SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 03 PRETORIA 002701 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 July 8 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: - Rand, Oil Prices Offset Inflation Good News; - June Forex Reserves Leap, Helped by FDI; - Falling Interest Rates Lift Credit Demand to 15-year High; - Employment Fell in First Quarter 2005; - COSATU Strike Fails to Halt Rand's March; - Record Portfolio Inflow in Second Quarter; and - April Leading Indicator Up 1.8%. End Summary. Rand, Oil Prices Offset Inflation Good News -------------- ¶2. Consumer inflation came in well below market expectations, but with oil prices trending higher and the rand weakening, it was unlikely that the Reserve Bank would lower interest rates in August. Figures released by Statistics South Africa showed that CPIX (consumer price inflation less mortgage costs),the Reserve Bank's targeted measure of inflation, rose 3.9% year-on-year in May, and 0.2% month-on-month. The main contributors to May's rise in consumer inflation were increases in the price indices for housing (excluding interest rates on mortgage bonds) and the index for transport, which recorded increases of 1.2% and 1.3%, respectively, during the month. The better-than- expected CPIX figures failed to nudge the rand to firmer levels. The rand fell 1.6% to R6.72 against the dollar, from its previous close of R6.62. Standard Bank economist Monica Ambrosi said that although overall inflation pressures have been relatively muted for more than a year, the transport component has been almost a consistent source of upward pressure on the back of a volatile oil price. Food prices remain muted, with prices falling 0.1% month-on- month, from a 0.1% rise in April. Core inflation slowed to 3.3% year-on-year, from 3.4% in April. Source: Business Day, June 30. June Forex Reserves Leap, Helped by FDI -------------- ¶3. South Africa's net gold and foreign exchange reserves jumped by nearly $1.5 billion to $15.2 billion during June, boosted in part by inflows of foreign direct investment (FDI),the Reserve Bank said. Gross reserves jumped to $18.7 billion from $17.2 billion in May. Markets speculated the forex increase was fuelled in part by transactions related to the planned acquisition by Britain's Barclays bank of a majority stake in ABSA, but analysts said this was unlikely given the deal's timetable. The settlement date for the R33 billion ($5.1 billion) deal has been moved to July 27 from July 13. Other potential inflows that could have affected reserves were a payment last month to Kumba (the continent's biggest iron ore producer) of R1.2 billion ($185 million) for the repurchase of Kumba's share of the Hope Downs iron mine in Australia or foreign purchases of R11.8 billion ($1.8 billion) of equities during June. The Reserve Bank has repeatedly said it would buy dollars cautiously, to avoid affecting the value of the rand. Gold reserves rose to $1.74 billion from $1.66 billion at the end of May due to higher gold prices. The surge in reserves during June, which followed a $1.2 billion increase in May, took the country's import cover to about 4 1/2 months, analysts said. Source: Business Day, July 7. Falling Interest Rates Lift Credit Demand to 15-year High -------------- -------------- ¶4. Low inflation and low interest rates fueled demand for credit nearly to 15-year highs, strengthening the case against a rate cut when the Reserve Bank's monetary policy committee meets next month. Economists said that from an inflation point of view, the figures, taken together with high oil prices and a weaker rand, should be worrying for the Reserve Bank. Interest rates, at 24-year lows, have spurred consumer spending to record levels, as it has become more affordable to borrow money to finance purchases. Producer price inflation (PPI) also came in above market expectations, largely on the back of higher international oil prices. The PPI, which tends to lead consumer inflation by a few months, rose sharply to 2.4% year on year in May, against a 1.8% rise in April. Economists said the strong growth in monetary aggregates counted against further monetary stimulus and another interest rate reduction. Private sector credit extension and money supply increased slightly above market expectations. Private sector credit extension jumped 22.9%, to just more than R1 trillion ($154 billion) in May, compared with an increase of 20.4% in April, spurred mainly by mortgage advances and leasing finance. The broadest measure of money supply, M3, rose to 16.3% year-on-year in May, or R983 billion ($151 billion), from a revised increase of 15.0% in April, driven mainly by claims on the private sector. Standard Bank economist Shireen Darmalingam said the revision was also due to the reclassification of the Public Investment Corporation (PIC). The PIC, which was previously not classified as part of the monetary banking sector, will now have its deposit liabilities, which contribute about 40% to total government deposits, included in the M3. Source: Business Day, July 1. Employment Fell in First Quarter 2005 -------------- ¶5. Employment in the non-agricultural