SOUTH AFRICA ECONOMIC NEWSLETTER JUNE 2 2006

UNCLAS SECTION 01 OF 03 PRETORIA 002261

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER JUNE 2 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:

- First Quarter GDP Growth Accelerates;
- April Credit Growth Slows;
- China, SA Conclude Draft Agreement to Restrict Textile
Exports;
- SA Trade Deficit Reaches R2.4 Billion;
- Koeberg's Unit 1 Operational;
- Eskom Spending a Brake on Increased SA Growth; and
- Manufacturing Recovers.
End Summary.

First Quarter GDP Growth Accelerates
--------------


2. Economic growth accelerated to 4.2% in the first
quarter 2006, after 3.2% growth during the last quarter
2005, according to Statistics SA. First quarter 2006
growth was the 30th consecutive quarter of economic
growth, the longest continuous growth phase in South
Africa's history. The highest growing sector was the
construction sector, which, although it makes up only 2.8%
of total output, grew 13.7%, compared to 12.4% during the
fourth quarter 2005. The manufacturing sector showed a
sharp improvement, growing by 4.3% compared to 4th quarter
2005 contraction of 0.3%. Other sectors showing
substantially higher growth in the first quarter 2006
include the finance and real estate at 8.8% compared to
fourth quarter 2005 growth of 3.7%. The finance sector
makes up 19.5% of South Africa's economy. However, the
primary sectors of the economy, agriculture and mining,
contracted. The mining sector, which contributes 6.3% of
GDP, declined only 2.9% compared to fourth quarter's
decline of 5.4%. Despite the commodities boom, the mining
sector is now officially in recession, having contracted
for three consecutive quarters, by 3.4% and 5.4% in the
last two quarters 2005 and by 2.9% in the first quarter

2006. Table 1 shows growth rates in the first quarter
2006 and fourth quarter 2005 for South Africa's major
industrial sectors and indicates that the services sector
continues to fuel South Africa's GDP growth.

Table 1.
Quarterly Growth, Fourth Quarter 2005 First Quarter 2006
Primary Sector -2.7% -4.1%
Agriculture 3.9% -6.9%
Mining -5.4% -2.9%
Secondary Sector 1.7% 5.5%
Manufacturing -0.3% 4.3%
Electricity/Water 3.5% 3.6%
Construction 12.4% 13.7%
Services Sector 3.2% 4.2%
Wholesale/Retail Trade 9.0% 5.1%
Transport/Communication 6.5% 4.9%
Finance/Real Estate 3.7% 8.8%
Personal Services 2.9% 3.4%
Government 1.9% 1.2%
GDP 3.2% 4.2%
Source: Investec's GDP Update, May 30; Business Day and
Business Report, May 31.

April Credit Growth Slows
--------------


3. Growth in M3, the broadest measure of money supply,
slowed to 23% (y/y) compared to March's growth of 26.8%.
Growth in private sector credit extension (PSCE) slowed to
23.2% y/y in April, from 24.3% during March. Installment
sales credit increased by R1.7 billion, or 18.4% y/y, and
leasing finance rose by R741 million. Mortgage advances
were up R11 billion, showing a 30.1% y/y increase. Other
loans and advances, mainly corporate overdrafts and credit
card debt, slowed to a growth rate of 15.6% (18.8%
previously). JPMorgan economist Marisa Fassler expects
the South African Reserve Bank (SARB) to increase interest
rates by 25 basis points, especially if the SARB's
inflation forecasts were revised upwards to reflect a
weaker rand and the second quarter inflation expectations
came in higher due to higher petrol prices over the past
few months. The SARB's Monetary Policy Committee meets on

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June 7 and 8th and the Bureau for Economic Research will
release its second quarter inflation expectations survey
on June 8th. Source: Business Day, May 31.

