Identifier
Created
Classification
Origin
06PRETORIA1811
2006-05-05 07:51:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER MAY 5 2006 ISSUE

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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R 050751Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3193
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 PRETORIA 001811 

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DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/RALYEA/CUSHMAN
USTR FOR COLEMAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER MAY 5 2006 ISSUE

UNCLAS SECTION 01 OF 03 PRETORIA 001811

SIPDIS

SIPDIS

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/RALYEA/CUSHMAN
USTR FOR COLEMAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER MAY 5 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:

- Trade Deficits Point to Possible Rand Weakness and
Increased Inflation;
- Savings Increase at Year End Although Fall in 2005;
- Manufacturing Shows Improving Activity for the Second
Straight Month;
- Competition Complaints Increase;
- Financial Stability Review Warns About Impacts of Interest
Rate Rise;
- Car Sales Increase 12.7% in April; and
- Retail Sales Continue to Show Strong Growth.
End Summary.

Trade Deficits Point to Possible Rand Weakness and
Increased Inflation
-------------- --------------


2. According to the South African Revenue Service, South
Africa's trade deficit narrowed to R2.8 billion in March
from R3.9 billion in February as the rand weakened
slightly. Exports increased 13% to R29.9 billion in the
month, while imports rose 8% to R32.8 billion. On a
quarterly basis, the deficit reached R14.6 billion,
substantially higher than 2005's first quarter deficit of
R 4.7 billion and two thirds the value of 2005's yearly
deficit of R21.8 billion. The current account trade
deficit increased to 4.2% of GDP in 2005, compared to 3.4%
in 2004, and is expected to increase further in 2006. If
commodity prices continue to rise, the rand may remain
strong; however, concerns exist about whether South Africa
can continue to attract enough capital inflows to finance
its widening current account deficits. Gold accounts for
about 8% of South African exports, and rising gold prices
contribute positively to the trade account deficit.
However, a higher oil import bill will offset the positive

influence of increased gold earnings. Oil imports account
for 14.2% of South Africa's imports. If rising oil prices
continue along with strong credit growth, the Reserve Bank
may increase interest rates. Source: Business Day, and
Business Report, May 2.

Savings Increase at Year End Although Fall in 2005
-------------- --------------


3. According to the SA Savings Institute "Savings
Barometer," South Africans saved more during the fourth
quarter 2005 although 2005 showed a yearly decrease in
savings. The "Savings Barometer," which measures savings
across all the sectors of the economy, increased in the
fourth quarter by 1.05 index points to 116.88. However,
the national savings ratio for 2005 fell to 13.5% compared
to 14% in 2004 and 17.6% in 2002. Higher real disposable
household income and lower consumer inflation helped
improve the savings environment for households in the last
quarter of 2005. Lower government spending as a
percentage of gross domestic product and the decrease in
government debt had a positive influence on the
government's savings. Households are increasing debt as
low interest rates and inflation encourage increased
credit growth. The debt-to-disposable income ratio for
households has increased to 65.6%, while household savings
are now 0.2% of disposable income. Source: Business
Report, May 2.

Manufacturing Shows Improving Activity for the Second
Straight Month
-------------- --------------


4. The Investec Purchasing Managers Index (PMI),compiled
by the Bureau for Economic Research at Stellenbosch
University, increased to 54.3 during April from 51.5 in
March, the second consecutive month that the PMI stayed
above the level of 50 (representing the line between
expansion and contraction),after dropping below 50 in
January and February. The PMI index is a leading
indicator of the official data compiled by Statistics SA,
which will release its data for March next week. The
manufacturing sector accounts for 16% of GDP and is the
second-largest sector of the economy after financial and
businesses services. The main contributor to the rise in

PRETORIA 00001811 002 OF 003


the PMI was an acceleration in new sales orders, which
indicates the prospect of positive conditions ahead.
Output activity also rose for the second month in a row.
Increased production did not, however, translate into
increased employment, with a decline in the employment
subindex of the PMI to 47.9 from 48.2 in March suggesting
further job losses in the manufacturing sector. The
latest Statistics SA manufacturing data showed a slowing
in quarterly growth in February, leading to speculation
about possible interest rate reductions. The latest PMI
index points to a recovery in manufacturing activity,
ruling out future interest rate reductions, especially
given South African Reserve Bank Governor (SARB) Mboweni's
recent statements that the SARB's bias is now towards
higher rates. Source: Reuters and Business Day, May 3.

