SOUTH AFRICA ECONOMIC NEWSLETTER

UNCLAS SECTION 01 OF 04 PRETORIA 000864 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 18 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 in the February 18 newsletter include: - President Mbeki's State of the Nation address - South Africa's manufacturing capacity improves - South Africa's project value up 309 percent in 2004 - Power station revamp will create 36,000 jobs - Unemployment is South Africa's biggest worry - South Africa's 2004 4Q real GDP grows 4 percent - SA and Angola sign trade and investment agreements - Final stake in South Africa's SNO awarded to India's VSNL END SUMMARY. -------------- PRESIDENT MBEKI'S STATE OF THE NATION ADDRESS -------------- ¶2. In his "State of the Nation" address to the South African Parliament, President Thabo Mbeki painted a picture of a country which "has never in its entire history enjoyed such a confluence of encouraging possibilities." The president reiterated government's broad objectives to increase investment in the economy, lower the cost of doing business, improving economic inclusion and provide the required skills. Mbeki said that 72 percent of the government's programs were being carried out more or less within the time frames set. He singled out issues such as classroom-building and the provision of services by municipalities as areas which required improvement. Referring briefly to AIDS, he said "the government's comprehensive plan, which is among the best in the world, combining awareness, treatment and home-based care, is being implemented with greater vigor." R180 billion ($31 billion) has been allocated to build or improve harbors, oil pipelines and power stations, and banks were commended for committing R85 billion ($14 billion) over three years for low-cost housing, infrastructure, small black businesses and new black farmers. Government would allocate R21.9 billion ($3.8 billion) for a five-year National Skills Development Strategy. A simpler system for paying taxes and levies and registering businesses would be introduced by April 2006. More than R1.5 billion ($259 million) had been spent on an expanded public works program, he said, creating 76,000 jobs. Extra money would be allocated to pay for restoring land to those who had been deprived of it under white rule. Action would be taken to ensure that free basic electricity was provided "to all with minimum delay" and that municipalities could provide sanitation to 300,000 households a year from 2007. (BuaNews, February 11) -------------- - SOUTH AFRICA'S MANUFACTURING CAPACITY IMPROVES -------------- - ¶3. Manufacturing capacity utilization by large enterprises rose to 86.3 percent in November 2004 from 83.1 percent in November 2003, Statistics South Africa (Stats SA) said today. The under-utilization of 13.7 percent for November 2004 was attributed mainly to insufficient demand (8.9 percent of reported under-utilization),followed by `other' reasons (such as downtime due to maintenance, lower productivity and seasonal factors) (2.2 percent),a shortage of raw materials (1.8 percent) and a shortage of labor (0.8 percent). The capacity utilization rate is reported quarterly and has been rising since November 2003, when the new survey started. The November 2004 survey covered ten sectors with the highest utilization rate recorded for large enterprises in furniture and `other' manufacturing industries (91.9 percent),followed by those in wood and wood products, paper, publishing and printing (91.5 percent),glass and non-metallic mineral products (89.8 percent),electrical machinery (87.8 percent) and basic iron and steel, nonferrous metal products, metal products and machinery (87.2 percent) divisions. Large enterprises in the radio, television and communication apparatus division recorded the lowest utilization rate for November 2004 (82.7 percent),followed by those in the division food and beverages (83.1 percent). The economy has officially been in an "upward" phase since September 1999. (I-Net, February 17) -------------- -------------- SOUTH AFRICA'S PROJECT VALUE UP 309 percent IN 2004 -------------- -------------- ¶4. The value of announced capital projects with a value in excess of R20 million ($3.4 billion) more than quadrupled to a record R174 billion ($30 billion) in 2004 from R42 billion ($7.2 billion) in 2003, according to Nedbank's (NED) capital expenditure project listing. The quadrupling in value in 2004 represented government's plans to accelerate spending on infrastructure in order to upgrade a badly outdated and inefficient transport network and expand capacity in both the transport and power systems to meet future demand. The South African Treasury in its Medium Term Budget Policy Statement (MTBPS) in October 2004 said that the public sector, including non-financial public enterprises such as Eskom and Transnet, would spend R301 billion ($51.9 billion) on capital expenditure over the next three fiscal years (2005/6 to 2007/8) compared with only R188 billion ($32 billion) spent in the past three fiscal years of 2001/2 to 2003/4. The government aims to increase fixed capital formation from 16.3 percent of GDP currently to 25 percent by 2014. In 2004, the private sector announced 46 new projects worth R38.4 billion ($6.6 billion) compared with 41 projects of R25.4 billion ($4.4 billion) in 2003. (I-Net, February 18) -------------- POWER STATION REVAMP WILL CREATE 36,000 JOBS -------------- ¶5. Eskom's recommissioning of mothballed power stations would create 36,000 jobs and contribute R5.8 billion ($1 billion) in GDP by 2007, according to a study undertaken by Econometrix on behalf of the power utility. Eskom has commissioned the return to service of three mothballed stations to provide 3,800MW: Camden in Ermelo, Grootvlei near Balfour and Komati in Middleburg at a cost of R12 billion ($2 billion),which is about 40 percent of the cost of a new station. About 26,000 of the jobs would be in Mpumalanga were the Camden station is located. Camden is expected to be operational in June this year and the rest by ¶2008. Econometrix said the jobs were expected to subsequently decline when constructions activities