Identifier
Created
Classification
Origin
05PRETORIA515
2005-02-04 12:10:00
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 04 PRETORIA 000515 

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
February 4 2005 ISSUE


UNCLAS SECTION 01 OF 04 PRETORIA 000515

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
February 4 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:
- Background to the February 9 Monetary Policy Committee
Meeting;
- Trade Conditions Weakened in January;
- Money Supply and Credit Growth Remains High;
- Manufacturing Survey Declines;
- January Vehicle Sales Increase 20.9 Percent;
- Vehicle Parts Sector Shows Weakness;
- Draft Immigration Bill Increases Regulations;
- First Black Appointed as Anglo American's Chief
Executive;
- December's Trade Balance Surplus; Yearly Trade Deficit;
- Retail Sector Receives 8.8 Percent Wage Increase; and -
- Deregulation of Telecommunications Sector Starts.
End Summary.

BACKGROUND TO THE FEBRUARY 9 MONETARY POLICY COMMITTEE
MEETING
-------------- --------------


2. Comment. On February 9-10, the Monetary Policy
Committee meets to decide the direction of interest rates
for the next two months. Most analysts predict that the
Committee will decide to leave interest rates unchanged;
however, the following five articles highlight short-term,
conflicting economic trends describing the current state
of the South African economy, making predictions about
next week's interest rate decision difficult. The second
Monetary Policy Committee meeting in 2005 is scheduled for
April 13 and 14. End Comment.

TRADE CONDITIONS WEAKENED IN JANUARY
--------------


3. The South African Trade Management Indices weakened in
January, with the trade activity index below 50, implying
a contraction in trading activity. Seasonally adjusted,
the trade activity index reached 48, compared to
December's value of 50. January is the third consecutive

month showing gradual weakening of the trade activity
index. The trade expectations index (TEI),measuring
expectations of trade conditions for the next six months,
indicates that medium-term sales expectations should
improve. The TEI increased to 63 compared to December's
60, with expectations regarding sales volumes, new orders
and purchase prices being especially strong. The
converging trend of the two activity measures offers more
conflicting evidence on the future expansion of the South
African economy. Source: Standard Bank, SATMI, February

3.

MONEY SUPPLY AND CREDIT GROWTH REMAINS HIGH
--------------


4. In December, money supply growth (M3) grew 12.8
percent (y/y),slowing somewhat, although growth in
private sector credit extension (PSCE) accelerated,
reaching 13.6 percent. The accelerating growth of private
sector credit extension, reflecting strong consumer
demand, may be a major factor influencing the Monetary
Policy Committee. Over the past three months, PSCE has
shown healthy growth at 10.2 percent, 10.4 percent and
13.6 percent, for October through December 2004. In
December, credit for installment sales, mortgage advances
and leasing finance experienced growth of over 15 percent,
at 21.2, 24.1 and 15.6 percent respectively, while credit
for investment and discounted bills declined. December's
growth in PSCE was largely driven by private sector credit
demand components and underlying consumer demand,
especially in durable goods. These fourth quarter 2004
trends are expected to fuel growth in 2005. In 2004,
growth in consumption has been financed largely by credit,
which has led to concerns about the sustainability of the
current economic expansion. However, reductions in
financing costs have allowed the debt to income ratio
(55.4 percent in 2004 Q3) to remain relatively low.
Source: Standard Bank, Money Supply Alert and Investec
Money Supply Alert, January 31; Business Day, February 1.


5. Comment. CPIX inflation (consumer inflation excluding
mortgage costs) slowed to 4.3 percent y/y in December,
below the midpoint of the 3-6 percent inflation target
band, helped by the strong rand. Based on inflation
figures alone, additional rate reductions could be
expected; however, trends in private sector credit demand
reduce the chances of additional rate cuts. Recent
statements by Tito Mboweni, the South African Reserve
Bank's (SARB) Governor, highlight continuing inflation
concerns. The Governor says that the SARB wanted a
competitive exchange rate "which brings about a proper
balance in the earnings of exporters, but also contributes
significantly to low inflation from the import side of the
equation." End Comment.

