SOUTH AFRICA ECONOMIC NEWSLETTER

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
January 7 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:
- IMF Report on South African Investment;
- Government Set to Meet 3.2 Percent Budget Deficit
Target;
- Gasoline Prices to Decline in February;
- Economic Forecasts for 2005; and
- Service Sector SETA Faces Funding Crisis.
End Summary.

IMF REPORT ON SOUTH AFRICAN INVESTMENT
--------------


2. A recent study by the International Monetary Fund
(IMF) highlights South Africa's foreign investment profile
from 1994 to 2002. South Africa has had no problem
attracting foreign investment, however, the type of
investment that it attracts is worrying from an economic
growth perspective. South Africa attracts far less
foreign direct investment (FDI) compared to emerging peer
countries such as Thailand, Malaysia, Mexico, Poland and
South Korea. However, South Africa surpasses other
emerging market economies in attracting portfolio
investment. According to the IMF study, during the period
1994 to 2002, average net inflows of FDI into SA amounted
to 1.5 percent of gross domestic product (GDP),compared
with just 3 percent of GDP in 16 other emerging markets.
Excluding the large FDI transactions, such as Telkom's
partial privatization in 1997 and the Anglo American
takeover of De Beers in 2001, FDI fell to an average of
0.7 percent of GDP over the eight-year period. During
1994 to 2002, the share of foreign investment in capital
flows was 88 percent in other peer countries, while the
FDI share amounted to only 30 percent in South Africa.
Although the FDI share in SA has increased to 50 percent
during the 2000 to 2002 period, mostly due to the slowdown
in equity flows, it remains well below that in other
emerging market countries. Because of its long -term
horizon, FDI is more conducive to economic growth and job
creation by helping the transfer of technology and
improving the skill levels of the labor force. The study
shows that South Africa attracts far more portfolio
investment than its peers, with inflows as a proportion of
GDP amounting to almost double that of other emerging
markets. During the period 1997 to 2000, portfolio
inflows into South Africa averaged 5 percent of GDP, with
South Africa benefiting from an exodus of capital from
Asia during that period. According the study, more than
70 percent of portfolio inflows during the period 1994 to
2002 went into the equity market, with SA attracting more
equity flows than other emerging markets. The IMF study
shows that South Africa's trade openness is far lower than
other emerging markets. Other factors where South Africa
ranks low are its economic growth performance,
infrastructure and crime levels. The study also shows
that exchange rate volatility has a crucial role to play,
with lower volatility likely to boost FDI, but probably
reduce portfolio investment. The rand is one of the most
volatile currencies in the world. The currency has doubled
in value against the dollar after reaching a record low of
R13.85/$1 in December 2001. The IMF says the South
African Reserve Bank's (SARB) steady build-up of foreign
exchange reserves will help reduce exchange rate
volatility. In 2004, SARB eliminated its foreign
exchange debt leading to recent increases in its gross
reserves, although the level of reserves remain low
compared to other emerging markets. Source: Business
Day, January 5; IMF Country Report No. 04/379.

GOVERNMENT SET TO MEET 3.2 PERCENT BUDGET DEFICIT TARGET
-------------- --------------


3. The government expects to meet its revised deficit
target of 3.2 percent of gross domestic product this
fiscal year, according to consultancy Econometrix.
Government revenue grew 17.9 percent in November,
substantially higher than the full year budgeted revenue
growth of 9.6 percent. November's revenue growth meant
that revenue for the first eight months of the 2004/05
fiscal year increased 11.7 percent. Company tax revenue
fell sharply, but growth in personal tax revenue, transfer
duties, excise duties and the fuel levy more than made up
for low corporate tax growth. Government expenditure in
November increased 16.1 percent y/y, above the full year
budgeted growth of 13.1 percent. Growth in expenditure
for the first eight months was 11.2 percent, less than the
budgeted growth rate. Econometrix predicts little problem
in financing its increased infrastructural spending in the
current fiscal year, although future infrastructural
spending needs are significant. Source: Business Report,
January 4.

GASOLINE PRICES TO DECLINE IN FEBRUARY
--------------


4. The Department of Minerals and Energy announced that
the retail price of 97 octane unleaded petrol is
anticipated to drop by 52 rand cents a liter, and the
wholesale price of diesel containing 0.05 percent sulphur
to decrease by 39 rand cents a liter in February.
Unleaded and leaded 93-octane petrol should decrease by 44
rand cents a liter. Even though fuel prices should
significantly decline in February, corresponding decreases
in transport and food prices are not expected because of
sustained consumer spending and fuel costs being a small
percentage of input costs. Expectations for food prices
and transport costs remain constant due to increased
maintenance costs and wage pressures. Source: Pretoria
News, January 4.