decrease. Alec Erwin, the minister of public enterprises, announced a R107 billion ($18 billion) investment over five years for electricity in which Eskom would spend R87 billion ($15 billion). The investments are part of the government strategy to strengthen power capacity to supplement the excess capacity which was expected to run out in 2007. South Africa would need at least a power station that can produce 3,600MW at a cost of R30 billion ($5 billion) every three years. (Business Report, February 15) -------------- UNEMPLOYMENT IS SOUTH AFRICA'S BIGGEST WORRY -------------- ¶6. Nine out of 10 South Africans are worried about the high unemployment levels in the country, according to the latest South African Broadcasting Corporation-Markinor survey on governance. The survey identified crime as the second most important issue affecting South Africans. The third greatest concern that required urgent government attention was poverty and then HIV/AIDS. The survey also found out that perceptions among South Africans of corruption involving government officials had decreased - although it was still fifth on the respondents' list of priorities. Following this was concern about government's slow delivery in the education sector. Respondents were worried about both poor education facilities and the education department's ability to provide the same standard of education for South Africans of all backgrounds. The development of infrastructure such as water, electricity, roads and bridges took seventh place in the respondents' list of priorities. The poll was conducted in October last year and about 3500 South Africans were interviewed, representing a demographic sample of the entire country. (Business Day, February 14) -------------- -- SOUTH AFRICA'S 2004 4Q REAL GDP GROWS 4 PERCENT -------------- -- ¶7. Real gross domestic product (GDP) at market prices on a quarter-on-quarter basis rose by 4 percent in the fourth quarter 2004 from a revised eight-year high of 5.7 percent in the third quarter 2004, (previously estimated at 5.6), according to Statistics SA. On a year-on-year (y/y) basis fourth quarter 2004 GDP was up 4.7 percent from the third quarter's 3.8 percent. This is the highest y/y growth rate since the third quarter 2000, when growth was 5.2 percent y/y. The annual average for 2004 was 3.7 percent compared with 2.8 percent in 2003. This was the highest annual average since 4.2 percent in 2000. According to a survey of economists, fourth quarter 2004 gross domestic product (GDP) growth was expected to have risen to a median forecast of 4.4 percent on a q/q saa basis. The range of forecasts was from 3.6 to 5.4 percent. The growth rate on a y/y basis was expected to be in a range of 4.4 percent to 4.8 percent with a median of 4.6 percent. The median forecast for the annual average for 2004 is 3.7 percent with a range of 3.5 percent to 3.8 percent. The main drivers of GDP growth in 2004 were internal trade, financial services, transport and communications, and manufacturing. The main drivers in the fourth quarter of 2004 were financial services, internal trade, transport and communications and manufacturing. (I- Net, February 15) -------------- -------------- SA AND ANGOLA SIGN TRADE AND INVESTMENT AGREEMENTS -------------- -------------- ¶8. South Africa and Angola signed four agreements aimed at strengthening economic and bilateral relations during an official visit by Angolan Prime Minister Fernando dos Santos. Angola has considerable reserves of oil, gas, diamonds and other minerals. This week's visit indicates a major thaw in the relationship between SA and Angola. Both governments appear keen to forge closer ties after their relationship was damaged when Angola and SA supported opposite sides in the war in the Democratic Republic of Congo. An investment agreement, signed by Trade and Industry Minister Mandisi Mpahlwa and Angolan Transport Minister Andre Brandao, commits the countries to facilitate the granting of permits and licensing agreements necessary for investment. An agreement on electricity commits both countries to engaging in joint projects in urban and rural electrification and secures Eskom's position in Angola to assist with the development of the country's power generation and national grid. Agreements were also signed to set up a defense committee to extend co-operation in peace support missions and disasters; and on co-operation in social development programs. Deputy President Jacob Zuma, who hosted the three-day talks, says pacts in "other areas" will be concluded soon. SA's exports to Angola were worth R2,5 billion ($417 million) last year, a decline on the previous three years, and SA imports R1,3 billion ($217 million) in goods from Angola, a major increase on 2003. (Business Day, February 18) -------------- -------------- FINAL STAKE IN SOUTH AFRICA'S SNO AWARDED TO INDIA'S VSNL -------------- -------------- ¶9. The Communications Minister approved the bid by Indian Telecoms group VSNL for a 26 percent equity stake in the second national operator. Minister Ivy Matsepe-Casaburri said, "The stakeholders must (now) finalize the shareholder agreements and business plan as a matter of urgency." She called on ICASA, the telecommunications regulator, to issue a license for the second national operator (SNO) "at the earliest opportunity." VSNL is part of the Tata Group, which already has business interests in South Africa. VSNL was allocated the 26 percent equity stake in the second national operator after a long and contentious bidding process that saw one shareholder, Nexus, threaten a judicial review. The Tata-group is one of India's business giants, with international interests in sectors ranging from communications to motor vehicles. Analysts believe its long experience in telecommunications will benefit the future SNO. The private sector has been impatiently waiting the licensing of a second national operator, hoping that competition will result in cheaper rates. Other shareholders in the SNO include Nexus (19 percent),Eskom's Esitel (15 percent),Transnet's Transtel (15 percent), Communitel (12.5 percent),and TwoConsortium (12.5 percent). (SAPA, February 14) FRAZER