MANUFACTURING SURVEY DECLINES
--------------


6. In January, the Purchasing Managers' Index (PMI),a
leading indicator of manufacturing output, showed signs of
weakening, falling to 49.3, the first time below 50 in 15
months, compared to December's value of 53.2. A value
below 50 indicates that more managers are experiencing
worsening business conditions than those expecting
improvement. The PMI also indicated a January pause in
growth of consumer demand, with the subindex measuring new
sales orders dropping to 49.7 compared to December's 57.
Strong domestic consumer demand is not offsetting the
effects of the strong rand and weak global demand on the
manufacturing sector. Statistics SA recently released
November's manufacturing production, showing a monthly 1.2
percent decline, also indicating a slowdown in
manufacturing production. In 2004, the rand appreciated
18 percent against the dollar, leading to South Africa's
2003 trade surplus of R16 billion turning to 2004's trade
deficit of R12.5 billion. In 2003, the manufacturing
sector accounting for 16 percent of GDP, contributed more
than half of South Africa's exports. Source: Business
Day and Business Report, February 2.

JANUARY VEHICLE SALES INCREASE 20.9 PERCENT
--------------


7. Motor vehicle sales grew by 20.9 percent in January
(y/y),with passenger cars showing growth of 22.2 percent,
according to statistics released by the National
Association of Automobile Manufacturers of South Africa
(NAAMSA). In January, the top five passenger car
manufacturers include: (1) Volkswagen at 19.1 percent
market share; (2) Toyota having 18.4 percent share; (3)
DaimlerChrysler with 16.7 percent share; (4) General
Motors SA with 9 percent share; and (5) Ford Motor Company
with 7.5 percent share. Sales of commercial vehicles
showed strong January growth at 35.6 percent, leading to
expectations that 2005 motor sector's growth will remain
robust. The car market is expected to continue growth
next year. At worst, interest rates should remain
unchanged, given December's CPIX inflation of 4.3 percent,
allowing consumers to continue to finance asset purchases
through debt. NAAMSA reports that real vehicle prices
declined by 3.5 percent in December, another reason for
expecting continuing strong market conditions. Source:
Standard Bank, Motor Alert, February 2.

VEHICLE PARTS SECTOR SHOWS WEAKNESS
--------------


8. According to Clive Williams, executive director of the
National Association of Automotive Components and Allied
Manufacturers, the vehicle component sector is facing
increased prospects of production cuts. The strong rand
is cutting into profit margins on exports and keeping
domestic prices low while imported component prices
continue to decline. According to Williams, small parts
companies that had been building up distribution networks
in the United States over the past five years are
abandoning their export programs and only large companies,
with economies of scale, are able to still export. Local
car manufacturers are limiting component price increases,
as imports provide competitive pressure on prices.
Vehicle and parts exports to the U.S. were valued at $150
million in 2000, $359 million in 2001, $572.9 million in
2002; however in November 2004, exports to the U.S.
declined 23.2 percent (on a year-to-date basis),reaching
$530.3 million. Car manufacturers have announced recent
plans to increase South African investment, with both
Volkswagen planning to increase its exports from South
Africa by 45 percent and Toyota planning to increase its
South African exports from 10,000 to 100,000 by 2010.
Source: Business Day, February 2.

DRAFT IMMIGRATION BILL INCREASES REGULATION
--------------


9. Draft immigration regulations, issued by the Home
Affairs Department and published for comment, appear
significantly stricter than earlier proposals, and suggest
a deliberate effort to tighten up immigration procedures.
The business permit for entrepreneurs wishing to start
businesses in South Africa now asks potential investors to
meet more requirements. In the past they had to meet at
least just two out of seven requirements before being
granted approval. Now they have to comply with all seven
requirements. In addition to having to provide R2.5
million ($420,000) in financial guarantees, the main
criterion in the past, would-be investors would now have
to supply proof of a business plan. The business plan
would outline its feasibility both in the short and long
term, show proof of entrepreneurial skill, demonstrate
that they would permanently employ at least five citizens
or five permanent residents, provide proof of the export
potential of the business, and include a police-clearance
certificate. Linda Lamprecht, an immigration expert at
PricewaterhouseCoopers, stated that the criteria would
affect small and medium business operations most. She
also stated that the requirement of requiring potential
investors to contribute to the geographical spread of
economic activity, would also have negative effects. The
Department of Home Affairs defended the new regulations,
saying they would contribute towards the development of an
immigration policy framework that responded to both the
"developmental and socioeconomic needs of our country, the
continent and the world." Sourcee: Business Day,
February 1.

