SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 03 PRETORIA 003657 SIPDIS DEPT FOR AF/S/KGAITHER; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR OAISA/BARBER/WALKER/JEWELL USTR FOR COLEMAN PARIS FOR NEARY E.O. 12958: N/A TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER September 9 2005 ISSUE ¶1. Summary. Each week, Embassy 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: - Manufacturing Indicator Down in August; - August Business Confidence High Although Declines From Peak; - Trade Activity at Breakeven Level Although Trade Expectations Still High; - Retail Sales Slow but Still Strong; - July Manufacturing Production Growth Stalls; - Mzansi Transfers Possible; - Free State Municipalities in Debt; and - Decline in 2005 SA Human Development Rating. End Summary. MANUFACTURING INDICATOR DOWN IN AUGUST -------------- ¶2. The Investec Purchasing Managers Index (PMI) has come down slightly in August 2005 from record levels in July. The August PMI was down to 56.8 from the historical high of 61.7 recorded in July 2005, but still above the critical level of 50. According to Andre Roux of Investec, the reading of 56.8 is still fairly high and consistent with 5 percent year on year growth in the manufacturing sector. July's reading pointed to a 9 percent growth rate in the sector, a growth rate that was not sustainable for any length of time. The PMI from the Bureau of Economic Research in Stellenbosch records activity in the manufacturing sector of the South African economy. Source: Business Day, September 2. ¶3. Comment. The PMI is compiled on a monthly basis among purchasing managers, released on the first working day of each month. Purchasing managers manage the supply chain within their respective factories, making sure there are enough inputs for the process and no buildup of inventory. Globally, this survey based on interviewing purchasing managers gives an early and good indication of what's happening in the manufacturing sector. Even though South Africa's August reading has dipped, it is still above many of its global counterparts. End comment. AUGUST BUSINESS CONFIDENCE HIGH ALTHOUGH DECLINES FROM PEAK -------------- -------------- ¶4. The Business Confidence Index (BCI),compiled by the South African Chamber of Business (SACOB),declined to 126.1 in August from 129 in July. July's level peaked at the highest level so far for 2005. August 2005's BCI was 1.7 points below August 2004's level of 127.8. Of the 13 BCI sub-indices, seven made a positive contribution to the August 2005 index while six had either a negative or a neutral impact. Among those having a negative impact were liquidations, merchandise goods export volumes, real retail sales and core inflation for metropolitan and urban areas. Manufacturing production and merchandise goods import volumes had a neutral impact. Higher risk factors are becoming more evident, such as: increasing credit expansion; low domestic saving; greater price instability; a slow down in value added exports; liquidations; possible weaker financial inflows; and the higher price of crude oil. SACOB believes that the present growth expansion, fueled by demand, must be matched by expansion in domestic supply for South Africa's higher growth to be sustainable. Growth prospects may be jeopardized if not followed by higher real expansion, particularly in the primary and secondary sectors. Source: Business Report and Business Day, September 6. TRADE ACTIVITY AT BREAKEVEN LEVEL ALTHOUGH TRADE EXPECTATIONS STILL HIGH -------------- --- ¶5. The August South African Trade Management Indices indicate that the optimistic six month outlook continues (reaching 60),although declining marginally compared to July. Current trade activity hovers around the critical 50 level, where half of the respondents expect improvement, and the activity index has remained there for the last six months. A strong improvement in current sales volumes pulled overall trade activity up in August and optimistic views of continuing growth in sales over the upcoming December holiday period signal that trade conditions should remain good over the year. Source: SATMI, Standard Bank, September 6. RETAIL SALES SLOW BUT STILL STRONG -------------- ¶6. According to Statistics South Africa (StatsSA),real June retail sales increased 5.4 percent y/y from 5.7 percent growth in May, although declined by 1.8 percent on a monthly basis. The slowing growth in retail sales may indicate that the stimulus from the 6.5 percent reduction in interest rates since June 2003 may be slowing. Vehicle sales, a leading indicator of retail sales, recently showed strong growth and business confidence continues to be at relatively high levels, indicating that consumer demand growth may continue. Downside risks include continuing high oil prices and an overextension of private sector credit demand which might lead to possible reductions in retail sales. Source: Standard Bank, Taking Stock, September 