SOUTH AFRICA ECONOMIC NEWSLETTER

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
August 5 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:
- Recent Inflation Trends Bring Poor Economic Relief;
- June's Trade Balance Surplus Eases Concern for Rand;
- South Africa's July PMI Record Increase;
- S&P Upgrades South Africa's Currency;
- Rising Income Creates Potential 1.5 Million Car
Consumers;
- July Slowdown in Car Sales Indicates Possible Market
Cooling; and
- Growth Pause in Current Trading Conditions.
End Summary.

RECENT INFLATION TRENDS BRING POOR ECONOMIC RELIEF
-------------- --------------


2. Between 1998 and 2004, the average inflation rates
have been higher for the rich than for the poor. This
trend, however, looks set to be reversed this year. Until
October 2004, there were only two periods when prices were
rising faster or at the same pace for the country's upper
expenditure category. The two rates converged in July
2001 but then for more than three years the very low
expenditure group experienced higher inflation, largely
because of the rand's weakness and food prices increased
disproportionately more than other goods. In January
2002, annual inflation for the lowest income bracket was
9.1 percent versus 4.1 percent for the most affluent
group. The past two years have shown substantial recovery
in the rand, which appreciated 140 percent against the
dollar between 2002 and 2004. In 2005, the rand has shown
recent weakness, depreciating 14 percent against the
dollar so far, although the depreciation has been mild
compared to 2002. In June 2005, inflation for the very
low expenditure group was 1.5 percent (y/y) while
inflation for the high expenditure group reached 2.7
percent. Lower food prices explain the much of the
differential in inflation among expenditure groups. The
very poor have seen a real increase in wealth. In 2005,
the child welfare and old age grants increased by 5.9
percent and 5.4 percent respectively, substantially above
their inflation rate. Higher fuel prices also helped
explain the difference in inflation rates as higher income
groups tend to own vehicles and consume petrol. Policies
of government such as inflation targeting and welfare
spending may begin to bring modest relief to South
Africa's poor. The robust rand, however, is also blamed
for job losses that take their biggest toll on those at
the low end of the income scale. Employment numbers from
the latest March 2005 Labor Force Survey show that the
South African economy created 500,000 new jobs from March

2004. Many of the new jobs are in services, retail and
construction, which have benefited from lower interest
rates. While inflation is generally lower for all income
groups, the poor seem to be doing better, with price
increases for lower income groups falling behind welfare
increases. Statistics SA has only released consumer
inflation by income, ranging from very low to very high-
expenditure groups, since 1997. Source: Business Day,
August 1.

JUNE'S TRADE BALANCE EASES CONCERN FOR RAND
--------------


3. June's trade balance showed a surplus of R1.3 billion,
in contrast to May's R2.8 billion deficit, according to
the latest figures released by the South African Revenue
Service (SARS). Economists polled by Reuters expected a
trade deficit of about R1.2 billion in June. The latest
trade figures also improved the outlook for the rand and
interest rates, because of their implications for the
current account. A large deficit on the current account,
amounting to 3.8 percent of GDP in the first quarter, has
been worrying since it could lead to a weaker rand and
higher inflation. An 8.3 percent monthly increase in the
value of exports explained June's surplus as the value of
imports declined by 5.8 percent. Despite this, the
balance for the year to date remains considerably worse
than at the same period last year, with a R6.7 billion
deficit compared with a R2.1 billion shortfall in 2004.
Source: Business Day and Business Report, August 1.
SOUTH AFRICA'S JULY PMI RECORD INCREASE
--------------


4. South Africa's Purchasing Managers' Index (PMI)
increased to an all-time high at 61.7 compared to June's
59.8, as a weaker currency boosted sales orders, but it
was too early to call it a recovery for the manufacturing
sector. Investec Asset Management head of fixed income
Andre Roux said the jump in the index was unexpected and
more readings at higher levels in subsequent months would
confirm a recovery in manufacturing conditions. The
previous record of 60.3 was set in April 2002. South
Africa's manufacturing sector contracted by 1.9 percent in
the first quarter of 2005, for the first time since 2003,
largely hurt by the strong rand. Manufacturing constitutes
more than 16 percent of GDP. The rand has depreciated by
almost 14 percent against the dollar so far this year, but
the trend has only put a small reversal into three years
of straight gains, which have eroded exports. However,
June's exports do show recent gains. The July PMI
increase was driven by a strong showing in two of the
PMI's eight sub-indices, measuring business activity and
new sales orders. New sales orders climbed to 69 in July
from 66.3 in June. Business activity jumped to 69.9 from
60.3 in June. However, other sub-indices such as
inventories, suppliers' performance and employment gave up
some of their June gains. The seasonally adjusted
employment index slipped back to 50.1 after rising to
53.3, but Roux did not believe this began a reversal of an
upward trend. If the PMI reading was corroborated in
next week's manufacturing production figures for June from
Statistics SA, the release of which coincides with a
meeting of the Reserve Bank's Monetary Policy Committee,
it might indicate that a manufacturing recovery has
started. Source: Reuters and Business Day, August 2.

