Identifier
Created
Classification
Origin
05PRETORIA270
2005-01-21 09:41:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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UNCLAS SECTION 01 OF 04 PRETORIA 000270 

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 21 2005 ISSUE


UNCLAS SECTION 01 OF 04 PRETORIA 000270

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 21 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:
- Free Electricity to Poor More Expensive than Planned;
- Jo'burg Needs R800 Million to Invest in Electricity
Infrastructure;
- Amnesty Program Increases Declared Offshore Assets to R65
Billion;
- Manufacturing Index Improves in December;
- Exports to U.S. Reflect Rising Commodity Prices Rather
than Increase in Manufacturing Products;
- Reserve Bank Expects Further Upgrades in Credit
Ratings;
- Retail Sales to Grow 8.5 Percent in 2005; and
- Banks Increase Mortgage Lending by 23 Percent.
End Summary.

FREE ELECTRICITY TO POOR MORE EXPENSIVE THAN PLANNED
-------------- --------------


2. Government's policy of providing free basic
electricity for the poor has been lauded as one of the
successes of the fight against poverty, but service
delivery and administrative problems will be discussed
during a cabinet lekgotla (roundtable),convening in
Gauteng for the next three days. These problems could
become issues in local government elections this year.
Ompi Aphane, Chief Director in the Minerals and Energy
Department, reported that only 12 percent of the poor had
received the free electricity benefit in the 18 months
since its launch, while expenditure on the initiative had
increased to about R750 million ($125 million using 6
rands per dollar),more than 2.4 times the amount
initially budgeted. He noted that the constitutional
autonomy of local government meant that the national
government could not force the implementation of its
policies on other spheres of government. According to
Aphane, municipalities having 1.3 million poor were

distributing electricity to 3 million consumers, giving
free electricity to 1.7 million consumers or 88 percent of
all municipal customers, most of whom who did not qualify.
Providing free electricity to the poor started began 18
months ago, with R300 million ($40 million, using R7.56
per dollar, the 2003 annual exchange rate average)
allocated to municipalities in the form of a conditional
grant from national government for the first financial
year, and R500 million ($60 million, using 6 rands per
dollar) in FY2004. In the first year, municipalities spent
R710 million ($94 million, using the 2003 exchange rate)
on the program, making up the difference from other
provincial sources of income. Eskom, the power company
responsible for rural areas and the bulk of the poor, had
spent only R46 million last year. Aphane said the main
problem was poor targeting and leakages, with many
relative well-off households receiving it, while the
majority of the poor did not. Many municipalities also
did not have the capacity to implement the program.
Disputes between municipalities and Eskom also created
problems. Of South Africa's 284 municipalities, 57 had
not signed funding and service agreements with Eskom for
it to provide free basic electricity. These agreements
were necessary because Eskom was not constitutionally
mandated to provide electricity in municipal areas. Two
municipalities disagreed with the free basic electricity
program and refused to implement it. Source: Business
Day, January 19.

JO'BURG NEEDS R800 MILLION TO INVEST IN ELECTRICITY
INFRASTRUCTURE
-------------- --------------


3. Throughout the past year, Johannesburg has experienced
increasing power blackouts, negatively affecting
businesses. Talks between the Department of Minerals and
Energy (DME),National Treasury, and the Provincial and
Local Government Department, were taking place to invest
R800 million ($133 million) in Johannesburg's outdated
electricity infrastructure. Representatives from DME
cautioned that there were many competing claims on the
national budget and that the project would have to be
evaluated alongside other priorities. Power failures in
the country's industrial heartland were a source of great
concern to government because of their economic effect and
threat to investment. A department study found that
Johannesburg would need R2 billion over five years, but a
minimum R800 million investment would get the electricity
network to the right level. If the government wanted to
update the electricity infrastructure in all of the large
metropolitan areas, it would cost R3-4 billion.
Johannesburg's problem was the most serious as its network
was very old and supplied major industries. According to
Ompi Aphane, Chief Director in the DME, a percentage of
the electricity tariff paid by consumers should have been
used for maintenance, but municipalities used this money
for their other services instead. The municipalities
claimed that the money allocated them by national
government each year from the national budget was not
enough for them to perform their functions. A capital
grant is required, as tariff-generated investment income
would take too long to accrue. Source: Business Day,
January 19.

