Identifier
Created
Classification
Origin
05PRETORIA394
2005-01-28 14:23:00
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 03 PRETORIA 000394 

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 28 2005 ISSUE


UNCLAS SECTION 01 OF 03 PRETORIA 000394

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 28 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:
- December Consumer and Producer Inflation Less than
Expected;
- Study Questions Informal Sector's Importance in
Increasing Employment;
- South Africa Favored for U.S. Investment;
- Calls for Increased Textile Protection as MFA Ends;
- Aspen Approved by U.S. FDA; and
- UCT Business School Ranked in Top 100.
End Summary.

DECEMBER CONSUMER AND PRODUCER INFLATION LESS THAN
EXPECTED
-------------- --------------


2. December's consumer prices, CPI, and consumer prices
excluding mortgage costs, CPIX, increased by 3.4 and 4.3
percent (y/y),less than the consensus forecasts of 3.6
and 4.6 percent, respectively. Last month's consumer
price inflation reached 3.7 percent for overall consumer
prices and 4.6 percent for the targeted inflation rate.
The lower annual rate in December 2004 compared to the
previous month can be explained by lower inflation in
medical care and health expenses, transport and food, even
though housing prices increased. In December, the CPI for
medical care and health expenses increased 8.4 percent
compared to November's increase of 9.1 percent. The CPI
for transport increased 6.8 percent in December compared
to the previous month's inflation of 8.4 percent.
However, recent oil prices have risen substantially,
signaling that easing of transport costs may not continue
in subsequent months. Food prices increased 1.5 percent
in December, compared to November's increase of 1.9
percent. As the strong housing demand continues, the CPI
for housing showed a higher December increase of 1.4

percent compared to November's increase of 1.1 percent.
Table 1 shows annual inflation of CPI, CPIX and PPI
(producer price inflation) over the past three years.
December's producer prices increased 1.9 percent, lower
than the consensus forecast of 2.6 percent. Lower oil
prices contributed to the lower producer price inflation
as well as lower agricultural commodity prices. A
stronger rand in December (averaging 5.69 rands per
dollar) eased inflation of imported goods. For 2004,
domestic producer prices increased 2.3 percent, imported
producer prices declined by 3.9 percent leading to an
overall 2004 producer price increase of 0.6 percent.
Source: Statistics SA Releases P0141.1, January 26;
P0142.1, January 27; Standard Bank CPI, January 26; PPI
Alert, January 27.

Table 1
2002 2003 2004
CPI 9.2% 5.8% 1.4%
CPIX 9.3% 6.8% 4.3%
PPI 14.2% 1.7% 0.6%


3. Comment. December's lower than expected CPIX
inflation increased the chance of an interest rate
reduction, but many analysts think that South African
Reserve Bank may reduce rates in April rather than the
February Monetary Policy Committee meeting. Out of six
economists surveyed, two expected interest rate reductions
by February; the rest expected cuts by April. End Comment.

STUDY QUESTIONS INFORMAL SECTOR'S IMPORTANCE IN INCREASING
EMPLOYMENT
-------------- --------------


4. The University of South Africa's Bureau of Market
Research completed a study based on surveys of informal
sector traders in Pretoria's greater metropolitan area.
Informal sector traders are defined as businesses or
traders that are not registered for VAT purposes and do
not offer any wages or benefits. The study concludes that
South Africa's informal traders run mainly survivalist-
type enterprises as an escape from poverty and
unemployment, and do not have the entrepreneurial acumen
to increase their businesses. The study shows that 50
percent of those surveyed operated their informal
businesses for longer than five years, while 15 percent
had run their businesses for between three and five years.
Almost 90 percent of respondents said they would continue
trading as informal businesses, while a majority said they
would not accept a salaried job. About 70 percent of
informal businesses were in the retail trade sector. The
study found that informal businesses had start-up capital
of less than R1,000 ($167, using 6 rands per dollar).
Average monthly revenue was estimated at R3,420 ($570),
while gross profit averaged about R1,000. According to
the study, R1,000 was less than half the monthly sum
needed to sustain a household at a minimum living level.
The conclusions of the study imply that government
assistance should be targeted in order to boost
entrepreneurs' ability to expand, while improving in areas
such as infrastructure development (e.g., providing
shelter and basic services). Small business development
is an important avenue for job creation, but government
should have a more targeted approach to financial and
training assistance. Source: Business Day, January 25.

SOUTH AFRICA FAVORED FOR U.S. INVESTMENT
--------------


5. In 2003, South Africa remained the top recipient of
U.S. foreign direct investment of all countries in sub-
Saharan Africa not exporting petroleum, according to
figures released by the U.S. International Trade
Commission. Oil exporting countries Equatorial Guinea and
Nigeria attracted the largest sums of U.S. foreign direct
investment flows in that year, with $823 million and $340
million respectively. At $89 million, South Africa
received substantially less U.S. investment than its oil-
producing counterparts. Cameroon, a country that does not
export petroleum, was not far behind South Africa,
receiving U.S. foreign direct investment worth $73 million
in 2003. South Africa received virtually all of the
foreign portfolio investment flows directed to sub-Saharan
Africa. Total exports from sub-Saharan Africa to the
United States increased almost 40 percent to about $25.5
billion in 2003, compared with $18.2 billion in the
previous year, attributed to an increase in oil exports.
Sub-Saharan Africa's non-energy related exports to the
United States increased 20 percent, reaching $7.8 billion.
Exports from sub-Saharan African countries that are
eligible for AGOA benefits increased 36.3 percent to $14
billion in 2003. Source: Business Day, January 25.


