Identifier
Created
Classification
Origin
06PRETORIA2768
2006-07-07 11:02:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Pretoria
Cable title:
Emerging Market Jitters Weaken Rand, Inflation Diminishes
how-toVZCZCXRO1774 RR RUEHDU RUEHJO RUEHMR DE RUEHSA #2768 1881102 ZNR UUUUU ZZH R 071102Z JUL 06 FM AMEMBASSY PRETORIA TO RUEHC/SECSTATE WASHDC 4391 INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY RUCPDC/DEPT OF COMMERCE WASHDC RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS PRETORIA 002768
SIPDIS
SENSITIVE
SIPDIS
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/BCUSHMAN
E.O. 12958: N/A
TAGS: EFIN ECON EINV SF
SUBJECT: Emerging Market Jitters Weaken Rand, Inflation Diminishes
Growth Prospects
REF: Pretoria 2395
Sensitive but Unclassified; Protect Accordingly. Not For Internet
Distribution.
UNCLAS PRETORIA 002768
SIPDIS
SENSITIVE
SIPDIS
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/BCUSHMAN
E.O. 12958: N/A
TAGS: EFIN ECON EINV SF
SUBJECT: Emerging Market Jitters Weaken Rand, Inflation Diminishes
Growth Prospects
REF: Pretoria 2395
Sensitive but Unclassified; Protect Accordingly. Not For Internet
Distribution.
1. (SBU) Summary. Emerging market jitters in May and June led to a
roughly 20 percent depreciation in the rand, contributing to a
growing current account deficit and higher inflation. As a result,
growth in 2006 will likely be below the government's forecast of 4.9
percent. Other than contributing to slower growth, the emerging
market weakness has had relatively little negative effect. The
current account deficit, financed primarily by short term capital
flows, is the key vulnerability. End Summary.
2. (U) Declining commodity prices, particularly gold, and cooling
investor interest in emerging markets led to the first notable
deprecation in the rand in over three years. The rand began May at
approximately R6/$, hit R7.5/$ in late June and closed the month at
roughly R7.2/$. Citing an unstable international environment, local
analysts are reserving judgment on the future direction of the rand.
Few expect export growth to pick up in the short term.
3. (U) In early June the South African Reserve Bank's Monetary
Policy Committee (MPC) raised its repurchase (repo) rate 50 basis
pionts, noting that it expected inflation to breach the upper end of
its target range of 3-6 percent (reftel). Subsequent data releases
support the prediction of higher inflation, largely due to high oil
and food prices. The CPIX (CPI minus mortgage costs) rose 4.1
percent in May, up from 3.7 percent in April. The PPI also rose 5.9
percent in May from 5.5 percent in April.
4. (U) In raising the repo rate, the MPC also cited a sharp increase
in the current account deficit, which registered 6.4 percent of GDP
in the first quarter, against 4.5 percent in the fourth quarter of
2005 and the widest in two years. StatsSA subsequently reported
that the trade deficit hit R7 billion in May. Higher oil prices and
strong consumer demand pushed imports up 30 percent, while exports
grew 15.6 percent. Analysts had expected a trade deficit of about
R2 billion.
5. (SBU) The Reserve Bank's Monetary Policy Committee meets again in
August. Given continued inflationary pressure and current account
weakness, analysts expect another rate hike, probably 50 basis
points. The higher interest rates will likely restrain consumer
spending, a key factor in South Africa's recent strong growth.
6. (SBU) Growth is already showing signs of a slow down. The
Reuters Econometer Confidence Index fell to a 14-month low of 258 in
June. The SACOB Business Confidence Index fell below 100 (neutral)
in June, and the FNB/BER consumer confidence index also fell
slightly, from 21 to 20. The rate of growth in housing price
increases slowed to four and a half year low of 13.6 percent (y/y)
in June, while the growth rate for new vehicle car sales continued
to slow, dropping to 13.8 percent (y/y) in June. While both rates
are still healthy, there are sharply below levels of a year ago.
Analysts expect growth this year to be below the government's
official projection of 4.9 percent: they are currently estimating in
the neighborhood of 4.2 percent, healthy but short of the
government's objective of 6 percent.
7. (SBU) Ratings agencies Standard and Poor's and Fitch have
recently completed their annual reviews of the South African
economy. Both are uncertain about short term direction of the
economy and are cautious about another ratings upgrade this year.
Fitch noted that "we need to see how this volatility is managed
..."
