SOUTH AFRICA ECONOMIC NEWSLETTER May 20 2005 ISSUE

UNCLAS SECTION 01 OF 03 PRETORIA 001980

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER May 20 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:

- ANC to Discuss Relaxation in SA's Labor Market;
- Empowerment Funding Structure Debated;
- Savings Still Low Although Conditions Improved;
- SA Productivity Drives Increase in Global
Competitiveness;
- Manufacturing and Retail Sales Show Signs of Slowdown;
- Sub-Saharan African Transport Expensive; and
- 2004/05 Budget Deficit Lower.
End Summary.

ANC TO DISCUSS RELAXATION IN SA'S LABOR MARKET
-------------- -


2. In preparation for the African National Congress'
(ANC) general council meeting in June, a plan calling for
a dual labor market, where young workers would earn less
and their employers might not meet all the current labor
regulations, is circulating. The plan is part of a search
for solutions to South Africa's high unemployment.
Acknowledging that young people constitute 60 percent of
South Africa's unemployed, the ANC document says that
subjecting young people to a more flexible labor relations
regime would mean waiving the minimum wage and other
collective bargaining arrangements (including limits on
overtime work) and make it easier to dismiss poor workers.
Another proposal is that industrial development zones be
free of labor laws such as the Labor Relations Act and
Basic Conditions of Employment Act, encouraging investment
and employment growth in poorer provinces such as Eastern
Cape and KwaZulu-Natal. Initial reactions from trade
unions were negative with the Congress of South African
Trade Unions (COSATU) opposing attempts by government to
"reverse worker rights." Any change to existing labor
laws would be unconstitutional. Officially, COSATU and
the South African Communist Party would not comment on the
proposals, saying they had not yet seen the document. The
proposal also suggests changing the definition of small
business, increasing its size from 50 to 200 employees and
exempting it from parts of existing labor laws. Source:
Business Day, May 16.

EMPOWERMENT FUNDING STRUCTURE DEBATED
--------------


3. A discussion document for the African National
Congress (ANC) national general council meeting criticizes
the current way of funding empowerment deals. Currently
most deals are debt-driven. Since the money spent is not
invested productively, these deals represent a drain on
the economy. The deals, based on debt-financing, are
unsustainable. Other critics say large empowerment deals
are structured in so that they are unprofitable for long
periods of time. Another problem is that empowerment
partners do not have money for financing proposed
transactions. Some argue for more flexibility in the
funding arrangements of empowerment deals to allow for an
early exit. John Kane-Berman, Chief Executive of the
South African Institute of Race Relations, says the
fundamental problem is that there are not enough black
people to purchase large amounts of shares. He suggests
that attracting foreign direct investment and combating
unemployment should be government's primary concerns. He
also argues that few empowerment deals generate business;
they just transfer assets. Source: Business Day, May 17.

SAVINGS STILL LOW ALTHOUGH CONDITIONS IMPROVED
-------------- -


4. South Africans continue to spend their surplus cash
rather than save it, despite the excellent environment.
The South African Savings Institute's (SASI) national
savings barometer for the fourth quarter of 2004 shows
that the environment for saving improved by 1.98 index
points to 115.06 in December. This was the fifth quarter
in a row that conditions improved. Despite the
improvement, gross savings as a percentage of gross
domestic product (GDP) fell from 15 percent in the third
quarter 2004 to 13.5 percent in December. The lower
savings ratio was mainly attributable to the corporate and
household sectors, with the government sector's ratio
practically unchanged. SASI noted that an increase in
business confidence, lower producer inflation figures and
low interest rates have led to an improvement in savings
conditions for businesses and increases in disposable
income improved the savings environment for consumers.
Lower government spending as a percentage of GDP and the
decrease in government debt as a proportion of GDP were
among the factors contributing to the improvement in
government's saving environment in the last quarter of

2004. Source: Business Day, May 16.

SA PRODUCTIVITY DRIVES INCREASE IN GLOBAL COMPETITIVENESS
-------------- --------------


5. According to the National Productivity Institute
(NPI),South Africa's rising productivity, growing at more
than 3 percent per year since 1996, forms the basis for
South Africa's improved international competitiveness.
South Africa improved its ranking from 49 to 46 out of 60
countries according to the latest World Competitiveness
Report compiled by the Swiss-based Institute for
Management Development, primarily due to due an improved
2004 economic performance. Despite this improvement in
its rankings, South Africa showed a decline in three of
the four ranking categories since 2004. Apart from a
sharp improvement in economic performance, areas such as
business efficiency, government efficiency and
infrastructure development had actually declined in
comparison with other countries. The NPI said business
efficiency was hampered by inadequate skilled labor, the
brain drain, low employment rate, insufficient finance
skills, and shortages of competent senior managers and
entrepreneurs. South African employers were also not
keeping pace with other countries in terms of planning and
supervision of employees. Source: Business Day, May 16.