S&P UPGRADES SOUTH AFRICA'S CURRENCY
--------------


5. International ratings agency Standard & Poor's (S&P)
has upgraded South Africa's long-term foreign currency
rating from triple B to triple B plus, putting it three
levels above the entry-level investment grade rating and
bringing South Africa to within one notch of the A
category. South Africa's foreign rating is now equal to
Poland and Thailand and is one notch ahead of Mexico.
S&P's upgrade, prompted by South Africa's stronger
economic growth prospects and reduced vulnerability to
external shocks, comes after Moody's, a rival ratings
firm, upgraded South Africa's credit rating in January

2005. The third of the big rating agencies, Fitch, has
put South Africa on positive ratings watch, indicating an
upgrade could come later this year. Sovereign credit
ratings are a measure of a government's creditworthiness,
a higher rating implies less risk for investors, so they
will be willing to accept lower yields on that
government's debt, making it cheaper for the country and
its corporations to borrow on local and international
markets. S&P credit analysts are confident that South
Africa's economic growth prospects for this year are even
better than last year's, expecting the budget deficit to
remain within the government's medium-term target of 3
percent of GDP and the general government debt stable at
40 percent of GDP. Although government's record of
economic policy management was very good, there were still
problems in delivery. S&P remains concerned about
unemployment, poverty and income disparity, citing these
as negative comparisons against its peers. S&P has
upgraded South Africa's debt rating four times in the past
10 years. Source: Business Day and Business Report,
August 2, 2005.

RISING INCOME CREATES POTENTIAL 1.5 MILLION BLACK CAR
CONSUMERS
-------------- --------------


6. According to a Merrill Lynch research report, there is
a potential market of 1.5 million used and new car black
consumers due to rising income levels. Providing vehicle
finance for households with gross incomes of just over
R5000 per month ($770 using 6.5 rands per dollar) and
allowing private leasing could broaden the potential pool
of vehicle owners. Only 24 percent of people earning
between R4000 ($600) and R5999 ($900) per month owned cars
according to the South African Advertising Research
Foundation. The report showed that a pretax salary of
R5700 a month ($880) would allow someone to buy a used car
of about R70,000 ($11,000),and R9000 a month ($1400)
would allow someone to buy a new car for about R110,000
($17,000) financed over 54 months. Even if the gross
household salary was as low as R5,200 ($800),an
"innovative" bank could finance the purchase of a vehicle.
Private leasing could add a further 327,000 potential car
buyers to the market. Affordability, or the price of cars
relative to people's salaries, was also more of a problem
in South Africa than in other countries, even though cars
became more affordable between 2003 and 2004, the Merrill
Lynch report said. While the report expected car sales to
slow due to the rise in interest rates it foresaw next
year, and the resulting lower disposable income, long-term
vehicle-sales growth should remain strong. The small
number of car owners, rising income levels and the poor
public-transport infrastructure would support vehicle-
sales growth of between 6 percent and 12 percent a year
for the next five years. Merrill Lynch also warned that a
rise in gasoline prices could derail the positive outlook
for the vehicle industry. (Business Day, August 2).


7. Comment. South Africa's car producers are dependent
on local sales as well as exports. Car production
accounts for 7.1 percent of South Africa's economy, making
it larger than mining. South Africa produces less than 1
percent of the global yearly car output. End Comment.

JULY SLOWDOWN IN CAR SALES INDICATE POSSIBLE MARKET
COOLING
-------------- --------------


8. The first signs that South Africa's car sales market
may be cooling emerged with the release of the latest
vehicle sales figures, which showed a 6 percent month-on-
month decline. However, year-on-year sales by National
Association of Automobile Manufacturers of South Africa
(NAAMSA) members rose 19.4 percent in July compared with
July 2004, slightly below the growth level of about 20
percent that South African car manufacturers have
experienced in the past few months. Economists said that
the slowdown was in line with expectations of a gradual
slowdown to continue for the rest of 2005. New vehicle
sales showed strong growth in July, reaching 26.5 percent.
Ford Motor Company asserted that the market was just
starting to cool, with daily passenger car sales slowing
to 1,473 in July, compared with 1,530 in June. Other car
manufacturers also noticed a leveling of July sales,
although production and stock constraints rather than
softening consumer demand were cited as reasons. Source:
Business Day, August 3.

GROWTH PAUSE IN CURRENT TRADING CONDITIONS
--------------


9. July's South African current trading conditions
continue to slow, similar to June's trend, although
expectations for the next six months remain high. The
South African Trade Management Indices (SATMI) consists of
two trading indices designed to capture current and future
(next six months) trading environments. In May 2005,
current trading conditions reached year-to-date highs and
the past two months have seen steady declines, with new
orders showing the largest declines. July's trade
activity index reached 47, compared to June's 49. Monthly
expectations about future trading conditions have remained
relatively high (over 60) throughout 2005, unchanged from
the past two months (June and July). Source: Standard
Bank, SATMI, August 4.


10. Comment. Standard Bank publishes the monthly survey
consisting of South African Chamber of Business members.
The threshold value of the index is 50; when above this
level, trading conditions are seen to have improved
relative to the previous month, when below, trading
conditions have deteriorated. End comment.

FRAZER