ECONOMIC FORECASTS FOR 2005
--------------


5. Many economists and analysts did not predict the
rand's crash at the end of 2001, and most did not foresee
the rand's subsequent strength. But after three
successive years of gains, analysts have come around to
the view that the rand's strength may continue. ABSA
bank economist Karen Smith-Ford says the rand could end
the year at about R5.63 to the dollar, similar to its
current trading levels. The dollar will be the wild card
this year with more weakness expected because of the U.S.
economy's current account and fiscal deficits. A sharp
move in the dollar poses the risk of boosting the rand
further into overvalued territory, and putting more strain
on the export sector as exports become less uncompetitive.
The strong rand, however, will continue to be good news
for inflation, as import prices remain low and domestic
producers restrict price increases in order to remain
competitive against cheap imports. Economists expect that
the targeted inflation measure CPIX (consumer inflation
excluding mortgage costs) will remain comfortably within
the 3 to 6 percent target range for this year. Standard
Bank economist Elna Moolman says CPIX will probably remain
at the bottom half of the target range for most of the
year, peaking at 4.4 percent and averaging 3.9 percent for
the full year. The low inflation numbers could leave
enough room for the South African Reserve Bank (SARB) to
lower interest rates again this year, economists say.
Efficient Group economist Nico Kelder says rates could be
cut by about 0.5 percentage points next month, and
possibly again in April. The SARB kept its repurchase
rate unchanged at 7.5 percent in December, citing high
domestic spending and uncertainty about the rand's
strength as potential inflation risks. Domestic spending
gave a boost to economic growth last year, lifting it to
an eight-year high of 5.6 percent in the third quarter (on
a seasonally adjusted and annualized basis). Efficient
Group's growth forecasts are higher than most, with gross
domestic product (GDP) estimated to rise 5.7 percent this
year, up from an expected 3.8 percent in 2004. Kelder
says domestic demand will continue to drive the local
economy, but exports are likely to show more substantial
growth in the face of a fairly stable exchange rate.
Despite the higher growth rates, economists concur that
this is unlikely to make a significant dent into the
unemployment numbers. South Africa's official unemployment
rate, counting only those who are actively looking for
work stands at 27.8 percent, or 4.6 million people. The
unemployment rate increases to 41.2 percent, or 8.4
million people, when discouraged job seekers are included.
The Efficient Group expects the current account deficit to
increase, reaching R45 billion ($7.9 billion using 5.7
rands per dollar),or 3.2 percent of GDP in 2005, slightly
worse than last year's estimated deficit of R40 billion,
or 3 percent of GDP. Source: Business Day, January 4.

SERVICE SECTOR SETA FACES FUNDING CRISIS
--------------


6. The Services Sector Education and Training Authority
(SETA) has declared a moratorium on new learnerships
(apprenticeships) until at least July. The SETA said
resumption of its primary activity of starting
learnerships in the services sector would be "subject to
sufficient discretionary funding availability and
satisfactory conclusion of quality assurance issues." The
90,000 companies registered with the SETA will continue
paying their skills development levies a total of about
R40 million ($7 million using 5.7 rands per dollar) a
month to the South African Revenue Service without being
able to obtain the benefits for which they are paying.
About 80 percent of the fees revert to the SETA, which
means that, for at least six months, more than R190
million ($33 million) will be used either to pay the
authority's debts or to maintain its infrastructure.
Dozens of companies have disputed comments made recently
by a SETA spokesperson that claimed that creditors had
been paid just before the SETA closed on December 15 for
the holiday season. Numerous organizations, including the
South African Chamber of Business (SACOB),said they had
received no money despite promises of payment. According
to SACOB's CEO James Lennox, the Labor Department as well
as the SETAs have repeatedly asserted that the skills
development levy (which amounts to 1 percent of a
company's payroll) is not a tax. The impact of the
service sector SETA's actions might be that companies that
are participating in learnerships and sponsored skills
programs will refuse to participate in the government's
job creation initiatives, especially the smaller companies
not having enough cash flow to pay the SETA without
receiving any benefits. One creditor, the X-Pert project
management group, is owed nearly R10 million ($1.7
million) with the amount increasing by more than R700,000
a month because it is carrying the costs for more than 400
apprentices, 55 of whom have physical or other
disabilities for which the SETA is responsible. Source:
Business Day, January 4.

HARTLEY