SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 05 PRETORIA 000655 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 11 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: - Reserve Bank Keeps Interest Rates Unchanged; - South Africa's FDI Outlook Improves; - Higher Than Expected Manufacturing Growth in December; - Retail Sales Remained Strong in November; - Gov't and Industry Seek Solutions to Textile Crisis; - Steel Antidumping Duties Revoked; - Water and Electricity Public-Private Partnerships Have Failed; - Maize Farmers Face Low Prices and Oversupply; - Deutsche Bank Sells 25% of SA Business to BEE Group; - JSE Securities Exchange to Sell Public Shares; - Some Improvement to SA's Skewed Income Distribution; and - Low-Cost Bank Account Draws Over Half Million. End Summary. RESERVE BANK KEEPS INTEREST RATES UNCHANGED -------------- ¶2. The two-day meeting of the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) has decided to keep the repurchase rate steady at 7.5%. This is the third consecutive MPC meeting that has kept interest rates steady. Two thirds of economists surveyed by I-Net Bridge forecasted no change in the rate, but one third expected a 50 basis points cut. The last 50 basis point cut was announced at the August 12, 2004 MPC meeting. This cut caught the market by surprise after the SARB cut interest rates by 550 basis points in 2003. The capital market has seen yields drop by more than 180 basis points since August 12, 2004 with the benchmark government bond, the five-year R153, yield trading at a record low of 7.54% on February 10 compared with 9.38% on August 12, 2004 before the MPC announced the surprise rate cut. The next MPC meeting is on April 13 and 14. (I- Net Bridge, February 10) SOUTH AFRICA'S FDI OUTLOOK IMPROVES -------------- ¶3. South Africa's outlook for foreign direct investment this year has improved, according to the South African research organization BusinessMap Foundation. BusinessMap director, Reg Rumney, said about $8 billion in foreign investment was announced in January alone. BusinessMap tracked investment at about $5.8 billion last year in its preliminary calculations, up from about $2.7 billion in ¶2003. BusinessMap researcher Michel Hanouch said South Africa's stable political and economic outlook had played some part in encouraging foreign companies to invest here. Hanouch said a large portion of the investment coming through this year was from brewer SABMiller's commitment to invest R5 billion in South Africa. SABMiller is seen as a foreign company due to its primary listing in the UK, but is a South African company in other respects. Apart from the brewer, international vehicle manufacturers have announced plans to increase their investments in South Africa. Volkswagen and Toyota have both said they plan to invest more than R1 billion (approximately $161 million) this year. Further investment is expected to come from independent power producers invited to supplement Eskom's electricity- generation plan. While the outlook is good, there are some factors that can limit investment in South Africa. BusinessMap said confidence could be knocked if rand volatility returned along with a fall in commodity prices and a slowdown in world economic growth. Traditionally the mining sector has attracted high levels of foreign direct investment, but the flow of investment in the sector in the third quarter of last year was poor. (Business Day, February 9) HIGHER THAN EXPECTED MANUFACTURING GROWTH IN DECEMBER -------------- -------------- ¶4. Manufacturing production grew by 7.8% y/y in December 2004 compared to 5.5% y/y in November. Growth was higher than expected in December, as production usually slows at the end of the year. The main categories contributing to the rise were petroleum and chemical products, textiles, clothing leather and footwear, food and beverages, as well as wood, paper, and printing products. Declines in production were recorded in glass and non-metallic mineral products, motor vehicles and parts, furniture, basic iron and steel products, and electrical machinery. Manufacturing production average annual growth was 4% in 2004. (Standard Bank and Nedbank, February 8) RETAIL SALES REMAINED STRONG IN NOVEMBER -------------- ¶5. According to Statistics South Africa, retail sales at constant prices grew by 12.6% y/y in November 2004 after growing 12.9% y/y in October. These strong sales figures indicate that consumers took advantage of the favorable retail environment. Strong growth in disposable income, low inflation, and low interest rates boosted consumer confidence. Based on the growth trend through November 2004, December most likely experienced high growth as well. Retails sales are expected to remain strong in 2005. (Standard Bank and Nedbank, February 10) GOV'T AND INDUSTRY SEEK SOLUTIONS TO TEXTILE CRISIS -------------- -------------- ¶6. Last week's meeting between representatives of government, labor, and clothing and textile industries revived hopes of protecting the troubled industries from a surge of cheap imports from China and other east Asian countries. Textile Federation of SA executive director Brian Brink said this week that talks were on track and that he was optimistic about their progress. According to the South African Clothing and Textile Workers Union (Sactwu), the industry has shed about 30,000 jobs in the last two years. A task team consisting of representatives from the Trade and Industry Department met in Cape Town last week to consider remedies aimed at countering the negative effects of cheap imports on the local clothing and textile sector. Brink said on Monday that the parties had made progress in the negotiations, but that it was premature to say whether there would be policy changes. The parties plan to meet again in about a month's time. The resumption of the task team's discussions has not stopped the Textile Federation from applying to the Trade and Industry Department for the adoption of safeguard measures. However, Trade and Industry