6. Comment. According to the South African Reserve Bank,
both the United States and Europe have been important
sources of South African foreign investment over the past
three years, although the U.S. share is far larger in
portfolio investment compared to direct investment. The
United States comprises virtually all of America's share
of investment, at 23.7 percent of total foreign investment
in 2003, while the United Kingdom is the main European
investor, reaching 38.3 percent of foreign investment,
although its share is greater in direct rather than
portfolio investment. End comment.

CALLS FOR INCREASED TEXTILE PROTECTION AS MFA ENDS
-------------- --------------


7. Both industry and unions have called for increasing
protection in textiles as the January 1st expiration of
the Multi-Fiber Agreement (MFA) and the strength of the
rand have led to increasing numbers of job losses and
company closures. The initial aim of the MFA was to
protect the textile industries of developed nations that
were facing competition from low-cost producers in poorer
states and so developed nations were allowed to impose
quotas on textile imports. A World Trade Organization
study released in September last year showed that China
and India would probably dominate about 50 percent of the
global textile market in a post-MFA era. AGOA still
offers the advantage of duty-free access to U.S. markets,
while other producers are subject to tariffs. By 2003,
Lesotho had become a major textile manufacturer in Africa,
producing 31 percent of textiles exported to the US under
AGOA, with roughly 50,000 people employed by Lesotho's
textile industry in 2004, compared with 20,000 two years
earlier. By the end of 2004, six textile factories shut
down, leaving 6,650 employees without work. The six
company owners who closed their businesses believed that
the low wages, economies of scale and efficient
engineering of factories in China and India would
eventually crowd them out of the market. In South Africa,
30,000 textile workers have lost their jobs in the past
two years due to the influx of Chinese goods. Walter
Simeoni, the president of the SA Textile Federation,
recommends that South Africa impose a quota on Chinese
textile imports allowing the textile industry more time to
reorganize. According to Simeoni, Chinese clothing now
represents 86 percent of the total garments imported into
South Africa. Most of the increase in Chinese imports
occurred within the past three years. Currency
fluctuations have worsened the crisis in the textile
industry. The rand has strengthened from the historic low
it reached in December 2001, when $1 traded for R13.85.
The dollar is now worth about R6. Industry sources
estimate that an exchange rate of R9 to the dollar is
needed for local textile exports to regain their edge.
Manufacturers also complain that labor costs in the
country are pricing them out of the market. Simeoni
claimed that monthly salaries for the industry had
increased from about $215 (R1,290) a month in January 2002
(excluding overtime and shift allowances) to $500 in
September 2004, although these labor cost estimates are
somewhat controversial, with many industry analysts still
quoting labor costs between $200-$300 per month. South
Africa's competitors in the Far East paid between $40 and
$100 a month. Source: Business Report, January 26.

ASPEN APPROVED BY U.S. FDA
--------------


8. Aspen Pharmacare won U.S. Federal Drug Administration
(FDA) regulatory approval for its AIDS drugs to be
included in the U.S.'s $15 billion AIDS program. The
approval is for the most widely used triple cocktail
combination of Lamivudine/Zidovudine and Nevirapine
tablets in conventional adult dosages and Aspen stated
that the drugs would be priced at affordable levels.
Aspen is the first accredited generic supplier to the U.S.
AIDS program. Drug production will begin at a Port
Elizabeth factory soon, which was approved by the FDA in
December. Aspen's pioneering of anti-retroviral drugs
(ARV) on the African continent and its world first generic
ARV recognition by the FDA was achieved after getting
voluntary licenses from the original drug manufacturers.
The license providers include GlaxoSmithKline, the leading
supplier of HIV and AIDS drugs, German drug maker
Boehringer Ingelheim, and Bristol-Myers Squibb. By close
of business on January 25, shares in Aspen increased 4.4
percent to R19.84 per share. About 25.4 million people
live with HIV in Africa, where just three percent of those
infected had access to life-prolonging ARV drugs. At least
2.3 million people died from the disease in sub-Saharan
Africa in 2004. Source: Business Day; Business Report;
allAfrica.com, January 26.

UCT BUSINESS SCHOOL RANKED IN TOP 100
--------------


9. In a first for Africa, the University of Cape Town's
Graduate School of Business MBA program has been ranked in
the Financial Times' Top 100 list of programs. The annual
survey ranked UCT's School of Business as 82nd on the
list. The results were based on full-time MBA courses and
institutions were judged according to a basic three-tiered
evaluation strategy. The first set of criteria
investigated students' progress after they had graduated
and were in the workplace; the second concentrated on the
school itself, regarding diversity of students, the
faculty and board members; and the third examined the
institution's performance and contribution in the research
field. Harvard shared overall top position alongside
Wharton School at the University of Pennsylvania. Source:
Allafrica.com; Cape Argus, January 26.


MILOVANOVIC