SOUTH AFRICA ECONOMIC NEWSLETTER December 9 2005

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

- Interest Rates Remain Unchanged;
- October Manufacturing Growth Slows to 0.3%;
- Moderate House Price Growth Continues;
- South Africans Abroad Keep Contacts;
- Business Confidence Still High;
- South African Teacher Shortage Looms;
- Competition Commission Found Higher Car Prices but no
Legal Case; and
- SA Wants to be Africa's Services Hub but Finds High IT
Costs a Barrier;
End Summary.

Interest Rates Remain Unchanged
--------------


2. Citing improved inflationary outlook, the Monetary
Policy Committee (MPC) decided to leave interest rates
unchanged, with the repurchase rate remaining at 7%.
Inflation excluding mortgage costs (CPIX) has been
declining since August 2005, even with substantially
higher petroleum prices. October's CPIX inflation dropped
to 4.4% compared to August's inflation of 4.8%. Food,
clothing and furniture prices have shown recent declines
and even services inflation have been well within the 3-6%
target, with October's growth at 5.2%. The MPC now
expects CPIX to reach 5% by the end of 2007, compared to
5.3% at the October MPC meeting. In addition,
inflationary expectations came in lower compared to
expectations at the October MPC meeting. According to the
inflation expectations survey conducted by the Bureau for
Economic Research (BER),CPIX inflation expectations
remain unchanged in 4th quarter 2005 compared to the
previous quarter, with inflation expected at 5.2% for both
2006 and 2007. The previous BER survey expected 2007
inflation at 5.4%. The MPC also noted signs of moderating
consumer demand, with vehicle sales, manufacturing
production, money supply and credit growth all
experiencing slowing growth. The MPC cited an increasing
current account deficit as the primary risk, although it
noted that so far the deficits have been financed by
capital inflows. Market expectations thought that the MPC
would leave interest rates unchanged in December. Source:
Monetary Policy Statement, South African Reserve Bank,
December 8; Standard Bank, MPC Alert, December 8.

October Manufacturing Growth Slows to 0.3%
--------------


3. Manufacturing growth slowed to an 18-month low of 0.3%
(y/y) in October compared to September's growth of 5.6%,
according to Statistics SA. On a monthly basis,
manufacturing output fell by 4.9% (seasonally adjusted).
Following the latest Investec Purchasing Managers Index
(PMI) figures, a leading indicator of manufacturing
activity, the outlook for the manufacturing sector remains
uncertain in the short term. PMI declined to 50 index
points in November, making it the fourth consecutive month
it has declined. Growth in manufacturing production has
been supported by strengthening domestic demand since late
2003, but as consumer demand growth flattens, the
manufacturing sector is once again exposed to exchange
rate risks. Domestic demand accounts for 80% of the
manufacturing market, and there are indications that the
strength in consumer spending may be abating. Borrowing
growth slowed to a seven-month low of 19.5% in October as
consumers' debt levels increased to a record 62% of
disposable income in the second quarter 2005. The rand
has strengthened 9.4% since June 2005, leading to recent
export decline of 11% in October. The manufacturing
sector is the 2nd largest in South Africa (after the
service sector),accounting for 16% of the economy.
Source: Business Report and Business Day, December 8;
Standard Bank, Manufacturing Unpacked, December 7.

Moderate House Price Growth Continues
--------------


4. According to ABSA, nominal house-price growth reached

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14.7% in November, the lowest year-on-year growth since
mid-2002, compared to 16.2% in October. The declining
growth trend, which started after house-price growth
peaked at 35.5% in October 2004, may allow first-time
buyers and middle-income consumers to enter the market.
This trend could extend strong residential property demand
if interest rates remain stable. Standard Bank's
residential property report for the last quarter 2005 also
confirmed a declining house-price growth trend, saying
that according to its home-loan database, house prices
grew 21.5% from a peak of 35.5% in November 2004. Source:
Business Day, December 6.