Department Deputy Director-General Lionel October said this week that safeguard measures were "no panacea." October said that safeguard measures had been used in a bid to protect the local footwear industry, with little success. Parliament's Trade and Industry Committee said it would hold public hearings on the problems. (Business Day, February 9) STEEL ANTIDUMPING DUTIES REVOKED -------------- ¶7. The South African government revoked hefty antidumping duties on steel imports from Russia and Ukraine on February ¶8. The move attempts to offer cheaper steel imports for South Africa's struggling steel users, but could lead to dumping in South Africa. Ispat Iscor, South Africa's largest steel maker, had hoped government would retain the duties and warned of "uncompetitive steel trading" if the duties were revoked, while the government has been pressuring the company to develop a new pricing model. South Africa implemented punitive duties of 81.7% and 94.8% on Russian and Ukrainian steel, respectively, five years ago when it was found that suppliers from those countries were dumping steel in South Africa. The antidumping duties are reviewed every five years. The scrapping of the anti- dumping duties appears to be in line with other steps government has undertaken to unlock the downstream industry's value-adding and job-creating potential. The steps include forcing Ispat Iscor to develop a new pricing model, and an incomplete probe into the possible scrapping of the general 5% duty applicable to all steel imports into South Africa. The government agency responsible for duties, the International Trade Administration Commission, said in preliminary findings that the expiry of the antidumping duties was likely to lead to the resumption of dumping from Russia and Ukraine, but also found that it was unlikely to materially injure domestic steel makers. The decision was likely influenced by record demand and steel prices globally, which saw Ispat Iscor's profits soaring. (Business Day, February 9) WATER AND ELECTRICITY PUBLIC-PRIVATE PARTNERSHIPS HAVE FAILED -------------- -------------- ¶8. Public-private partnerships in Africa over the past 15 years have generally failed to provide water and electricity, a new study shows. According to a study by the South African Institute of International Affairs (SAIIA), about 600-million people in sub-Saharan Africa lack access to electricity, about 300-million have no access to safe water, and there were just eight telephones-either cellphone or fixed-line-per 100 inhabitants. The report, released on February 8, acknowledged successes achieved by public- private partnerships in sectors such as telecommunications, transport, ports and eco-tourism, but said that much still needed to be done to in water and electricity provision. Governments often chose public-private partnerships as an alternative to full privatization, which had politically contentious aspects. However, the partnerships are complex and often lead to more expensive services for a consumer. For example, the 30-year concession of water provision on South Africa's Dolphin Coast saw a French multinational SAUR Services securing better terms for itself and receiving a 21% return on investment - while its local partner, Siza, was not making a profit from the concession. The Congress of South African Trade Unions (Cosatu),which describes public-private partnerships as "a form of privatization," said private sector participation should not replace government, but should complement government capacity. Cosatu economist Neva Makgetla said that private-sector contractors often lied about their capacity to deliver, especially to poor areas. Makgetla said private delivery "is fine where it will not compromise development aims." Some upcoming big projects, which would require private sector participation, include the proposed R7 billion (approximately $1.1 billion) Gautrain Rapid Rail Link project, the R2.5 billion (approximately $403 million) Dube Trade Port which incorporates the King Shaka International Airport in Durban, and the building of schools and hospitals across the country. (Business Day, February 9) MAIZE FARMERS FACE LOW PRICES AND OVERSUPPLY -------------- ¶9. The free-falling price of maize over the past few months has been so severe that some farmers have not bothered to plant this season. The grain's price plunged from more than R1,000 a ton (approximately $161) in November to less than R600 a ton (approximately $97) in February. The low price has negatively affected farmers' profits, and commercial farmers' representative Grain SA is questioning the sustainability of the industry. The price crisis gripping South African maize farmers has once again exposed the risky nature of commercial farming. Farmers owe financial institutions billions of rand, and some risk losing everything this year. The deregulation of the agricultural sector in the 1990s left commercial farmers exposed to the risk of drought, exchange rate, and commodity price fluctuations. Grain SA says because costs of input products such as tractors, fertilizer, seeds and labor have not decreased with the maize price, farmers face shrinking margins and are struggling to repay their loans. On average, commercial maize farmers must get R900 a ton in order to cover their input costs without making a profit. Another problem is the fact that South Africa has maize stocks in excess of 3.2 million tons. This season's yield is likely to swell stocks because commercial farmers have planted an area even bigger than last year. This year, South Africa's maize farmers are expected to harvest about 9 million tons. Grain SA is considering building ethanol plants to absorb the surplus. (Business Day, February 9) DEUTSCHE BANK SELLS 25% OF SA BUSINESS TO BEE GROUP -------------- -------------- ¶10. Deutsche Bank sold a 25% share in its South African operations to Black Economic Empowerment (BEE) group Uthajiri and its employees. Uthajiri will take a 15% stake while the remaining 10% will be