SOUTH AFRICA ECONOMIC NEWSLETTER

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
April 22 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:
- International Economic Conditions More Important than
Domestic for South African Monetary Policy;
- Russian Banks to Increase Services in South Africa;
- Rand Impacting Tourist Spending;
- SARB Wants Inflation Above 3 Percent;
- China, South Africa Seek Middle Ground on Increase in
Imports; and
- Telkom Fees Hindering South African Growth.
End Summary.

INTERNATIONAL ECONOMIC CONDITIONS MORE IMPORTANT THAN
DOMESTIC FOR SOUTH AFRICAN MONETARY POLICY
-------------- --------------


2. Favorable global economic conditions, low real
interest rates, a weakening dollar, accelerating growth
and increasing commodity prices helped make South Africa
and other emerging markets recipients of significant
international capital. Rand strength has weakened
domestic inflation pressures, allowing the South African
Reserve (SARB) to reduce local interest rates. Buoyant
confidence, credit extension, robust motor vehicle and
retail sales growth and increasing house prices followed
the interest rate cuts. In predicting South Africa's
future interest rates, most analysts focus on domestic
credit and demand rather than any international factors
impacting the value of the rand. However, in a global
world characterized by substantial capital flows, the SARB
has limited control over South African interest rates and
currency. As capital inflows increase, the South African
currency becomes firmer, pushing down inflation to the
point of threatening the lower end of the target band,
forcing interest rate cuts, despite domestic inflation
risk factors. South Africa is an open, small economy, and
in understanding the rand's strength, international
developments are more important. From a global
perspective, it may be premature to expect an imminent
turning point in South African rates. A major, sustained
revival of the dollar, with the concomitant threat of
capital withdrawal hindering the outlook for the rand, is
probably not at hand. When the inward expansion of
capital begins to recede within a context of domestic
imbalances, it is possible that monetary policy aggression
will once again surprise, but in the other direction, with
rates moving faster upward, once again with apparent
disregard for domestic demand conditions. Source: Based
on a column by Jonathan Stewart, head of fixed interest at
RMB Asset Management, Business Times, I-Net Bridge, April

18.

RUSSIAN BANKS TO INCREASE SERVICES IN SOUTH AFRICA
-------------- --------------


3. Russian banks intend to open offices in South Africa
to serve a growing number of Russian companies seeking to
operate in South Africa, according to Russian Central Bank
Deputy Chairman Konstantin Korishchenko. Korishchenko was
accompanied by three Russian commercial banks and the
Association of Russian Banks to the first meeting of South
African and Russian banking authorities, which began at
the South African Reserve Bank. The Russian banks
visiting South Africa are Vneshtorgbank, Bank of Moscow,
and Nomosbank. There is already one Russian state-owned
bank with a representative office in South Africa,
Vnesheconombank, which started doing business in the
country in 2000. Russian interest in South Africa has
grown in recent years. Russia's largest mining company,
Norilsk Nickel, already holds 20 percent of Gold Fields,
while Russian company SUAL is considering investing in a
smelter in the Coega Industrial Development Zone in SA.
Korishchenko said he would welcome any South African banks
intending to follow Standard Bank by opening branches in
Russia to serve the growing number of South African firms
operating there. Banking Registrar Errol Kruger said
while Standard Bank had a successful Russian business, he
would be "surprised" if many other local banks followed
suit, as Standard Bank is very focused in terms of its
niche market in resource banking and really understands
that market. Source: Business Day and Business Report,
April 19.

