SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 13 2006

UNCLAS SECTION 01 OF 02 PRETORIA 001548

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 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:

- Interest Rates Unchanged;
- Manufacturing Production Slows in February;
- Reserve Bank Slows Reserve Accumulation;
- Global Investors Taking a Long View Term of SA;
- Mid-Sized Business Survey Results on Trade; and
- March Trade Activity Improves.
End Summary.

Interest Rates Unchanged
--------------


2. The South African Reserve Bank (SARB) left its
repurchase rate unchanged at the April 12-13 Monetary
Policy Committee meeting. Citing strong consumer demand,
credit growth, and rising international oil prices as
continuing threats to inflation, SARB Governor Tito
Mboweni expected the inflation outlook to remain within
its targeted range of 3%-6% until 2008. Mboweni noted
that CPIX inflation excluding fuel increased 3.3% in the
first two months of 2006, close to the lower end of the
targeted range. Expected inflation should peak just below
5% in the first quarter of 2007 and then decline to 4.6%
throughout 2008. According to the latest inflation
survey conducted by the Bureau for Economic Research, CPIX
should remain below 5% until the end of 2008. The
Monetary Policy Committee perceived more risks towards
future increased inflation, although with little current
evidence, left interest rates unchanged. The latest
Reuters poll of economists found all polled expected no
interest rate change. Source: Reuters and SARB,
Statement of the Monetary Policy Committee, April 13.

Manufacturing Production Slows in February
--------------


3. Manufacturing production grew 3.8% in February, slower
than January's growth of 5.8%, primarily due to slower
monthly growth in the basic iron and steel and metal
products, non-metallic mineral products, and the motor
vehicle and parts industries. February is the second
consecutive month of slowing manufacturing production
growth, although both January and February 2006's y/y
growth came in higher than January and February 2005's
growth of 3.3% and 2.6%, respectively. On a seasonally
adjusted month-on-month basis, output declined by 0.8%.
In the three months to February, manufacturing grew 2%.
After growing by 5.6% in the third quarter 2005, the
manufacturing sector declined by 0.3% in the fourth
quarter, with 2005 yearly growth at 3.5%. Manufacturing
accounts for 16% of GDP. Source: Reuters, Statistics SA
P3014.2, April 11; Business Day, April 12.

Reserve Bank Slows Reserve Accumulation
--------------


4. The South African Reserve Bank (SARB) slowed its
reserves accumulation in March as the rand slightly
weakened. Economists expect reserves to increase
moderately over the next few months. Gross reserves
reached $23 billion in March, an increase of $398 million,
and the international liquidity position, or net reserves,
rose $517 million to $19.5 billion. Foreign exchange
reserves increased to $20.6 billion, from $20.2 billion in
February. Analysts expect increased reserves accumulation
in April as the rand strengthened briefly to below R6 to
the dollar in the first week of April, buoyed by a
stronger euro and a gold price trading at 25-year highs.
The rand weakened slightly during March as it averaged
R6.20 per dollar compared to February's 6.12. However,
according to Stanlib Asset Management economist Kevin
Lings, South Africa still has a relatively low level of
reserves compared to most emerging economies. The SARB
has not indicated a target level for reserves, but rather
that they will continue to build reserves when it is
appropriate. A higher gold price during March increased
SARB's accumulation of gold reserves to $2.3 billion and
the gold price rose to $586/oz, from $557/oz in February.
Gold now accounts for 10% of total reserves. Source:

PRETORIA 00001548 002 OF 002


Reuters and Business Day, April 10.

Global Investors Taking a Long Term View of SA
-------------- -


5. According to South African financial analysts, global
investors are beginning to diversify their investments in
South Africa and taking a long-term view of South Africa's
growth prospects. According to Standard Bank Group
economist Goolam Ballim, long-term investors are investing
funds in a range of assets through financial instruments,
rather than directly putting funds in direct investment
projects. South Africa's depth and liquidity of its
financial markets as well as macroeconomic stability and
developed legal infrastructure encourages global investors
to invest funds with a buy and hold strategy. Both Ballim
and Ian Cruickshanks, head of Strategic Research at
Nedbank, explained that the recent stability of the rand
is being supported by the strength of gold and other
commodities. Contributing to possible weakening is a
sharp fall in the differential between local and offshore
interest rates, which makes rand-based fixed interest
investments less attractive to foreigners. At the end of
2002, South Africa's repurchase rate was at 13.5%, while
the U.S. federal funds rate was 1.25%. Now the interest
rate differential is 2.25%, with the South African
repurchase rate at 7% and the U.S. federal funds rate at
4.75%. According to Bloomberg, the gap in yield between
South African 10-year bonds and the equivalent U.S.
treasuries is near its narrowest since 1997. Because of
improved growth prospects, lower South African interest
rates increased earnings in the equity market, encouraging
flows between asset classes rather than out of South
Africa. Cruickshanks did not expect an interest rate rise
at the Reserve Bank's monetary policy meeting in April,
but believed it should come some time this year, barring
some unexpected event. Source: Business Report, April

11.

Mid-Sized Business Survey Results on Trade
--------------


6. According to Grant Thornton's 2006 International
Business Owners Survey, 61% of mid-sized South African
firm owners believed that China's increased trade with
South Africa had no impact on current business. However,
China was cited as both the biggest threat and opportunity
for business over the next two years. The U.S. offered
the second largest trading opportunity and Zimbabwe was
rated as the second-biggest threat to trade. Only 37% of
survey respondents reported that they engaged in
international trade, reflecting the regional focus of
medium-sized firms. Grant Thornton surveyed 300 companies
in South Africa, employing between 50 and 250 workers.
Source: Business Report, April 11.

March Trade Activity Improves
--------------


7. The South African Trade Activity Index (TAI) rose to
56 in March from 50 in February, reflecting a substantial
improvement in current trading conditions. March's index
rose above 50 for the first time since November 2005,
implying expanding trade activity. The South African
Trade Management Indices, consisting of the TAI and the
Trade Expectations Index (TEI) is compiled by the South
African Chamber of Business and sponsored by ABSA bank.
The TEI, which measures sales activities for the next six
months, decreased slightly in March to 66 from 67 in
February. Improvements in current trading conditions were
explained by increasing new orders, inventories and
supplier deliveries. The slight decline in trading
expectations was due to an expected moderation of sales,
input costs increasing by more than inflation, inventory
levels rising and possible supply constraints. Source: I-
Net Bridge, April 11.

TEITELBAUM