SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 13 2006

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 13 2006
ISSUE



1. Summary. Each week, Embassy 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:

- Manufacturing Production Growth Recovers;
- Housing Prices Continue to Slow;
- Credit Demand Slows;
- Trade Deficit Narrows;
- Transnet's Credit Risk from Zimbabwe Parastatals Low;
- Reserves Above $20 Billion
- Business Confidence at 2005 Peak;
- SA's Online Spending Increased 20%;
- SA Vehicle Sales Increase 28.5% in 2005; and
- High School Dropout Rate High
End Summary.

Manufacturing Production Growth Recovers
--------------


2. In November, South Africa's manufacturing output rose
by 3.7% (y/y in volume terms, not seasonally adjusted),
compared to October's yearly rise of 0.3% according to
Statistics South Africa (StatsSA). On a monthly basis,
manufacturing production rose by 2.1%. Using a year to
date basis, manufacturing production increased by 3.2%,
giving a better indication of overall 2005 growth. Seven
out of ten manufacturing sectors experienced positive
quarterly growth. The major contributors to increased
growth included the basic iron and steel, non-ferrous
metals and metal products and machinery sectors, followed
by motor vehicles sector. The petroleum, rubber, plastics
and chemical sector accounted for most of the negative
growth in sectors because of petroleum industry changing
to lead free fuel, followed by production decline in food
and beverages. Manufacturing is the second-biggest sector
(after the service sector) in South Africa, accounting for
more than 16% of the economy. Recent strengthening of the
rand poses potential risks to the manufacturing recovery,
especially if consumer demand softens. In recent trading,
the rand traded just under 6 rands per dollar. Source:
Reuters and Statistics SA Release P3041.2, January 12.

Housing Prices Continue to Slow
--------------


3. In December 2005, nominal housing prices continued
their slowing trend, reaching 14.7% increase compared to a
30.8% increase at the beginning of 2005. The rate of
nominal house price growth peaked in September and October
2004 at 35% and has since declined steadily. According to
ABSA bank housing surveys, the average house price in 2005
was R700,200 ($110,100, using 6.36, the 2005 average
rand/dollar exchange rate) compared to 2004's average
house price of R574,200 ($89,000, using 6.45, the 2004
average rand/dollar exchange rate). The 2005 growth in
mortgages reached 27% and 2006's growth is expected to be
20%-22%, along with a growth in real disposable income at
6%, according to ABSA senior economist Jacques Du Toit.
Adrian Saville, chief investment officer at Cannon Asset
Managers asserted that residential property remained an
overvalued asset and vulnerable to interest rate
increases, although risks of interest rate hikes remain
low due to slowing in inflation, money supply and credit
growth. Source: Business Day, January 12.

Credit Demand Slows
--------------


4. November's demand for credit by the private sector
reached 18.8% (y/y),slower than October's growth of
19.3%. The broadly defined M3 measure of money supply
grew by 16.4%, below forecasts, after increasing by 15.9%
in October. Consensus forecasts expected private sector
credit demand and M3 to increase by 18.6% and 17.3%,
respectively. The strong demand for private sector credit
in 2005 has fueled strong growth in domestic expenditures,
leading to an expected 2005 GDP growth of over 5%.
Source: Business Day, December 30.

Trade Deficit Narrows
--------------


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5. According to the South African Revenue Service,
November's trade deficit narrowed compared to October due
to strong growth in exports. The trade deficit narrowed
to R3.1 billion from October's R5.5 billion, with exports
and imports increasing by 17.1% and 6.4%, respectively.
Exports showing the strongest November growth include:
vehicles, aircraft and vessels, jewelry, base metals,
machinery and electrical appliances and minerals. Nedbank
economist Magan Mistry said the deficit exceeded market
expectations of R2 billion. The cumulative deficit for
the period from January to November in 2005 was R24.9
billion, compared to R15.3 billion for the same period in

2004. Standard Bank economist Johan Botha said the
cumulative deficit had raised fears that the current
account deficit might increase from 4.7% of GDP to more
than 5%. Source: Business Day, December 30.

Transnet's Credit Risk from Zimbabwe's Parastatals Low
-------------- --------------


6. According to Public Enterprises Minister Alec Erwin,
Zimbabwean utility companies owed Transnet R28.7 million
($4.8 million, using 6 rands per dollar) in September but
only 0.03%, or R949,000 ($158,167),would not be repaid.
Transnet was exposed to credit risk from more than one
Zimbabwean parastatal. Air Zimbabwe owed a monthly
balance of R530,000 ($88,330) and the National Railways of
Zimbabwe (NRZ) was in a net credit position. Transnet did
not grant a credit line beyond the standard over-border
account between NRZ and Transnet. When Transnet agreed to
buy fuel for NRZ, the value was limited to the monthly
over-border account to ensure settlement within 30 days.
Zesa, the Zimbabwean electricity utility, settled its
debt, ranging from R138 million ($23 million) to R14
million ($2.3 million),to Eskom by May 2005. Source:
Business Day, January 6.

