SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 03 PRETORIA 001505

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DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
April 15 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:
- Surprise Interest Rate Cut;
- Manufacturing Growth Declining;
- Reserve Bank Slows Accumulation of Foreign Exchange;
- Foreign Tourist Arrivals Drop;
- Treasury Will Spend Tax Revenue Surplus to Reduce Debt;
- Trading Activity Stable; Expectations Still High;
- Commercial Property Confidence Strong; and
- Gautrain Will Increase GDP by R2.6 billion.
End Summary.

SURPRISE INTEREST RATE CUT
--------------


2. The South African Reserve Bank's (SARB) Monetary
Policy Committee reduced interest rates by 50 basis points
to bring the repurchase rate to 7 percent. The prime
lending rate should be reduced to 10.5 percent. The
Monetary Policy Committee (MPC) noted evidence of slower
economic activity in the manufacturing sector as a result
of the move by the rand to a higher trading range over the
past six months, as noted in the following paragraph. In
addition, recent evidence of slowing inflation and
inflationary expectations were also cited. The latest
inflation expectations survey conducted by the Bureau for
Economic Research (BER) at the University of Stellenbosch
showed a significant decline in inflation expectations.
According to the survey, CPIX inflation expectations
reached their lowest level since the BER started the
survey in 2000. For the first time, survey respondents
expect inflation to be below the upper end of the
inflation target band. On average, CPIX inflation is
expected to be at 4.5 per cent, the mid-point of the band
for 2005, down from 5.5 per cent in the previous survey.
CPIX inflation is also expected to remain within the
target range for the next 3 years. The reduction in
interest rates took most analysts by surprise, as a
Reuters poll of 15 economists done last week predicted
that the SARB would keep the repurchase rate at 7.50
percent for the remainder of the year, with any rise in
2006 limited to less than 50 basis points. The unexpected
rate cut may signal that the SARB is more convinced that
oil prices will soon decline and that it is more concerned
about the detrimental impact of a strong rand. Source: I-
Net Bridge and Standard Bank, MPC Alert, April 14;
Business Day April 8.

MANUFACTURING GROWTH DECLINING
--------------


3. Manufacturing production growth has sharply
decelerated in the first two months of 2005 compared to
December's growth of 7.9 percent, according to statistics
based on a revised manufacturing sample by Statistics SA.
In January, manufacturing production grew by 3.2 percent
y/y and February's growth of 2.7 percent continued the
trend of slower growth. Slower growth in South African
manufacturing production reflects rand strength, poor
economic growth in European markets, and impacts of high
oil prices on importing countries. Since 35 percent of
all South African manufactured exports go to countries in
the Euro zone, slower economic growth and increased
European spending on higher energy costs have restrained
manufacturing export growth. Manufacturing production
continues to grow due to strong local consumer demand.
Consumer demand is expected to remain strong in 2005, as
the recent R6.8 billion income tax rebates and
expectations of stable interest rates should support local
demand. On a quarterly basis, manufacturing production
declined 0.6 percent, with 7 out of 10 manufacturing
sectors reporting a decline in output. Food and beverage
sector showed the largest quarterly production decline of
0.5 percent, followed by wood and paper products and basic
iron and steel. Manufacturing sales showed the same
decelerating growth as production, with the first two
months' growth in 2005 at 4.9 percent and 4.3 percent,
respectively. Source: Standard Bank, Manufacturing
Unpacked and Statistics SA Release P0341.2, April 14.


4. Comment. The April 14th release of Stats SA in
manufacturing sales and production used a new sample for
the first time, based on an improved business register,
created in July 2004, which included more small businesses
that were not required to register for the VAT. The
trends in the new survey results mirror those of the old
survey despite recording a 2.6 percent higher level in
manufacturing sales. End Comment.


RESERVE BANK SLOWS ACCUMULATION OF FOREIGN EXCHANGE
-------------- --------------


5. The South African Reserve Bank's (SARB) accumulation
of foreign exchange reserves slowed significantly in
March, as the rand weakened almost 7 percent against the
dollar. Net foreign exchange and gold reserves, also
known as the international liquidity position, increased
to $12.4 billion from $12.2 billion in February, an
increase of $194 million compared with February's increase
of $527 million. It was the 14th consecutive month that
net reserves increased; they are almost double what they
were a year ago. Until recently, South Africa had the
lowest reserves among its emerging-market peers. Its
improved reserve position has contributed to last year's
sovereign credit rating upgrade by Moody's. Source:
Business Day, April 8.

