SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 20 2006

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 20 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:

- Consumer Confidence Up;
- Manufacturing Activity Improves;
- October Retail Sales Up 7.7%;
- Predictions of 2006 Budget Proposals; and
- South Africa's 2006 Growth Prospects;
End Summary.

Consumer Confidence Up
--------------


2. Diminishing chances of a rise in interest rates, along
with declining fuel prices, led South African consumers to
express strong confidence in the final quarter 2005. The
First National Bank and Bureau for Economic Research at
Stellenbosch University (FNB/BER) consumer confidence
index rose to 20 in the fourth quarter, compared to 17 in
the third quarter 2005. More people seem confident about
their own economic prospects, as income, employment and
asset market prices keep rising. Consumers expect that
interest rates will remain constant throughout 2006,
although more consumers thought that durable goods should
not be purchased now and that housing price growth will
stagnate. Confidence among whites fell, while black
consumer confidence rose for the third consecutive
quarter. The confidence of high-income earners rose,
while that of low-income earners fell. Source: Business
Report and Business Day, January 18.


3. Comment. The FNB/BER index is compiled from the
results of a survey in which consumers are asked for their
outlook for the economy and their own finances in the next
year, as well as whether they view the present time as
suitable to buy durable goods. End comment.

Manufacturing Activity Improves
--------------


4. According to the Investec Purchasing Managers Index
(PMI),growth in manufacturing improved in December, with
PMI reaching 52.5 compared to November's level of 50. The
December rise halted a consecutive four month decline,
although the index remains well below the peak of 60
reached in July 2005. Analysts fear the recent strength
of the rand could still threaten continued job creation in
the manufacturing sector as exports decline and
competition increases from cheaper imports. At the end of
December 2005, the rand closed at R6.32 per dollar, and
reached R5.96 on January 17, an eight-month high. PMI's
employment index improved in December, although still
showing signs of contraction. December's job index
reached 48.7 compared to 45 in November. Source: I-Net
Bridge, January 18; Business Day, January 17.


5. Comment. A reading above 50 signifies expansion in
the manufacturing sector, while a number below 50
indicates that manufacturing output is shrinking.
Manufacturing accounts for 16.4% of GDP, however, it
accounted for almost 22% in 2002. The latest PMI follows
figures from Statistics SA showing manufacturing output
grew 3.7% in November compared to the previous month's
0.7% growth. End comment.

October Retail Sales Up 7.7%
--------------


6. In October, South Africa's real retail sales rose by
7.7 % (y/y) compared to September's growth of 5%,
according to Statistics South Africa. On a quarterly
basis, retail sales rose by 7.0% percent. Stronger growth
in consumer demand has driven faster South African growth
since 2002, helped by low inflation and interest rates.
Retail sales contributed 13.7% to GDP in the third quarter
of 2005. Although retail sales are expected to continue
to grow strongly in 2006, economists expect the rate of
growth to stabilize in the absence of any new interest-
rate cuts and as higher inflation slows down the pace of
real income growth. Brait economist Colen Garrow said
strong retail sales had been supported by both fiscal and

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monetary policies, with R74 billion ($12 billion using 6
rands per dollar) in tax relief since 1995 and 6.5
percentage points reduction in interest rate since 2003.
However, he does not expect these expansionary policies to
continue. In addition to the stimulus of tax cuts and
lower interest rates, retail sales had benefited from
increasing black middle class. The South African
Advertising Research Foundation, which measures movements
from Living Standard Measures (LSM) 1 (low income) to LSM
10 (high income),had reported significant shifts within
the middle income spectrum. These shifts were
concentrated around LSM 6-7, where the number of black
South Africans had increased by some 683,000 between 2000
and 2004. Source: Reuters and Business Day, January 19.

Predictions of 2006 Budget Proposals
--------------


7. According to Kevin Lings, the chief economist at
Stanlib (South Africa's largest mutual funds company),the
February 15 South African budget might announce that
exchange controls for individuals would be lifted. In
addition, pension funds may also have their offshore
limits lifted slightly. Another of Lings' predictions was
that the SA Revenue Service might have collected R40
billion ($6.6 billion) more in taxes than was expected. A
growing number of financial firms predicted that the
government would collect extra revenue. BoE Private
Clients estimated a total R60 billion ($10 billion) extra
revenue, while Johan Rossouw, the chief economist at
Vector Securities, estimated a R32 billion ($5.3 billion)
overrun with an outside chance of R50 billion ($8.3
billion). The collection of excess revenue opens the
possibility of tax cuts and extra government spending.
Lings expects individual tax relief, although he is less
certain about reduction in company taxes. He advocates a
broad-based policy response to growth obstacles cited
recently by a World Bank report surveying 800 South
African companies. These companies cited lack of skilled
workers, labor regulations, rand volatility and crime as
the main obstacles to sustained 6% growth in South Africa.
Source: Business Report, January 19.

South Africa's 2006 Growth Prospects
--------------


8. Domestically, economic growth prospects are
optimistic. Uneasiness remains over the extent to which
South Africa's future growth prospects depend on global
events. The South African economy has outperformed
expectations, with GDP growth now seen at about 5% for
2005, and 4%-plus growth expected for 2006. South Africa
benefited from the fairly robust performance of the world
economy as reflected in strong demand for exports, high
international commodity prices and favorable financing
conditions. The structural improvements inherent in the
emergence of a new black middle class, as well as low
inflation expectations, suggest that the economy should be
able to sustain substantially higher growth. Globally,
economic growth is expected to continue. The U.S. is
expected to continue to outperform other developed
countries with 3.4% growth in 2006, while China's growth
could reach over 8% again. Global economic growth risks
could point to constraints in achieving high 2006 South
African growth rates. Higher oil prices pose growth and
inflationary risks. Global trade imbalances, such as the
U.S.'s large current account deficit and low savings rate
and the matching surpluses in Asia, may cause increased
volatility in currencies, increases in interest rates and
a slowdown in growth. According to Nedbank's chief
economist Dennis Dykes, the key economic vulnerability
South Africa faces is the growing current account deficit.
As of the third quarter of 2005, the current account
deficit had risen to R73 billion or 4.7% of GDP, compared
with 3.7% in the second quarter. Merchandise exports,
though improving, continue to be less than imports, which
have expanded strongly with record high oil prices, the
strong rand and the sustained buoyancy of domestic
expenditure. If foreign capital cannot finance the
deficit, the rand would weaken, and higher inflation and
interest rates would appear, stunting growth. Despite the
strong likelihood of ongoing pressure on the current
account in 2006, JP Morgan economist Marisa Fassler
expects the economy to continue to attract strong capital

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inflows given the favorable GDP growth outlook. The
improvement in domestic optimism is also reflected in a
Merrill Lynch Fund Managers' survey undertaken in December

2005. According to the survey, 46% of fund managers
(versus 31% in the November survey) expect the economy to
grow a little stronger over the next 12 months. Inflation
fears have also eased. Though most managers still expect
interest rate hikes in 2006, the timing of these increases
has now shifted from the first quarter 2006 to the second
quarter. More than 45% expect the repurchase rate to be
8% or higher in the next 12 months (compared with the
current 7%),but only 17% expect the first hike to be in
the first quarter 2006. About 42% expect an increase in
the second quarter. Source: Financial Mail and I-Net
Bridge, January 18.

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