluding
mortgage costs (CPIX) at 3.1 percent, compared to
consensus CPI and CPIX forecasts of 2.6 percent and 3.2
percent respectively. February's inflation is close to
the lower range of the South African Reserve Bank's
targeted range of 3 to 6 percent, although expected to be
the year's trough, with higher oil prices and indirect
taxes impacting prices later in the year. Medical and
housing prices contributed the most to February's
inflation, with food, transport and communication costs
remaining flat. Services inflation, chiefly influenced by
wage increases, increased by 5.9 percent (y/y) and
accounts for 34 percent of the total CPIX. Given the
recent rand weakness and high oil prices, most expect
interest rates to remain unchanged after the SARB's
Monetary Policy Committee meeting in April. Source:
Standard Bank CPI Alert, March 30.

STRONG DOMESTIC ECONOMY WITH REDUCED SAVINGS
--------------


6. The South African Reserve Bank (SARB)'s March
Quarterly Bulletin shows healthy growth in domestic
expenditure driving a 2004 3.7 percent GDP growth,
although warning signs of a higher than expected trade
deficit and reduced savings point to possible
vulnerability. In 2004, domestic demand, now in its 16th
quarter of expansion, continued its strong growth, with
real gross fixed capital formation, household and
government consumption increasing 9.5 percent, 6 percent
and 7 percent respectively. Both business and consumer
confidence remained high as real disposable income
increased 5.5 percent due to higher wage settlements and
marginally lower income tax rates. Wealth effects arising
from large increases in property and other asset prices in
2004 contributed to the strong increase in household
spending. Households financed part of their increased
spending by incurring more debt. Household debt as
percentage of disposable income increased from 55 percent
in the third quarter of 2004 to 57 in the fourth quarter
and annually reached 54.5 percent in 2004 compared with
2003's debt ratio of 51.5 percent. Even though debt has
increased, these ratios are well below the 61 percent
levels reported in 1996 and 1997. The 2004 9.5 percent
growth in real gross fixed capital formation, higher than
the previous year's 9 percent growth, was due mainly to
strong growth in private sector investment although
slowing in the final quarter. In the fourth quarter of
2004, growth in real capital outlays by the private sector
slowed to 4.5 percent compared to the third quarter's
growth of 20 percent as agriculture and mining reduced
their capital spending. Reduced savings point to possible
problems for the South African economy to reach its 6
percent GDP growth target. The average ratio of gross
saving (made up of household, government and business
savings) to GDP declined to 13.4 percent in the final
quarter of 2004, bringing the 2004 average to 14.4
percent. This is the first time since 1960 that the ratio
has dropped below 15 percent.

AND WARNING SIGNS FROM THE INTERNATIONAL SECTOR
-------------- --


7. The high level of domestic expenditures and the 11.7
appreciation of the trade-weighted rand resulted in much
higher import growth, leading to a higher than expected
deficit on current account. In 2004, real export and
import growth of 2.9 percent and 13 percent, respectively,
widened the current account deficit as a percent of GDP to
3.2 percent from 1.5 percent in 2003. The current account
deficit was easily financed through foreign capital
inflows, although two thirds of the 2004 foreign
investment into South Africa were classified as portfolio
and `unrecorded transaction' investments, typically more
volatile than foreign direct investment. According to a
recent IMF paper, foreign direct investment (FDI) made up
70 percent of capital flows to other emerging markets from
1994-2003, while for South Africa, only 30 percent of
capital flows were FDI. The 3.2 percent current account
deficit, higher than the 2.3 percent deficit forecasted in
February's Budget Review, came as a surprise to many South
African economic analysts. Source: Standard Bank, QB
Crux, March 30; Business Day, Business Report, March 31.


8. Comment. The SARB Quarterly Bulletin presents the
national income and product account from an expenditure
basis, while Stats SA publishes the composition of GDP and
growth from a production perspective. The Quarterly
Bulletin also compiled employment and earnings data (from
the Survey of Employment and Earnings) up to September
2004, showing employment increases in the faster growing
areas of the economy (construction and trade) although
manufacturing also posted job gains. Wage increases
slowed over the year as well, from 9 percent in the first
quarter to 6.3 percent in the third. Over the last 10
years, South African growth has averaged 3 percent and
South Africa wants to boost its growth to over 6 percent
by 2014. Low savings, skills shortage, inefficient
infrastructure, HIV/AIDS, and labor market rigidity
present challenges to achieving substantially higher
growth. Inflows of investment are crucial and investment
showed strong gains in 2004. End comment.

FRAZER