8. (SBU) Comment. South Africa's economic fundamentals remain
sound. Emerging market weakness has contributed to slower growth
but otherwise has had relatively little negative effect. Also,
there are so far no signs of increased political risk premiums due
to the emerging debate on succession to President Mbeki. Still as a
small, open economy South Africa remains susceptible to the
vagrancies of international views on emerging markets. The current
account deficit is the key vulnerability. Financed primarily by
short term capital flows, a large movement out of emerging markets
could put renewed pressure on the rand, undermine confidence and
further lower growth. TEITELBAUM
SIPDIS
SENSITIVE
SIPDIS
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/BCUSHMAN
E.O. 12958: N/A
TAGS: EFIN ECON EINV SF
SUBJECT: Emerging Market Jitters Weaken Rand, Inflation Diminishes
Growth Prospects
REF: Pretoria 2395
Sensitive but Unclassified; Protect Accordingly. Not For Internet
Distribution.
1. (SBU) Summary. Emerging market jitters in May and June led to a
roughly 20 percent depreciation in the rand, contributing to a
growing current account deficit and higher inflation. As a result,
growth in 2006 will likely be below the government's forecast of 4.9
percent. Other than contributing to slower growth, the emerging
market weakness has had relatively little negative effect. The
current account deficit, financed primarily by short term capital
flows, is the key vulnerability. End Summary.
2. (U) Declining commodity prices, particularly gold, and cooling
investor interest in emerging markets led to the first notable
deprecation in the rand in over three years. The rand began May at
approximately R6/$, hit R7.5/$ in late June and closed the month at
roughly R7.2/$. Citing an unstable international environment, local
analysts are reserving judgment on the future direction of the rand.
Few expect export growth to pick up in the short term.
3. (U) In early June the South African Reserve Bank's Monetary
Policy Committee (MPC) raised its repurchase (repo) rate 50 basis
pionts, noting that it expected inflation to breach the upper end of
its target range of 3-6 percent (reftel). Subsequent data releases
support the prediction of higher inflation, largely due to high oil
and food prices. The CPIX (CPI minus mortgage costs) rose 4.1
percent in May, up from 3.7 percent in April. The PPI also rose 5.9
percent in May from 5.5 percent in April.
4. (U) In raising the repo rate, the MPC also cited a sharp increase
in the current account deficit, which registered 6.4 percent of GDP
in the first quarter, against 4.5 percent in the fourth quarter of
2005 and the widest in two years. StatsSA subsequently reported
that the trade deficit hit R7 billion in May. Higher oil prices and
strong consumer demand pushed imports up 30 percent, while exports
grew 15.6 percent. Analysts had expected a trade deficit of about
R2 billion.
5. (SBU) The Reserve Bank's Monetary Policy Committee meets again in
August. Given continued inflationary pressure and current account
weakness, analysts expect another rate hike, probably 50 basis
points. The higher interest rates will likely restrain consumer
spending, a key factor in South Africa's recent strong growth.
6. (SBU) Growth is already showing signs of a slow down. The
Reuters Econometer Confidence Index fell to a 14-month low of 258 in
June. The SACOB Business Confidence Index fell below 100 (neutral)
in June, and the FNB/BER consumer confidence index also fell
slightly, from 21 to 20. The rate of growth in housing price
increases slowed to four and a half year low of 13.6 percent (y/y)
in June, while the growth rate for new vehicle car sales continued
to slow, dropping to 13.8 percent (y/y) in June. While both rates
are still healthy, there are sharply below levels of a year ago.
Analysts expect growth this year to be below the government's
official projection of 4.9 percent: they are currently estimating in
the neighborhood of 4.2 percent, healthy but short of the
government's objective of 6 percent.
7. (SBU) Ratings agencies Standard and Poor's and Fitch have
recently completed their annual reviews of the South African
economy. Both are uncertain about short term direction of the
economy and are cautious about another ratings upgrade this year.
Fitch noted that "we need to see how this volatility is managed
..."
8. (SBU) Comment. South Africa's economic fundamentals remain
sound. Emerging market weakness has contributed to slower growth
but otherwise has had relatively little negative effect. Also,
there are so far no signs of increased political risk premiums due
to the emerging debate on succession to President Mbeki. Still as a
small, open economy South Africa remains susceptible to the
vagrancies of international views on emerging markets. The current
account deficit is the key vulnerability. Financed primarily by
short term capital flows, a large movement out of emerging markets
could put renewed pressure on the rand, undermine confidence and
further lower growth. TEITELBAUM