SOUTH AFRICA ECONOMIC NEWSLETTER

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
October 28 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:

- Medium Term Budget: Infrastructure Spending to Spur
Over 4% Growth;
- September Consumer Prices Increase Due to Transport
Costs;
- September Producer Price Inflation Higher;
- Increased Investment in COEGA;
- Signs of Cooling in Housing Market;
- Large Provincial Differences in Housing Affordability;
and
- Savings Crucial to 6% Growth.
End Summary.

MEDIUM TERM BUDGET: INFRASTRUCTURE SPENDING TO SPUR OVER
4% GROWTH
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2. Finance Minister Trevor Manuel's Medium Term Budget
Policy statement (MTBPS) forecasted steady growth above
4%, low inflation, low budget deficits for 2006 through
2008, and increased government expenditures on
infrastructure and social services. GDP growth should
reach 4.4%, 4.3%, 4.4% and 4.8% from 2005 through 2008.
Peaking in 2006 at 5.2%, targeted consumer price inflation
(consumer prices excluding mortgage costs) should recede
to 4.8% and 4.5% in 2007 and 2008, respectively, still
within the 3-6% range. In 2004, the budget deficit to GDP
ratio should reach -1% (compared to a forecasted -3.1%
made last February),and will average -2.1% over the next
three years. So far, approximately R30 billion ($4.6
billion using 6.5 rands per dollar) extra in tax revenue
has been collected this year, and government's spending on
infrastructure and transport initiatives will rise.
Reinforcement of existing social priorities of health,
education and housing will also occur. Government capital
spending will rise over the next three years, with public
sector capital formation as a percent of GDP reaching 6.7%
in 2008/09 from its current level of 5.6%. The current
account deficit remains high. The current account deficit
as a percent of GDP remains above its 2005 estimate of -
3.5%, and is estimated to reach -4.1% by 2008. In
addition, foreign exchange restrictions are gradually
being relaxed. Manuel announced relaxing foreign currency
investments to 25% of total retail assets from 20% for
unit trusts and 15% for investment companies. South
African banks will be able to lend foreign currency
denominated instruments to South African companies and 3%
of their total assets or 40% of their regulatory capital
offshore without South African Reserve Bank approval.
Source: Business Report, Business Day, October 26; MTEF
Alert, Standard Bank, October 25.

SEPTEMBER CONSUMER PRICES INCREASE DUE TO TRANSPORT COSTS
-------------- --------------


3. Consumer prices continue to reflect higher transport
prices, although second-round inflationary pressures are
not yet shown in September's inflation. Consumer prices
increased by 4.4% in September from August's 3.9% and CPIX
(consumer prices excluding mortgage costs) rose by 4.7%
compared to August's 4.8% increase. Most market forecasts
expected CPIX to rise 5% in September. September's food
prices increased more than in August; however, this was
not the case for core CPI, which excludes the most
volatile food prices. Core CPI increased by 5% in
September, slightly lower than August's 5.1% rise. Other
price categories showed little monthly increases. As a
result, there is little evidence of price feed-through
effects of higher oil prices. Recent statements by the
Governor of the South African Reserve Bank, Tito Mboweni,
indicated that the SARB intends to remain `ahead of the
curve' in increasing interest rates to curb second-round
inflationary impacts of the rise in oil prices. Source:
Standard Bank, CPI Alert; StatsSA Publication P0141.1,
October 26.

SEPTEMBER PRODUCER PRICE INFLATION HIGHER
--------------


4. September producer prices rose 4.6% from last month's
4.2% increase, slightly lower than the consensus forecast
of 4.7%. The seasonal monthly decline of 28.4% in
electricity prices explains the lower than expected
September producer price inflation. Increases in
agricultural, mining and quarrying prices were the largest
monthly contributors towards increased inflation, although
the decline in electricity prices outweighed these two
sectors. Manufacturing inflation, accounting for 80% of
the total producer price index, rose by 0.3% m/m in
September compared to 0.4% during August. The continued
absence of second-round inflationary pressures of oil
prices at the producer level is an indication of subdued
consumer inflation. Continuing drought conditions serve
as a source of worry towards future food price inflation.
September's agricultural prices did show a substantial
increase; however, next month's results should indicate
whether agriculture and oil prices should be a source of
inflationary concern. Source: Standard Bank, PPI Alert;
Stats SA P0142.1, October 27.