7; Business Day, September 8. JULY MANUFACTURING PRODUCTION GROWTH STALLS -------------- ¶7. July's manufacturing production grew at the same rate as June, reaching 2.4 percent (y/y). On a quarterly basis, manufacturing production increased by 0.8 percent (q/q). Quarterly manufacturing production growth grew slowly even though seven out of the 10 manufacturing sub- sectors grew faster than total manufacturing production. However, production in those industries more impacted by the stronger rand declined, having a more important contribution to overall manufacturing production. Food and beverages, textiles, and basic metals and machinery sectors declined 1.5 percent, 3.6 percent and 2.8 percent, respectively, contributing 44 percent towards overall manufacturing production. The stalled manufacturing growth was somewhat of a surprise to analysts, given that July's leading manufacturing indices, such as Investec's Purchasing Manager's Index and SACOB's Business Confidence Index, posted year-high levels. Source: StatsSA Release P3041.2 and Standard Bank Manufacturing Unpacked, September 8; Business Day and Business Report, September ¶9. MNANSI TRANSFERS POSSIBLE -------------- ¶8. Banks and the Post Office have launched the second phase of their Mzansi low-cost accounts, with a money transfer facility now available. The Mzansi Money Transfer is primarily aimed at the Living Standards Measure 1-5 income groups (the bottom 5 income groups out of 10, based on ownership of assets and provision of water and telephone),which often has to transfer money to family members in rural areas. They can now transfer up to R5000 ($800, using 6.3 rands per dollar) per day using the new facility. Nedbank, which had on average the most expensive fees for the Mzansi Account launched in 2004, now has the cheapest Mzansi Money Transfer rates. It charges a flat rate of R15 ($2.40) for transfers from an Mzansi account, while customers without an account who are transferring money are charged R17.50 ($2.78) regardless of the amount of money being transferred. The other banks charge between R17 ($2.70) and R100 ($16.00) depending on the amount being transferred. The Post Office charges R21 ($3.30) plus 1.5 percent of the amount being transferred. The person receiving the money receives the full amount as the remitter pays the fee. The number of Mzansi accounts opened since October 2004 has reached over 1.6 million. ABSA now has the highest number of Mzansi accounts (31%), followed by Post Bank (27%),Standard Bank (18%),FNB (14%) and Nedbank (10%). Source: Business Day, September ¶7. FREE STATE MUNICIPALITIES IN DEBT -------------- ¶9. According to a National Council of Provinces (NCOP) report presented to Parliament, debt in 25 of the Free States' municipalities has now reached R2.56 billion. Protestors in the province have complained about the lack of services and corruption among municipal officials, with the most recent being in the Kgotsong township of Bothaville on August 23. Protesters have also complained of inaction and corruption among municipal officials. The average payment of local government debt was 72.25% of what was owed. Only two councils collected all that was owed to them. In spite of attempts to implement credit controls and improve revenue collection, there had been no decrease in debt levels. Chairman of the NCOP local government committee Sicelo Shiceka said that of the 25 consolidated local councils in Free State, not one ran a surplus. Source: Business Day, September 7. DECLINE IN 2005 SA HUMAN DEVELOPMENT RATING -------------- ¶10. South Africa's United Nations Human Development Index (HDI) reached 120 out of 177 countries, slightly lower than 2004's HDI of 119, largely due to a fall in life expectancy because of HIV/AIDS and high levels of inequality. The HDI index tracks indicators including life expectancy, equality of income and education, based on 2003 data. South Africa was rated higher than India and most African countries, and lower than the occupied Palestinian territory, Mongolia and Indonesia. Positive trends include increasing real income and advances in gender rights. However, South Africa has an average HIV/AIDS prevalence rate of 21% for people aged 15-49. Largely due to this high HIV/AIDS prevalence rate, life expectancy dropped from 53 years in the period 1995-2000 to 49 years in the past five years. South Africa's income inequality was among the highest. The richest 10% of the population took 44% of the income, while the poorest 10% got 1.4%. This gave South Africa an inequality rating worse than Zimbabwe or Niger, even though South African per capita income was much higher. On a Human Poverty Index of developing countries, SA ranked in the middle, at 56 out of 103 countries. South Africa's GDP per capita of $3489 was higher than many of the countries of similar rank, growing faster than Russia and the United Arab Emirates. Source: SAPA, Business Day, September 8. TEITELBAUM