SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 03 PRETORIA 000176 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 January 14 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: - November Manufacturing Production Down; - Stats SA Chief Complains About Global Data; - Reserve Bank Slows Forex Reserve Buildup; - World Bank Plans to Increase Spending in South Africa; - Moody's Upgrades SA Foreign Currency Debt; and - Vehicle Sales Increase by 17.6 percent. End Summary. NOVEMBER MANUFACTURING PRODUCTION DOWN -------------- ¶2. November's monthly production growth declined 1.2 percent compared to October's monthly decline of 0.8 percent as the strong rand continues to impact negatively manufacturing production. This is the second consecutive monthly decline in manufacturing production since the manufacturing sector's recovery beginning March 2004. From April 2003 until February 2004, manufacturing production showed consecutive monthly declines and economists expected the sector to show strong positive growth later in 2004. Growth was anticipated due to lower finance costs as a result of declining interest rates from mid-June 2003 through August 2004. However, the rand has continued to appreciate, putting pressure on manufactured exports. Manufacturing production still shows positive growth if measured on an annual basis. Year-on-year manufacturing production grew 5.6 percent in November, still indicating positive though declining growth since August's peak growth at 7 percent. The food, textile and petroleum and plastics sectors contributed the most to November's slowdown in growth, although the communications sector showed the largest decline at 2.7 percent over the preceding three months. Source: Stats SA Statistical Release P3041.2 Revised, January 12. ¶3. Comment. On January 11, Stats SA initially released manufacturing production and sales data, showing manufacturing production declining by 5.1 percent m/m and increasing 1.9 percent on a yearly basis. The 5.1 percent decline in production would have been the largest monthly decline in four and a half years if true. Wednesday's morning papers (January 12) heralded the impact of the strong rand and declining economic growth of trading partners leading to increased speculation of a possible interest rate reduction during the next Monetary Policy Committee meeting in February. The initial manufacturing data included errors, however, in the basic iron and steel, non-ferrous metal products, metal products and machinery sector, which has a 22.4 percent weight in the production volume index. At first, Stats SA reported that this sector showed a 15 percent monthly decline; revised figures now show a 2 percent increase in November growth. This means that the overall manufacturing index is now 111.1 in October and 109.8 in November after seasonal adjustment compared with the previous October and November indices of 111.7 and 106.0, respectively. End comment. STATS SA CHIEF COMPLAINS ABOUT GLOBAL DATA -------------- ¶4. Pali Lehohla, Statistician-General of Statistics South Africa (Stats SA),criticized international agencies and global organizations that use "distorted statistics to misrepresent South Africa to foreign investors." He plans to present his concerns to the UN Statistics Commission in March and expects his concerns to be formally debated by the UN next year. Lehohla complains that these organizations do not use official South African statistics, quoting the unemployment rate, life expectancy, estimated population and HIV/AIDS prevalence figures as examples of "misleading statistics." According to Lehohla, the official unemployment rate is 28 percent, instead of 40 percent often used; the South African population should be 46.6 million compared to 45.2 billion estimated by the UN. He also said that recent estimates of daily HIV/AIDS deaths in South Africa being between 600 and 1,000 were overestimated. Stats SA plans to release a report about the cause of death in South Africa, which will be another source of data used to estimate HIV/AIDS deaths. Source: Business Day, January 12. ¶5. Comment. Recent international comparisons show little improvement in South Africa's economic and social standing. The latest United Nations Human Development Index (HDI) ranked South Africa 119 out of 177 countries, compared to 2002's position at 107. The impact of lower life expectancy was the largest factor in the South African decline in HDI. Recently, the Heritage Foundation released its index of economic freedom at 2.78, showing little improvement from the previous year's value of 2.79. The analysis cites unemployment rates over 40 percent, HIV infection rates of 11 percent, over-regulation, regional instability and high crime rates as reasons for little improvement in its economic freedom indicator. Stats SA publishes both a broad and narrow indicator of unemployment, with discouraged workers included in the broad measure. The latest South African unemployment rates (published September 2004, using data from March) are 27.8 percent for the narrow definition (including people who have actively looked for work within 4 weeks of the semi-annual Labor Force Survey interview),and 41.2 percent unemployed using the broad definition. Stats SA views mortality, HIV-prevalence and total fertility rates used by international organizations to be misleading as well. Official figures released by Stats SA put life expectancy for 2004 at 50 years for males and 53 for females, while UN studies typically use 45.1 years for males and 50.7 years for females. Stats SA estimates HIV prevalence rates are 6.5 percent lower than UN estimates. The UN uses total fertility rates of 2.6, lower than the total fertility rate of 2.77 in 2004 used by Stats SA, primarily due to different fertility assumptions about HIV- positive women, different life expectancies at birth and mortality rates. End comment. RESERVE BANK SLOWS FOREX RESERVE BUILDUP -------------- ¶6. December foreign exchange purchases halved, as liquidity in the market is typically low over the holiday season. Figures released by the South African Reserve Bank (SARB) show it purchased $532 million of foreign exchange