FIRST BLACK APPOINTED AS ANGLO AMERICAN'S CHIEF EXECUTIVE
-------------- --------------


10. Larazus Zim takes over South African operations at
Anglo American and becomes the first black appointed as a
chief executive officer at Anglo American. Tony Trahar,
the previous chief executive for South African operations,
will remain chief executive of London-listed Anglo
American and chairman of the South African operations.
According to Trahar, South Africa remained the largest
portion of Anglo's portfolio, contributing 35 percent of
its profits. Zim was appointed Trahar's deputy in 2003,
working primarily with the company's South African
operations and placing importance on cooperation between
business and government. Source: Business Report and
Business Day, February 1.

DECEMBER'S TRADE BALANCE SURPLUS; YEARLY TRADE BALANCE
DEFICIT
-------------- --------------


11. For the month of December, the trade balance showed a
small surplus at R2.8 billion; although for the year, it
showed a R12.5 billion deficit, below the 2003 surplus of
R16.1 billion. December's trade surplus followed six
months of consecutive monthly trade deficits. Exports
increased 2.5 percent on a monthly basis, rising to R28.6
billion, while imports declined by 9.2 percent (m/m)
reaching R25.8 billion, despite evidence of strong
consumer demand in December. December's base metals and
mineral products increased while exports of vehicles and
aircraft as well as machinery declined. Imports of
machinery, plastics, original components, chemicals and
metals declined compared to November's export values. For
the year as a whole, exports increased by 7 percent while
imports increased by 18.6 percent. In 2004, South
Africa's trade deficit has been easily financed by capital
inflows. In 2005, trade deficits may continue due to
continuing strength of the rand and weakening global
demand. In 2005, Standard Bank expects world growth at
3.8 percent, with advanced economies growing at 2.5
percent and emerging country growth at 5.2 percent, slower
than 2004 growth rates. Source: Standard Bank, Foreign
Trade Alert, January 31.

RETAIL SECTOR RECEIVES 8.8 PERCENT INCREASE
--------------

12. The Department of Labor announced an 8.8 percent wage
increase, starting February 1, for workers in the retail
and wholesale trade sector. This increase is above the
inflation target of 3-6 percent, but necessary to narrow
income gaps between black and white wage earners. Source:
Business Report, February 1.

DEREGULATION OF TELECOMMUNICATION STARTS
--------------


13. As of February 1, 2005, the first step towards
deregulation of the telecommunications sector has begun.
Value-added network service (VANS) providers can now offer
voice services (VoIP),provide their own fixed
infrastructure, acquire infrastructure from other licensed
operators other than Telkom, the telephone parastatal, and
resell spare capacity, as can other private
telecommunication network (PTN) operators. Much of the
industry believes that private operators will soon be able
to offer a variety of services and technologies previously
monopolized by Telkom. This would lead to rapid
competition on voice calls, internet access, video
conferencing and high speed data transmissions.
Regulations drawn up by Independent Communications
Authority of South Africa (ICASA) propose a license
application fee of R30,000 ($5,000 using 6 rands per
dollar),a 600 percent hike from the current fee of
R5,000. ICASA also wants every Vans operator to be 30
percent owned by black shareholders by October 2005. Both
Telkom and Vodacom have argued the Telecommunications Act
does not allow VANS operators to provide their own
facilities. This means that such operators must continue
leasing their networks from Telkom, or from the cellular
operators. Source: Business Day, February 1.


FRAZER