MANUFACTURING AND RETAIL SALES SHOW SIGNS OF SLOWDOWN
-------------- --------------


6. According to Statistics SA, manufacturing production
grew by 1.2 percent (y/y) and 0.9 percent growth (m/m) in
March, continuing its fourth month of slower growth. On a
quarterly basis, six out of 10 manufacturing sub-sectors
reported a decline in output in the period ending in March
2005, with basic iron and steel and machinery contributing
most to manufacturing production decline. The strong
rand, slower growth in the Euro zone economies, and higher
oil prices are manufacturers' key concerns. Retail sales
also slowed in the first two months of 2005 compared to
December 2004's growth of 10.2 percent (y/y). In January
2005, real retail sales increased by 3.4 percent (y/y),
showing a monthly decline of 32.6 percent. February's y/y
growth was 5.4 percent, while monthly growth (-1.5
percent) again declined but at a much slower rate. The
April 14th 50 basis point reduction in interest rates
should support additional positive growth in retail sales,
although sales of motor vehicles show signs of
deceleration. Source: Business Day, May 13; Standard
Bank, Taking Stock and Manufacturing Unpacked.

SUB-SAHARAN AFRICAN TRANSPORT EXPENSIVE
--------------


7. Despite the sub-Saharan Africa region owning the
largest transport infrastructure in Africa, it had the
highest transport costs on the continent. Sub-Saharan
Africa owns 83 percent of all African railways, but
transport costs as a proportion of import value in the
region were about 16 percent, compared with an average of
13 percent in other African countries, according to
Minister of Transport Jeff Radebe. Transport costs in
Africa were considerably higher than the 9 percent average
in other developing countries and more than double the
world average. North Africa had the lowest freight costs
on the continent, while West Africa was slightly lower
than the sub-Saharan region at 14 percent. High transport
costs are a big concern in South Africa. The country owns
42 percent of the sub-Saharan railway infrastructure, but
transport costs come in at about 13 percent of gross
domestic product. Maria Ramos, the Chief Executive of
Transnet (a state-owned transportation enterprise) said
that the transport utility wants to lower transport costs
to between 7 percent and 8 percent. Radebe said South
Africa had the biggest rolling stock on the continent,
accounting for about 47 percent of the locomotives in sub-
Saharan Africa, 32 percent of locomotives in Africa, 62
percent of freight wagons and carries 71 percent of the
continent's rail freight and 91 percent of sub-Saharan
Africa's. Source: Business Report, May 17.

2004/05 BUDGET DEFICIT LOWER
--------------


8. National Treasury stated that South Africa's national
budget deficit for the financial year 2004-05 narrowed to
1.5 percent of gross domestic product (GDP),compared to a
April estimate of 1.6 percent and a February estimate of
2.3 percent. The consolidated deficit, which covers both
national and provincial expenditures, is now projected at
1.3 percent compared to February's estimate of 2.5
percent. In April, the lower than expected deficit was
due to almost R10 billion ($1.5 billion, at R6.4 per
dollar) surplus revenue collected by the South African
Revenue Service. Better than expected economic growth,
led by strong consumer spending, resulted in higher
collected tax revenues. Acknowledging concerns about the
provinces' capabilities of delivering basic services
quickly, National Treasury stated that the reduced deficit
should not be viewed as under spending as it represented
savings, higher tax collections and the non-transfer of
funds. Spending by national and provincial governments
was 97.8 percent of their consolidated adjusted budgets in
2004/05. These figures would be revised when national and
provincial departments had finalized and reconciled
financial statements for submission to the auditor-general
by May 31. Source: Business Day and Business Report, May

18.

MILOVANOVIC