SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 03 PRETORIA 004367 SIPDIS DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR OAISA/RALYEA/CUSHMAN USTR FOR COLEMAN 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 -------------- -------------- ¶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 -------------- -------------- ¶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