last month, down from $1.3 billion in November. Gross reserves increased to $14.9 billion. Net reserves, also called the international liquidity position, increased to $11.4 billion last month, up from $11 billion in November. Economists said the SARB probably reduced its activity in the foreign exchange market last month to avoid distorting movements in the currency when liquidity in the market was low. Foreign exchange markets are expected to remain illiquid for most of January, and given the recent volatility in the rand, the SARB was likely to limit its foreign exchange purchases this month as well. Nedcor bank noted that gross reserves were now the equivalent of three and-a-half months of import cover. The rapid increase in imports as a result of the strong rand and buoyant consumer demand was putting pressure on the SARB to build up reserves. According to Econometrix Treasury Management analyst George Glynos, the SARB should be aiming for an equivalent of between four and five months' import cover. The SARB has been steadily building up its gross reserves after eliminating its foreign exchange debt in February last year, when gross reserves stood at about $8 billion. However, the SARB has resisted calls from exporters and labor unions to buy dollars more aggressively in the market to limit the rand's strength. Source: Business Day, January 10. WORLD BANK PLANS TO INCREASE SPENDING IN SOUTH AFRICA -------------- -------------- ¶7. The World Bank's private sector lending subsidiary, the International Finance Corporation (IFC),will increase its annual spending in South Africa to between $50 million and $150 million in support of black economic empowerment (BEE) and small and medium-sized enterprises, according to Managing Director Peter Woicke. With total investment of $225 million, South Africa is the IFC's largest client in sub-Saharan Africa. At present, the organization invests roughly $40 million a year in the country. IFC plans to increase its funding for BEE deals this year, especially in the mining and financial services sectors because the two sectors had finalized empowerment charters. Woicke, who is also the Executive Vice-President of the IFC, is in the country to meet government officials, local companies and the bank's clients. Woicke said he was concerned that few black people were benefiting from the country's BEE policy and urged the beneficiaries to re-invest their wealth to develop the local economy. Nearly three- quarters of the R28 billion ($4.6 billion, using 6 rands per dollar) BEE deals concluded in 2003 involved at least one of the top six BEE consortiums: African Rainbow Minerals, Mvelaphanda Resources, Shanduka (formerly MCI Resources),Safika, Kagiso and Tiso. Last year, the IFC helped the Johannesburg metropolitan council issue a R1 billion bond by providing a $30 million guarantee on the bond. The IFC also pumped $28 million into empowerment group Mvelaphanda Resources. Source: Business Report, January 11. MOODY'S UPGRADES SA FOREIGN CURRENCY DEBT -------------- ¶8. International ratings agency Moody's Investors Service has upgraded South Africa's country ceilings for foreign currency debt and bank deposits to Baa1 from Baa2, principally reflecting the substantial strengthening of the country's foreign reserves position. The outlook is stable. The upgrades conclude a rating review that began in October. Moody's affirmed the government's A2 domestic currency debt rating, also with a stable outlook. This rating had not been placed on review because the country's public finance indicators were considered appropriate to the existing rating. Moody's said that the upgrades were based largely on substantial improvements in official external liquidity, since foreign debt levels were already moderate and broadly consistent with higher-rated nations. South Africa had been an exception to other Baa-rated countries, with manageable external debt but relatively low reserves. Low reserves had contributed to financial and exchange rate volatility in recent years, and were an important explanation for the wide, three-notch difference between the government's domestic and foreign-currency ratings. The gap has now been narrowed to two notches. The rating agency also pointed to several other factors that supported the upgrades, among them the faster growth now underway and heightened investor optimism about the country's future prospects. Moody's noted that the recently quicker pace of growth helped to boost imports and push the trade balance into deficit in spite of the commodity cycle upturn. As a consequence, the current account shortfall is likely to continue to grow, particularly with a strong rand impeding the competitiveness of manufacturing exports. Capital inflows covered the country's external financing needs, even allowing for a substantial buildup in reserves. Moody's concludes that these inflows are vulnerable to reversal in the event of various changes in global or local circumstances. However, Moody's also emphasized that South Africa faces formidable long-term challenges related to chronic poverty and unemployment, whose grip has become more intractable with the spread of HIV/AIDS. These problems are being addressed gradually, with skills training, education budgets, targeted government spending, national health insurance, and hopefully, black economic empowerment initiatives that will benefit the broader population. Source: I-Net Bridge and Business Day, January 12. VEHICLE SALES INCREASE BY 17.6 PERCENT -------------- ¶9. According to data released by Stats SA, South African vehicle sales for the first ten months of 2004 increased by 17.6 percent compared with the first ten months of ¶2003. Showing accelerating sales growth later in the year, growth during the three months to October 2004 was 23.1 percent compared with the three months up to October ¶2003. Recent monthly data released by the National Automobile Association of South Africa (NAAMSA) show new vehicle sales increasing 37.9 percent (y/y) in December. For the year as a whole, NAAMSA-reported sales improved by 22 percent, reflecting increased consumer spending in ¶2004. Source: I-Net Bridge, January 12. MILOVANOVIC