China, SA Conclude Draft Agreement to Restrict Textile
Exports
-------------- --------------


4. China and South Africa concluded a draft agreement to
restrict Chinese textile exports to South Africa according
to the Chinese government. The agreement had been
circulated by South Africa's Department of Trade and
Industry to its textile industry for comment, said Zhou
Yabin, the Director-General for West Asia and Africa in
the Ministry of Commerce. China is addressing local
concerns about strong competition from Chinese textile
imports by encouraging its textile enterprises to reduce
their investments and production in China and to focus
more on high-quality textiles and clothing as this would
reduce direct competition with African producers of lower-
quality goods. Making conditional loans is another
incentive to encourage more production abroad. Zhou
believed the concerns of textile producers, especially in
South Africa, lay behind the hesitation by the SA Customs
Union (SACU) countries to conclude negotiations for a
China-SACU free trade area. An agreement was supposed to
have been reached by the end of 2004, but negotiations are
still continuing. Source: Business Report, May 30.

SA Trade Deficit Reaches R2.4 Billion
--------------


5. South Africa's trade deficit improved slightly to R2.4
billion in April compared to March's deficit of R2.9
billion, according to the South African Revenue Service
(SARS). A Reuters poll of economists forecasted a trade
deficit of R2 billion. Exports decreased by 11.5% m/m to
R26.5 billion in April from R29.95 billion in March, while
imports declined by 11.9% m/m to R28.93 billion from R32.8
billion in March. Domestic demand is relatively healthy
with the current level of imports close to the average
monthly increase of around R29 billion in 2005. The
cumulative deficit for the first four months of the year
amounted to R17.13 billion versus a deficit of R4.9
billion in the same period in 2005. Exports of mineral
products, machinery, precious metals and chemicals and
imports of vehicles, machinery, mineral products and
instruments declined during April. The South Africa
Reserve Bank's import cover ratio (which excludes foreign
currency held by all other monetary authorities) increased
to 20.2 weeks (5 months) in April from 17.4 weeks (4.3
months) in March. Source: Standard Bank Foreign Trade
Alert and Reuters, May 31.

Eskom Spending a Brake on Increased SA Growth
-------------- -


6. In testimony to Parliament, Eskom officials admitted
that underspending on new generating capacity presented a
constraint on increased growth in the economy and meant
that its electrification program might fail to meet the
program's targets. Brian Dames, a managing director at
Eskom's enterprises division, said that Eskom's R84
billion ($13 billion using 6.5 rands per dollar) capital
expenditure plans were based on an expectation of only 4%
economic growth. With 4% growth, Eskom (a government-
controlled energy utility) expected electricity would
increase by 2.3%. The South African government is aiming
for 6% growth which would mean that electricity demand
growth to reach 4.4%. At the World Economic Forum (WEF)
in Cape Town, Steve Lennon, Eskom's Managing Director for
Resources and Strategy, said that South Africa's target of
universal electrification by 2012 could only be met if
Eskom spent an additional R9 billion ($1.4 billion) on the
program. From 1994 to 2004, more than 3 million homes had
been electrified. Rural and semi-urban areas have the
most gaps in coverage. Source: Business Report, June 1.

Manufacturing Recovers
--------------


7. Investec's South Africa's Purchasing Managers Index
(PMI) rose to 57.6 in May from April's 54.3, confirming a
recovery in the manufacturing sector due to buoyant

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domestic demand growth. It was the third month in 2006
that the index has been above the 50 level that divides
growth and contraction, after dropping below 50 in January
and February. The price component of the PMI rose to 68.8
in May from 66.9 in April, suggesting the recent increase
in producer inflation (PPI) may continue. The business
activity component rose to 60.3 from 55.5 in April, with
new sales orders increasing to 63.7 from 58.1. More
positive was the employment index reaching 50.3 in April
from 47.9, further evidence that the economy was creating
jobs. Respondents' short-term expectations regarding
general business conditions improved to 69.9 in May from
68.1 in April. Source: Reuters, June 1.


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