Identifier
Created
Classification
Origin
05PRETORIA655
2005-02-12 09:07:00
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 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


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