AMNESTY PROGRAM INCREASES DECLARED OFFSHORE ASSETS TO R65
BILLION
-------------- --------------


4. Applicants for the foreign exchange and tax amnesty
declared R65 billion in offshore assets, according to the
Department of Treasury's amnesty unit. This figure far
exceeds the initial expected increase in offshore assets
of R35-40 billion. Amnesty unit spokesman Jannie Rossouw
said the R65 billion was calculated at the exchange rates
prevailing on February 28, 2003 (about R8 to the dollar)
and an additional R2.2 billion in tax revenue should come
from amnesty applicants. About 80 percent of this sum
would be come from foreign assets remaining offshore, 10
percent from funds repatriated and 10 percent as a tax
levy. In terms of the amnesty law, a 5 percent tax would
have to be paid on assets repatriated to South Africa and
a 10 percent levy on assets that would continue to be held
offshore. Altogether about 42,000 applications were
received, 23,000 of which have been processed. Rossouw
said the adjudication process had taken longer than
expected because of the flood of about 23,000 applications
in the last few days before the deadline at the end of
February last year. The influx meant a unit initially
comprising only nine adjudicators and some support staff
had to be increased to more than 70 people, 36 of them
adjudicators. Another reason for the delay was that
applications received close to the deadline were generally
more complex than earlier ones and lacked all the
necessary information. The adjudication process is
expected to be to be completed by midyear. Those granted
amnesty would have six months to pay their taxes. Source:
Business Day, January 19.

MANUFACTURING INDEX IMPROVES IN DECEMBER
--------------


5. According to the latest Investec Purchasing Managers
Index, manufacturing showed signs of improving in
December, but there are indications that weaker export
demand and a continuing strong rand may affect future
growth. The index, which measures aspects of
manufacturing including orders, output and employment,
increased to a seasonally adjusted 53.2 points in
December, up from 51.6 in November. The higher index
reading last month followed two successive months of
decline. The improvement came mainly from a build-up of
inventories and an improvement in suppliers' performance.
However, measures of new sales orders and business
activity fell slightly, reflecting the effect of the
strong rand on production. Investec Asset Management head
of fixed income Andre Roux said yesterday that the
slowdown in export growth (exports account for 16 percent
of South Africa's economy) and increased import
competition were the main reasons for lower manufacturing
sales. Last week, Statistics SA's manufacturing
production showed a monthly November decline of 1.2
percent compared to October's monthly decline of 0.7
percent, while the rand strengthened more than 11 percent
against the dollar over the two months. Roux expected
manufacturing activity to grow about 4 percent in 2005,
compared with about 5.5 percent last year. Pieter
Laubscher, a senior economist at the University of
Stellenbosch's Bureau for Economic Research, said
yesterday that a crucial determinant of manufacturing
growth this year would be the rand. Source: Business
Day, January 18.

EXPORTS TO U.S. REFLECT RISING COMMODITY PRICES RATHER
THAN INCREASE IN MANUFACTURING PRODUCTS
-------------- --------------


6. South African Chamber of Business (SACOB) points out
that November's increase of $526.6 million compared to
November 2003 in South African exports to the United
States was primarily due to increased value of precious
metals and iron and steel products exports, as
international metal prices rose substantially over the
past year. Total exports of $5.34 billion to the U.S. for
the first 11 months of 2004 exceeded total exports to the
U.S. of $4.88 billion for the whole of 2003. In November,
precious metals and stones grew 61.6 percent year on year
to $212.5 million and iron and steel products increased
333.5 percent to $90 million. For the year to date,
precious metals and stones exports increased 29.2 percent
to $2.35 billion, and iron and steel products grew 119
percent to $645 million. Many manufactured exports to
the United States show sluggish growth. Vehicle exports
fell 14 percent to $40 million year on year in November
and declined 23.2 percent to $530.3 million for the year
to date. Machinery and mechanical exports showed growth
of 8.6 percent to $189.2 million, while clothing declined
47.1 percent to $70.8 million for the year to date.
Despite the strength of the rand making imports cheaper,
the value of imports from the U.S. dropped 17 percent when
compared with November 2003. According to SACOB, South
Africa had a trade surplus with the United States of $2.45
billion ending in November. SACOB compiled tariff and
trade data from the U.S. Commerce Department, U.S.
Treasury and U.S. International Trade Commission. The
U.S. has not released year-end trade figures yet. Source:
Business Day, January 19.


