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
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