RAND IMPACTING FOREIGN TOURIST SPENDING
--------------


4. While the latest monthly tourism statistics to
December 2004 from Statistics South Africa show that the
number of tourists visiting the country has flattened out
since 2001, there is evidence that the strong rand has
resulted in foreign tourists spending less money in the
country since 2003, according to Old Mutual Asset Managers
SA (Omam). A tourist who had 1,000 euros to spend in 2002
came to South Africa with 10,000 rand. In 2003, however,
that same 1,000 euros was worth only 7,150 rand - giving
the tourist 2,850 rand (or 28 percent) less to spend. In
2002, South Africa attracted an estimated 700,000 "high-
spending" tourists. These tourists were mainly middle-
aged from first world countries coming to South Africa for
their first or second time to stay in luxury resorts and
hotels, and had a high amount of discretionary spending
power. In 2005, the number of high-spending tourists was
expected to decrease by an estimated 10 percent to 630,000
and their spending power is also expected to decrease,
according to Brian Pyle, a portfolio manager at Omam.
Figures in the February annual Satour tourism report
confirm the sharp decline in average spending per tourist
during 2003. Despite a 5.3 percent increase in the number
of European tourists visiting the country during 2003,
average spending fell by 15.9 percent to R11,377 ($1,504,
using 7.56, the 2003 annual average rand per dollar) per
person. Europeans comprise almost 20 percent of all
foreign visitors to South Africa. Tourists from the
Americas spent 35.9 percent less in 2003 compared with the
year before, even though the number of tourists increased
by 3.1 percent. Tourists traveling from Asia and
Australia spent R10,141 ($1,341) rand per person in 2003
compared with R13,067 the year before, which is a 22.4
percent reduction. Source: I-Net Bridge, April 19.


SARB WANTS INFLATION ABOVE 3 PERCENT
--------------


5. The South African Reserve Bank (SARB) would rather
have inflation closer to 6 percent, rather than fall below
3 percent, according to Coronation Fund Managers.
According to the SARB's Deputy Governor Ian Plenderleith,
the bank does not want CPIX inflation (which excludes
mortgage interest rates) to fall below 3 percent, the
bottom of the bank's inflation target. Plenderleith said
the Monetary Policy Committee (MPC) had been concerned
that high oil prices would dampen consumer demand, so it
relieved the pressure by dropping interest rates by 50
basis points on April 14. However the MPC would monitor
the second-round effects of high oil prices to see if it
might have to increase rates in the future. Source:
Business Report, April 20.

CHINA, SOUTH AFRICA SEEK MIDDLE GROUND ON INCREASE IN
IMPORTS
-------------- --------------


6. According to China's Ambassador to South Africa, Lu
Qiutian, it is up to South African and Chinese policy
makers to find solutions to problems associated with the
surge of imports. As a result of a large increase in
Chinese imports, thousands of jobs have been lost in the
labor-intensive textile and footwear industries. Trade
unions and manufacturers have called on the government to
introduce protectionist measures to stem the inflow of
goods. Lu said free trade was an important instrument in
bringing prosperity and economic development, and his
country was in full support of efforts by the World Trade
Organization to open markets. The South African
government has indicated that it intends to negotiate a
trade agreement to gain preferential access for South
African exporters to the $1.65 trillion (R10.36 trillion)
Chinese economy before the end of this year. Talks will
also be opened with India, which has a gross domestic
product of $650 billion. Source: Business Report, April

20.

TELKOM FEES HINDERING SOUTH AFRICAN GROWTH
--------------


7. Research by Genesis Analytics about the cost of
telecommunications services has confirmed that in some
services, Telkom's fees are 400 percent above costs in
other countries, serving as a hindrance to higher South
African growth. The South Africa Foundation, which
represents about 15 multinationals trading in South
Africa, shows that the fees imposed on Telkom's
international leased lines are 400 percent higher than the
average price from 14 comparable countries and three times
higher than the 2nd most expensive country. Table 1
compares South African costs of selected telecommunication
services. Source: Business Day, April 21.
Table 1
Ranking (how
expensive)
Number of times more
expensive than
cheapest price
Business ADSL Most expensive
9.3
Domestic leased line Most expensive
14.7
International leased line Most expensive
31.4
Retail ADSL Most expensive
8
ISP Fees Fourth
5.1
Business (local calls) Most expensive
10.7
Business (international calls) Fifth 3.3
Business (mobile calls) Second
22.7
Retail (local calls) Fourth
7.9
Retail (mobile calls) Fifth
10.7

Per cent greater
than average price
Business ADSL 147.7%
Domestic leased line 101.5%
International leased line 398.6%
Retail ADSL 139.2%
ISP Fees 43.5%
Business-local calls 198.5%
Business-international calls-13.6%
Business-mobile calls 106.6%
Retail-local calls 79.3%
Retail-mobile calls 37.2%


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