South Africans Abroad Keep Contact
--------------


5. Most South Africans living abroad have not completely
cut ties with the country, with 77% of them retaining
their South African investments, 69% maintaining South
African bank accounts, and 32% owning houses, according to
the Homecoming Revolution, sponsored by the First National
Bank. In addition, 81% of respondents said they intended
to return to South Africa in the future. Homecoming
Revolution Managing Director Martine Schaffer said the
research did not ask about the skills of the respondents,
and could not give a breakdown of the sectors likely to
benefit from the homecoming. The survey was conducted on
a group of 1192 respondents. The survey found that the
main reasons for reluctance to return to South Africa were
crime (44%),poorer quality of life (20%),affirmative
action and black economic empowerment policies (19%),and
lack of job opportunities (15%). Source: Business Day,
December 6.

Business Confidence Still High
--------------


6. Business confidence remained high in November due to
strong domestic demand, and was likely to retain these
levels barring a hike in interest rates. The South
African Chamber of Business' (SACOB) business confidence
index rose slightly to 126.5 in November, up from 126 in
October. The SACOB index has remained stable for the past
four months. Over the past 15 months, it has recorded a
spread of only six index points between its lowest and
highest levels. SACOB economist Richard Downing said the
positive financial environment had led to the higher level
of business confidence and that low interest rates and low
inflation supported confidence remaining high. Plans to
increase the economy's growth rate to 6% will have to
increase supply potential. The ratio of investment to
gross domestic product (GDP) is currently at about 17%,
and will need to be above 20% to achieve sustainable 6%
economic growth. Source: Business Day, December 7.

South African Teacher Shortage Looms
--------------


7. South Africa faces a teacher shortage at a time when
pupil numbers are increasing, according to Mary Metcalfe,
head of the University of Witwatersrand's School of
Education. South Africa will have few teachers in the 30-
34 age group and fewer than 20,000 aged 35-39 due to a
12.7% HIV prevalence rate among teachers, up to 21,000
South African teachers leaving the profession, and
upcoming retirements. Metcalfe asserted that South Africa
should have 25,000 teachers qualifying each year compared
to the 5,000 teacher qualifying currently. South Africa's
Department of Education has stated that there is no
teacher shortage, as there are enough unemployed or
underemployed teachers to avert any shortage. Source:
Business Day, December 7.

Competition Commission Found Higher Car Prices but no
Legal Case
-------------- --------------


8. The Competition Commission found that car prices in
South Africa were higher, but did not find justification
for legal actions against car manufacturers, as the
companies were not defined as dominant players according
to South Africa's competition law. The 18-month-long
investigation into excessive pricing showed that cars in
South Africa cost about 14% more than in Europe. The

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Commission announced, however, that it had entered into
settlement agreements with six car makers and importers
relating to earlier investigations into collusion and
minimum resale pricing in the industry. General Motors
(GM),Nissan, DaimlerChrysler, Citron, Volkswagen and its
Gauteng dealers, along with Subaru, would pay a collective
administrative penalty of R31.6 million ($5 million, using
6.5 rands per dollar). By accepting settlement
agreements, these companies avoided further investigation
and possible prosecution by the Competition Tribunal. The
Commission has also found evidence of anticompetitive
behavior by BMW, but said it was still negotiating with
the company. Much of the Commission's findings in its
investigations related to a high level of control car
makers have over dealerships. The National Automotive
Dealers' Association welcomed the Commission's requirement
that car makers that had entered into settlement
agreements had to review dealer franchise agreements.
Source: Business Day, December 8.

SA Wants to be Africa's Services Hub but Finds High IT
Costs a Barrier
-------------- --------------


9. South Africa has been trying to position itself as the
business services hub on the continent, but high
telecommunications costs and skills shortage have
constrained local service providers from competing
successfully in the global market, according to Raymond
Ngcobo, the head of the Strategic Competitiveness Unit in
the Department of Trade and Industry (DTI). Over the next
three years, Ngcobo said the government would give
priority to business process outsourcing, financial
services, tourism and construction as these sectors had
the potential to create jobs. As part of the plans to
accelerate growth to a sustainable 6% by 2010, the DTI was
drafting a services strategy that would address
bottlenecks such as exorbitant telecoms costs and
infrastructure-related constraints. Between 2000 and
2004, global trade in services grew by 8.5% despite the
tight regulation of the market by many countries. Source:
Business Day and Business Report, December 8.

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