Reserves Above $20 Billion
--------------


7. The South African Reserve Bank (SARB) increased its
December foreign reserves to $664 million compared to a
$125 million increase in November so that its gross
foreign and gold reserves exceeded $20 billion for the
first time. Economists view $20 billion as a minimum
safety cushion and many economists expect SARB's foreign
reserve buying to continue, given continuing high
commodity prices and rand strength. In August 2005, two
ratings agencies (Standard & Poor's, as well as Fitch)
upgraded South Africa's foreign currency rating to BBB
plus, in part because of the Bank's accumulation of
foreign reserves, leading to an improvement in South
Africa's ability to repay foreign debt. Up until February
2004, the foreign exchange reserves had fluctuated around
the $6 billion since 1999, but then rose to $8.3 billion
in March and have risen steadily since. Although the
value of reserves increased 3.7% from $19.9 billion in
November to $20.7 billion by December, reserves are now
equal to 3.8 months' import cover, lower than the
international standard of six months. Source: INET,
Business Day, January 9; Business Day, January 10.

Business Confidence at 2005 Peak
--------------


8. The South African Chamber of Business's (Sacob)
business confidence index reached its 2005 peak in
December due to stable interest rates and an optimistic
inflation outlook. December's Sacob business confidence
index rose to 129.4 points, up from 126.5 in November.
During 2005, business confidence averaged 127.1 points,
compared with 124.4 in 2004. Sacob economist Richard
Downing cited strong domestic economic activity as
enhancing business confidence but warns about increasing
current account deficits as possible risks to the business
confidence outlook. The current account deficit, at 4.7%
of GDP in the third quarter of 2005, far higher than the
"ideal" 3%, is expected to stabilize at about 4% in 2006.
Downing said that in order for business confidence to
continue to be positive, the rand had to remain strong to
prevent serious inflationary consequences, but not so high
as to dampen the export sector. Sacob also attributed the
rise in confidence last month to the rise in gold and
platinum prices. Recently gold prices reached a 24-year

PRETORIA 00000143 003 OF 003


peak of $537/oz, while platinum peaked at $1014/oz on
strong demand and supply constraints. The metals account
for about 20% of South African exports. Source: Business
Day, January 6.

SA's Online Spending Increased 20%
--------------


9. South Africans spent R514 million ($86 million)
shopping online in 2005, 20% higher than 2004, according
to a report by research firm World Wide Worx. The 2005
total did not include 2005 online air ticket sales of R1.8
billion ($300 million) compared to its 2004 total of R850
million ($142 million). The 2005 online retail shopping
growth was lower than the 2004 growth of 25%. The survey
of 800 online retail outlets cited lack of speed in
internet access and affordable access to broadband as the
biggest obstacles to growth in online sales. The online
retail market was dominated by 10 online retail sites: M-
Web ShopZone and Digital Mall, online grocers Pick 'n Pay
Home Shopping and Woolworths, book retailers Kalahari.net
and Exclusive Books, florist NetFlorist, wine retailer
Cybercellar, electronics store Digital Planet, and health
and beauty store Ascot Direct. World Wide Worx expects a
further 20 percent increase in online retail shopping in

2006. Research firm BMI-TechKnowledge expects broadband
users to increase to 870,000 in the next five years from
40,000 in 2005, on expectations of lower internet access
prices. The number of online retail sites has grown from
719 at the end of 2003 to 826 in 2005. The fastest-
growing major categories were auctions, gifts and apparel.
Source: Business Report January 10.

SA Vehicle Sales Increase 28.5% in 2005
--------------


10. South Africans bought more new vehicles in 2005 than
in any previous year, according to sales figures released
by the National Association of Automobile Manufacturers
(NAAMSA). New vehicle sales (including cars, trucks and
buses) reached R125 billion ($21 billion) in 2005 compared
to R96 billion ($16 billion) in 2004. Domestic vehicle
sales figures for 2005 increased 28.5% to almost 617,500
units, double the number of new vehicles sold five years
ago, and higher than the previous record of 482,000 units
in 2004. Sales figures compiled by NAAMSA include NAAMSA
and non-NAAMSA members, accounting for 8% of South
Africa's market. Lower interest rates and growing middle
class were credited as the major stimulus behind record
car sales. McCarthy chairman Brand Pretorius estimated
that McCarthy, South Africa's largest dealer network, sold
one of every four or five new cars, and one out of every
three used cars, to black customers. It now took an
average South African household in the living standard
measure 10 category (average monthly income of R18,822 or
$3137) about 37 weeks' earnings to buy a car, compared to
71 weeks three years ago. NAAMSA has not yet totaled its
export figures but estimates that approximately 145,000
vehicles were exported in 2005, up from the 110,507
vehicles exported in 2004. The vehicle industry
contributes about 7.4% to GDP. Source: Business Day,
January 11.

High School Drop Out Rate High
--------------


11. Less than half of South Africa's grade 10 students in
2003 took their high school graduation (matric) exams two
years later. In 2005, 508,363 students took the exams in
grade 12, although 1,096,214 students were registered as
grade 10 students in 2003. While 347,184, or 68% of
students who took the exam passed in 2005, when calculated
as a percent of the 2003 grade 10 class, only 32% of
students graduated and 587,851 dropped out of school.
Teacher unions had asked for more research about the
increased dropout rate in high schools but little has been
released. Source: Business Day, January 11.

TEITELBAUM