7. Comment. Over the past three years, over 30 percent
of South African exports went to Europe, of which the
United Kingdom had the largest share at 8.4 percent in
both 2001 and 2002 and 8.8 percent in 2003. The
importance of the U.S. market for South African exports
has increased; its share for 1995, 2001, 2002 and 2003 was
4.7, 7.9, 8.1 and 10.5 percent, respectively,
demonstrating the impact of AGOA. U.S. share of South
African exports is now greater than the U.K. share.
Historically, the United Kingdom was South Africa's major
trading partner, although the United Kingdom provided over
60 percent of South African foreign direct investment in
2003 and 38 percent of all foreign investment. End
comment.

RESERVE BANK EXPECTS FURTHER UPGRADES IN CREDIT RATINGS
-------------- --------------


8. South Africa's continued build-up of foreign exchange
reserves might help the country achieve further credit
rating upgrades, according to Daniel Mminele, the head of
the Financial Markets Department of the South African
Reserve Bank. On January 12, Moody's, an international
credit ratings company, upgraded South African debt to
Baa1 from Baa2, citing increased foreign currency reserves
as one reason. The upgrade, the first by Moody's since
November 2001, puts South Africa on the same level as
Thailand and Mexico, and one notch below Malaysia.
"Further improvements in foreign exchange reserves levels,
together with progress being achieved with regard to some
of the other challenges highlighted by Moody's, should
certainly support the case for another move, not only by
Moody's but by other leading ratings agencies as well,"
Mminele said. Moody's said South Africa must also tackle
poverty, unemployment and the HIV/AIDS epidemic, where the
government's response had been "frustratingly inadequate."
Standard & Poor's, another credit rating firm, said
progress on these issues was required before it increased
its own rating, which is one notch below Moody's. Source:
Business Report, January 19.

RETAIL SALES TO GROW 8.5 PERCENT IN 2005
--------------


9. The Bureau for Market Research (BMR) expects retail
sales to grow 8.5 percent in 2005 with sales expected to
reach R350 billion ($58 billion),benefiting from low
interest rates and inflation. Sales of semi-durable goods
such as clothes and footwear are predicted to grow 10
percent, while growth in non-durable such as food and
beverages, and durable items such as refrigerators and
cars, are expected to vary between 7 percent and 8
percent, respectively. According to BMR, it takes 18 to
24 months for interest rate cuts to have an effect on
retail sales. The two other factors leading to high
growth in the retail sector are the relatively low
inflation and the emerging black middle class, which
benefit the clothing, footwear, food, motor vehicle and
insurance sectors. Recent data released by Statistics SA
showed that annual nominal retail sales grew by 16.7
percent (y/y) in October 2004. The figures bring the
total for the first 10 months of 2004 to R252 billion,
13.2 percent higher than the R223 billion in the
corresponding period in 2003. Source: Business Report,
January 19.

BANKS INCREASE MORTGAGE LENDING BY 23 PERCENT
--------------


10. South African banks boosted mortgage lending by 23
percent in the year through November as the lowest
interest rates in more than two decades made debt cheaper.
The total value of mortgage loans granted by South African
banks rose to R396.9 billion from R322.4 billion a year
earlier, according to data from the South African Reserve
Bank. Standard Bank, Africa's largest bank by assets,
lent R102.1 billion in home loans during the year, an
increase of 40 percent. FirstRand, the owner of the second-
largest South African bank, lent R61.1 billion, a gain of
22 percent, while Nedcor's Nedbank, the third-ranked bank,
increased home loans by 11 percent. Home loan lending by
ABSA Group, the nation's fourth-ranked bank, rose 24
percent to R122.4 billion. Source: Business Report,
January 19.

MILOVANOVIC