held by an employees' share trust called Deutsche Bank Black Empowerment Share Trust. The beneficiaries of the trust are all black South African staff currently working for Deutsche Bank South Africa. The purchase of the 25% will be funded by Deutsche Bank and the Uthajiri shareholders. Uthajiri will have three senior executives working for the Deutsche Bank in South Africa. Uthajiri, Swahili for wealth, was established in 2003 with the aim of being a leading BEE partner in the financial services and information, communications and technology sectors. (I-Net Bridge, February 3) JSE SECURITIES EXCHANGE TO SELL PUBLIC SHARES -------------- - ¶11. The JSE Securities Exchange SA is to become a "normal company" with publicly-traded shares. Currently, the exchange is owned by 8,000 rights holders, mostly stock broking firms. This is part of a move towards demutualization, in line with the introduction of the Securities Services Act last week, and follows changes to the Income Tax Act last year, which requires the JSE to begin paying tax for the first time. JSE CEO Russell Loubser said the 8,000 rights holders will be asked to vote on demutualization. Each right is worth R50,000 (approximately $8,100),valuing the JSE at about R400 million (approximately $64.5 million). If the resolution is passed, rights holders could swap each of these rights for 100 ordinary shares, each worth about R500. No single party will be able to hold more than 15% of the total shares, which will partially protect the JSE from a takeover bid. Any party wanting to buy a share larger than 15% could apply for special permission from the Financial Services Board. The JSE shares will not be listed on the main board, but traded over the counter between individuals. Brokers gave cautious approval to the move provided that JSE fees do not increase. (Business Day, February 8) SOME IMPROVEMENT TO SA'S SKEWED INCOME DISTRIBUTION -------------- -------------- ¶12. A new study by the University of South Africa's Bureau for Market Research suggests some improvement in income distribution overall, but increasing inequality within race groups. It supports the findings of a number of studies done in recent years, which show a decline in inequality between racial groups, mainly because of increased social grant spending, and better job prospects for blacks, resulting in them earning a larger slice of the income pie. However, inequality within race groups has increased, indicating that the rich have become richer through upward mobility, while the poor continue to struggle to improve their circumstances. According to the Bureau for Market Research, the number of black households that moved into the high income group, earning R153,000 (approximately $25,000) a year or more, jumped to 440,000, demonstrating 368% growth between 1998 and last year. White households still dominate the high-income category, and during the same six-year period their numbers increased 16% to 642,000. Over the same period, the number of black households in the low- income category, earning less than R9,600 (approximately $1,500),a year dropped sharply. The main reason for this drop seems to be the increase in the child grants and more efficient payment of old age pensions. The study also showed a dramatic change in the share of total income earned by the various population groups. In 1960, 69.4% of total personal disposable income (adjusting for tax) accrued to whites, while blacks earned 23.2%. In 2000, whites accrued 43.9%, slightly more than the 43.5% accrued to blacks. By 2007, the bureau estimates that blacks will earn 46.5% of total personal disposable income, a far greater proportion than the white share of 40.4%. However, despite enjoying more of the share of income on a per capita or household basis, blacks remain poor income earners for their population size compared to other race groups. After-tax income of an average white household is expected to increase from R190,563 ($31,000) a year in 2004 to R236,435 ($38,000) in 2007. Black households can expect average incomes to increase from R43,533 ($7,000) a year in 2004 to R54,424 ($9,000) in 2007. In 2001, black households made up almost 90% of the country's lowest income category. (Business Day, February 8) LOW-COST BANK ACCOUNT DRAWS OVER HALF MILLION -------------- - ¶13. The low-income national banking account, Mzansi, has signed nearly 560,000 accounts as of February 7, double the expectations based on market research. PostBank, the savings division of the post office, has the largest number of Mzansi accounts amongst the five banking institutions. Half of the account holders are female and two-thirds of the customers were in the 25-54 age group. Mzansi accounts do not appear to be cannibalizing existing accounts, as more than 90% of account holders did not have a prior relationship with their institution, although customers could have switched institutions. On February 7, 2005, the accounts were distributed as follows: PostBank 27.3%; Standard Bank 25.9%; Absa 23.9%; First National Bank 16.2%; and Nedbank 6.7%. The Banking Council expects to have additional providers of Mzansi accounts this year as second/third tier financial institutions see the benefits. An average of R290 ($47) is currently being held in each Mzansi Account, amounting to a total balance of R160 million (approximately $25.8 million) brought into the formal banking sector. The Mzansi account was launched on October 25, 2004, resulting from two years of work between the banking institutions, the Banking Council, and the National Economic Development and Labour Council (NEDLAC) in response to requirements outlined out in the Black Economic Empowerment (BEE) Financial Sector Charter. The Congress of South African Trade Unions (COSATU) complains that Mzansi account functions are too limited for self-employed customers and others, while banks continue to discuss ways to improve the Mzansi accounts to meet the needs of customers. (I-Net Bridge, February 9; Business Day, February 10) FRAZER