INCREASED INVESTMENT IN COEGA
--------------


5. The Coega Industrial Development Zone announced its
third major investor in the past five months, boosting the
chances of financial success for the industrial
development zone established in 1996. Straits Chemicals,
a consortium composed of Malaysians, British, Singaporean
and South African investors, announced a R1.1 billion
($170 million) investment project to build a chlorine
refinery and water desalinization plant. In May 2005,
Sanger International Textiles was Coega's first major
participant, planning to invest R200 million ($30 million)
in a weaving mill, followed by a R1.6 billion ($250
million) investment by German company Ferrostaal to build
a steel mill. Within the past five months, COEGA has
secured R2.9 billion ($450 million) of investment,
approximately 75% of the R4 billion cost to the South
African government. Source: Business Report, October 26.

SIGNS OF COOLING IN HOUSING MARKET
--------------


6. The latest First National Bank (FNB) residential
barometer showed increasing signs of a weakening property
market, although mainly for higher priced residential
properties. In the third quarter 2005, 48% of sellers
failed to obtain their asking price, compared to 43% a
year ago, and the average length of time properties
remained on the market increased to eight weeks from five
weeks at the beginning of 2005. Roughly 75% of sellers in
the lower-priced market were receiving their asking price
in the third quarter 2005 compared with 43% in the upper-
priced market. The lower-priced market is between
R180,000 ($28,000) and R350,000 ($54,000),the middle-
priced market between R350,000 ($54,000) and R750,000
($115,000),and the upper-priced market between R750,000
($115,000) and R2.5 million ($385,000). Properties bought
for investment purposes had declined to 18% in the third
quarter from 25% in the second quarter 2005. FNB's
residential property confidence indicator, which records
the level of activity in the market, declined to 6.1 in
the third quarter 2005, which is the lowest level recorded
since the start of the FNB residential property barometer
18 months ago. The South African housing market usually
slows right before the holiday season, so lower activity
level was expected. Source: Business Report, October 27.

LARGE PROVINCIAL DIFFERENCES IN HOUSING AFFORDABILITY
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7. The residential property market has showed relatively
strong growth in all the provinces and metropolitan
regions in recent years, but the rate of growth in
household income and housing prices has varied by region,
according to ABSA bank senior economist Jacques du Toit.
The potential size of the 2004 South African housing
market was relatively small, about 1.8 million households,
or 14.4% of a total number of 12.4 million households in

2004. The housing market is determined by the number and
percentage of households in a position to afford a house
of 80 square meters in the middle priced housing market.
This small percentage is due to a skewed distribution of
household income in 2004, with a large percentage of
households earning relatively low levels of income.
Gauteng province had the highest level of income per
household and the largest percentage of households able to
buy a house, while the Eastern Cape had the smallest
percentage. Johannesburg North and West were the major
metropolitan areas with the highest percentage of
households able to afford to buy a house in 2004, followed
by Pretoria. Cape Town was the metropolitan area with the
smallest proportion. In 2000, the ratio of house prices
to household income in South Africa was 4.5. This ratio
increased to 7.2 in 2004 and rose to significantly higher
levels in the Eastern Cape (10.6) and Limpopo (8.3).
Housing in these provinces has become much less affordable
than in provinces such as Gauteng and the Western Cape,
which have relatively high levels of housing prices and
household income. Source: I-Net Bridge, October 27.

SAVINGS CRUCIAL TO 6% GROWTH
--------------


8. Old Mutual Asset Managers economist Rian le Roux cites
low domestic savings as a possible constraint to achieving
South Africa's 6% growth goal. Roughly one in every nine
South Africans saves, either by putting money in the bank
or by putting it away for their retirement. Le Roux noted
that no mention was made of the low domestic savings rate
even though National Treasury's Medium Term Budget Policy
statement outlined the government's plans to spend at
least R165 billion ($25 billion) on infrastructure over
five years, sector investment strategies, education and
skills development and the improvement of service
delivery. While companies continue to be the largest
contributors to savings in the South Africa, household
savings have declined. There is a gap between savings and
fixed investment, with gross savings at 14.5 percent of
GDP and fixed investment at about 16 percent. Le Roux
said savings would have to rise to match the rise in gross
domestic fixed investment if South Africa was to attain
higher growth. Source: Business Report, October 27.

TEITELBAUM