FOREIGN TOURIST ARRIVALS DROP
--------------


6. Foreign tourist arrivals dropped 2 percent (y/y) in
November 2004, according to Statistics SA (Stats SA),due
to high oil prices making air travel more expensive and
the strong rand. South Africa is no longer an inexpensive
destination. The reduction in foreign tourists poses a
threat to South Africa's tourism industry, which employs
about 500,000 people and contributes 7.1 percent to gross
domestic product. November was the first month showing
negative y/y growth. The number of international tourists
to SA increased 5 percent in October 2004, compared with
the previous year. Tourists from Germany, France and the
U.K., the top sources of South African visitors, declined
4.3 percent, 23 percent, and 2.5 percent, respectively.
The number of visitors from the rest of Africa rose 8.9
percent in November. More than 92 percent of these were
from six neighboring countries, including Lesotho and
Swaziland. Source: Business Day, April 13.

TREASURY WILL SPEND TAX REVENUE SURPLUS TO REDUCE DEBT
-------------- --------------


7. Government's R9.6 billion tax surplus raised in the
2004-05 fiscal year would be used to repay government debt
maturing this year, according to National Treasury
Director-General Lesetja Kganyago. The statement ends the
debate over what should be done with the excess. The
Congress of South African Trade Unions had proposed that
it be used to fund infrastructure development. Kganyago
told Parliament's Finance Committee that the windfall
could not be used for other government expenditure this
year because the 2005-06 budget had already been prepared
and tabled before revenue collection figures were
finalized by the South African Revenue Service. Repaying
debt would reduce debt-servicing costs and release
resources to other areas of expenditure. About R29
billion in national debt matures this fiscal year, mainly
R152 bonds. By using the R9.5 billion to settle part of
this debt, government's total borrowing requirement would
be reduced. The net public sector borrowing requirement
this fiscal year has been estimated by national treasury
at R53 billion compared with last year's R38 billion. The
targeted mix of 20 percent foreign government debt and 80
percent local debt had been reviewed, with the Treasury
deciding not to increase the foreign debt significantly
because the risks arising from currency volatility were
too great. Currently, foreign debt represents only 13.5
percent of all government debt. The Treasury plans to
borrow up to $1.5 billion on foreign markets so as to
avoid crowding out the domestic capital market. Taking
into account a redemption of $200-$300 million in foreign
debt, net foreign budgeted borrowing should be $1.3
billion. This move will allow state-owned enterprises to
more easily raise additional funds for infrastructure
projects on the local market. Source: Business Day,
April 13.

TRADING ACTIVITY STABLE; EXPECTATIONS STILL HIGH
-------------- ---


8. March's South African Trade Management Indices (SATMI)
showed current trading conditions improved slightly from
February's level although expectations for the next six
months remained high. The index for current trading
conditions reached 49.1, still below the 50 level,
signaling that trading conditions have slightly
deteriorated compared to February. According to SATMI's
trading index, trading conditions were best in November
2004, reaching 55.7, only to have gradually retreated each
month since. The trade expectations index, measuring
expectations for trade conditions for the next six months,
reached 63, showing an optimistic view of the medium-term
outlook. In both the activity and expectations indices,
the employment component signals that a majority of
respondents have increased job opportunities. This is the
first time both current and expected employment has shown
increases. Source: Standard Bank, SATMI, April 7;
Business Day, April 8.

COMMERCIAL PROPERTY CONFIDENCE STRONG
--------------


9. South Africa's commercial and industrial property
market should experience rising lease values, declining
vacancies, and more tenants in the next six months,
according to eProp's Commercial Property Confidence Index
(CPCI). eProp's CPCI for March 2005 reveals that 75
percent of respondents are looking forward to improved
business conditions in the short-term. Eighty-one percent
of respondents think that lease values will rise in the
next six months and more than 70 percent predict rising
occupancies. More than 20 percent expect to hire more
staff. The CPCI tracks the sentiment of a sample of
property managers, asset and portfolio managers, and
brokers. Respondents rate their expectations of ten
market factors that are unique to commercial property,
including number of leases and sales; value of leases and
sales; net operating income; rental and vacancy levels;
capitalization rates and staff employed. A more general
category is sentiment about the management of the public
environment. eProp is a research firm devoted to the
commercial property market. Source: I-Net Bridge, April

13.

GAUTRAIN WILL INCREASE GDP BY R2.6 BILLION
--------------


10. The Gautrain Rapid Rail Link project, a proposed high
speed commuter rail service linking Johannesburg and
Tshwane (Pretoria),will create 1,200 permanent jobs and
contribute about R2.6 billion ($426 million, using 6.1
rands per dollar) to South Africa's gross domestic product
(GDP),according to a study released by Brait financial
service company. The Gautrain will have a ripple effect
on the economy by creating 70,000 jobs during the
construction phase and another 40,000 jobs when the rail
service is operational. The study points to other
benefits of Gautrain, such as reduction in congestion,
medical costs, and traffic accidents as commuters shift to
the rail service. Estimated savings to the economy should
reach R15.3 million ($2.6 million). Source: Business
Day, April 13.

FRAZER