sector fell unexpectedly by 136,000 jobs in the first quarter of 2005, casting doubt on the success of efforts to reduce the steep jobless rate. An expanded employment survey published by Statistics South Africa (Stats SA) showed that employment in the formal business sector fell 1.9% in the first three months of the year, compared with the last quarter of 2004. Patricia Koka, Stats SA's senior statistician said the decline in employment from 7,075,000 at December 2004 to about 6,939,000 workers in March was probably because of a fall-off in the number of seasonal workers employed. Data released earlier this year showed the unemployment rate dipped to 26.2% last September from 27.9% in March 2004, with 250,000 jobs created. Employment in the biggest sector, financial and real estate, fell sharply in the first quarter, dropping by 125,000 jobs, or 8.1%. Jobs in the retail and hotels sector dipped by 2.2%, while there were also declines in mining and manufacturing, the areas hit hardest by rand strength. Sectors where jobs increased included construction, electricity, gas, and water. Source: Business Report, June 29. COSATU Strike Fails to Halt Rand's March -------------- ¶6. Nationwide protests by the Congress of South African Trade Unions (COSATU) on June 27 in favor of a weaker rand failed to move the markets, with the local currency actually strengthening against the dollar. Several major mining houses, retailers, and companies in other industries reported considerably reduced operations, but analysts said it would take time before the full effect of the strike was felt. The strike was organized in part to protest against job losses resulting from the currency's strength, largely in mining and manufacturing, which together make up 23% of gross domestic product (GDP). Unemployment in South Africa is officially estimated at about 26%, but unions say that the figure is much higher - closer to 40%. The production side of the economy has shed hundreds of jobs as a result of the firm local currency, which has made it difficult for exporting companies to remain profitable. COSATU has proposed that retailers stock 75% local goods and cut back on imports, and that government pursue local procurement policies while reviewing its trade strategy. It also wants local authorities to halt the privatization of basic services. Government dismissed calls for a devaluation, with Trade and Industry Minister Mandisi Mpahlwa saying that South Africa had to look beyond the value of the rand in seeking to boost competitiveness. Mpahlwa also said that he was "not inclined to artificial measures to influence the currency." According to the South African Chamber of Business (SACOB),about 10% of the country's workers took part in the strike, costing the economy an estimated R500 million ($77 million). Source: Business Day, June 28. ¶7. Comment: Finance Minister Trevor Manuel conceded that a strong rand was worrying for exporters, but went on to say, "I don't control the rand." Manuel thinks that the unions need a "different approach" and that the government should work with the unions to develop "a commonality of perspectives" to address their concerns. End Comment. Record Portfolio Inflow in Second Quarter -------------- ¶8. Foreigners bought a record net R26.8 billion ($4.1 billion) worth of South African stocks and bonds in the second quarter 2005 after buying only a net R7.9 billion ($1.2 billion) in the first quarter 2005. The split between bonds and equities was almost equal with a net R12 billion ($1.8 billion) worth of purchases of bonds after net sales of R1.3 billion ($200 million) rand in the first quarter, while net equity purchases amounted to R14.8 billion ($2.3 billion) after net purchases of R9.2 billion ($1.4 billion) in the first quarter. The previous record quarterly portfolio inflow into South African financial markets was in the fourth quarter 2004, when foreigners bought a net R24.7 billion ($3.8 billion). Source: I-Net Bridge, July 1. April Leading Indicator Up 1.8% -------------- ¶9. South Africa's April 2005 leading economic indicator, which is compiled by the South African Reserve Bank (SARB), rose by 1.8% month-on-month (m/m) after a 1.0% m/m increase in March, but was still below the December 2004 level. Of the 13 leading indicator components in April, eight were positive, three were negative, and two were unavailable. The positive factors were average manufacturing hours worked, job advertising space, manufacturing orders, business confidence, the inventory/sales ratio, the interest rate spread between the money market and capital market instruments, building plans approved, and real M1 money supply. The negative factors were equity prices, commodity prices, and the composite leading indicator of major trading- partner countries. The unavailable data was for manufacturing labor productivity and the gross operating surplus as a percentage of GDP. On a year-on-year basis, the leading indicator rose 1.5% in April, up from 0.2% in March. The South African economy is currently in its 71st month of a record upturn, as the current expansion started in September 1999. Source: I-Net Bridge, June 30. FRAZER