Competition Complaints Increase
--------------


5. Based on a study by French and Swiss competition
analysts, allegations of anticompetitive behavior in sub-
Saharan Africa have increased to 365 in a two-year period
from 2002-2004, compared to 252 allegations over the
previous six years. South Africa accounted for 30% of the
total number of complaints. Most complaints occurred in
five sectors: food, telecommunications, petroleum, air
transport and chemicals. The study also found that
allegations of monopolistic practices, price fixing, and
cartels were increasing across the region. According to
the study, fewer than 30% involved foreign firms, with
most allegations against domestic or regional
corporations. Source: Business Day, May 3.

Financial Stability Review Warns About Impacts of Interest
Rate Rise
-------------- --------------


6. The latest South African Reserve Bank's (SARB)
biannual Financial Stability Review warns about the impact
of higher interest rates on consumer debt, reinforcing the
idea that future interest rate hikes are more likely than
reductions. The Review stated that although banks and
their clients are currently able to cope with record
levels of household debt, this might change. The Review
pointed out that in the fourth quarter 2005, household
debt to disposable income reached 65.6%, compared with
63.5% in the third quarter and 62% in 1997. Low interest
rates and inflation allowed households to use a relatively
small fraction of their disposable income to service their
increased debt. However, the SARB pointed out that signs
of change in the ability of borrowers to repay mortgage
loans. Mortgage loans overdue (those that are more than
180 days overdue and either inadequately secured or
uncollectible) increased by 5.5% in the year to February
2006, while the ratio of overdue mortgage loans to total
mortgage advances increased from 1% in the third quarter
2005 to 1.2% in the fourth quarter. SARB expects that the
demand for housing will continue to be supported by rises
in disposable income, favorable financial conditions and
structural changes in the economy, while noting that a
sudden increase in the cost of credit could cause problems
for overly indebted households. The Review also notes
additional potential risks to the financial system
stability of high and volatile energy prices, global
imbalances and abnormally high residential property
prices. Source: Business Report, May 4.

Car Sales Increase 12.7% in April
--------------


7. According to the National Association of Automobile
Manufacturers of SA (NAAMSA),domestic vehicle sales rose
in April at an annual rate of 12.7% to 45,635 units, due
to continued strong consumer spending. Quarterly domestic
sales were 19.5% ahead of the same period in 2005, above
expectations and leading industry analysts to revise
growth prospects to between 15% and 20% from 10%. Vehicle
export sales for the first three months of the year grew
by 57.6% to 38,541 units. The vehicle segment accounting
for most of the growth last month was heavy trucks, which
increased 23% compared with the same month in 2005.
Medium commercial vehicles, considered an indicator of
small business activity, grew 20.7% compared to April

2005. Passenger cars grew by 13.9% and light commercial
vehicles increased by 8.3% The automotive industry,

PRETORIA 00001811 003 OF 003


including component manufacturing and after sales products
and services, contributes more than 7% to South Africa's
GDP. Source: Standard Bank's Motor Alert, May 3;
Business Report, May 4.

Retail Sales Continue to Show Strong Growth
--------------


8. According to Statistics SA, real retail sales grew by
10.4% in February, compared to January's growth of 6.9%.
This was the strongest year-on-year increase since the end
of 2004, and the first time that positive month-on-month
growth was recorded in February since the introduction of
the new retail sales series in 1999. Despite the surge,
economists expected interest rates to remain unchanged for
the rest of 2006 as the CPIX indicator (consumer inflation
excluding interest costs on mortgages) was still well
within the South Africa Reserve Bank's 3%-6% target range.
Growth in retail spending was supported by rising real
disposable income levels, lower interest rates, continued
personal income tax relief since 1995, welfare and
dependency grants to more than 10 million South Africans,
and high consumer confidence. Source: Standard Bank's
Taking Stock, May 3; Reuters and Business Report, May 4.

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