SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 3 2006

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 3 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 Remain Unchanged;
- December's Trade Surplus Though Trade Deficit for Year;
- Money Supply and Credit Growth Higher than Expectations;
- Growing Fears of Transnet Strike Impacting Manufacturers;
- Manufacturing Sector Shows Weakness in January;
- Job Creation Perceived Essential;
- Unemployment Remains SA's Biggest Challenge;
- Continued Provincial Underspending Expected; and
- Half of Municipalities Fail to Submit Financial
Statements.
End Summary.

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


2. The Monetary Policy Committee (MPC) of the South
African Reserve Bank (SARB) announced that the repurchase
rate would remain at its current 7% during its fifth
consecutive meeting which resulted in no change in
interest rates. SARB cited robust credit demand and high
oil prices as the biggest risks to future inflation,
although SARB saw little evidence of second-round
inflation coming from higher energy prices. According to
SARB's current forecast, CPIX (targeted inflation which
excludes mortgage costs) should peak at 4.9% in the 1st
quarter 2007, reaching 4.7% by the end of 2007. SARB also
noted additional inflationary risks from higher food
prices, although asserted that 2005 food prices were
relatively low so food price acceleration in 2006 is not
unexpected. The MPC decision was expected, as most
financial analysts expect future movements in interest
rates later in 2006 or early 2007. All 20 economists in
the Reuters poll expected that the MPC would leave
interest rates unchanged during the February meeting.
Source: Statement of the Monetary Policy Committee, and
Reuters, February 2.

December Trade Surplus Though Trade Deficit for Year
-------------- --------------


3. December's trade surplus of R3.9 billion, the first
trade surplus in six months and the largest in two years,
increased over November's deficit of R3.1 billion due to
reductions in imports of machinery and electrical
equipment, according to the South African Revenue Service.
Exports reached R29.6 billion, a reduction of R833 million
from November's level, while imports declined by
significantly greater amount of R7.8 billion, reaching
R25.7 billion. Despite the monthly surplus, the trade
account showed a deficit R21.8 billion for 2005, almost
double the 2004 R12.7 billion trade deficit. December's
value of exports and imports declined 2.7% and 23.3%,
while the 2005 value of exports and imports increased
12.1% and 14.6%, respectively. Many argue that the
holidays explained the increased December trade surplus.
Retailers increased purchases in preparation for the
holidays, as imports showed gains in October and November
and subsided in December. According to Kagiso Securities
economist Elize Kruger, a continued trend of current
account deficits underscore the need for capital flows to
finance deficits and represents the biggest risk to a
stable outlook for the rand. Source: Standard Bank,
Foreign Trade Alert, January 31; Business Day, February 1.

Money Supply and Credit Growth Higher than Expectations
-------------- --------------


4. Demand for credit by the private sector rose by 19.7%
in the year to December, above market expectations of
18.6%, and faster than November's 18.8%, according to the
South African Reserve Bank (SARB). The broadly defined M3
measure of money supply grew by 18.1%, above consensus
forecasts and November's growth of 17.3% and 16.4%,
respectively. The SARB also indicated that its
international liquidity position rose to $17.2 billion in
December from $16.5 billion in November, increasing its
import cover ratio to 20.3 weeks (or 5.1 months) compared
to November's import cover of 15.4 weeks. Source:

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Business Day and I-Net Bridge, January 31.

Growing Fears of Transnet Strike Impacting Manufacturers
-------------- --------------


5. Manufacturers are beginning to fear that the Transnet
strike, which began on January 30, will lead to possible
shortages in raw materials and delays of their shipping
schedules. Four striking labor unions (South African
Transport and Allied Workers Union, United Transport
Alliance Union, United Association of South Africa and
South African Railways and Harbors Union, involving 15,200
workers) disagreed with Transnet's process of disposing
its non-core business units without obtaining prior union
approval. The strike started in Richards Bay and Durban,
and if not settled, will impact Port Elizabeth and Cape
Town and will then become nationwide. According to
Reuters, the strike could cost R100 million ($16.7
million) a day. As the strike continues, the impact on
the Durban container terminal, handling 65% of South
Africa's container traffic, will become more pronounced as
exporters may not meet shipping schedules but are still
liable for the fee. The unions claimed support for the
strike was close to 100% of workers at key Transnet
operations of ports, freight and commuter rail in the
KwaZulu-Natal province. According to Transnet, 4,000
workers had participated in the strike, while the unions
said 9,500 workers were involved. Pradeep Maharaj,
Transnet's Executive for Strategy and Transformation, said
the Durban container terminal was operating at 40%
capacity on January 31, down from about 65% the previous
day. Source: Business Day, January 31; Business Report,
February 1.

Manufacturing Sector Shows Weakness in January
-------------- -


6. In January, manufacturing activity declined sharply
showing possible contraction in the near future. The
Investec Purchasing Managers Index (PMI),a leading
indicator of South African manufacturing activity, fell to
48.1 from 52.5 in December. January's activity index
reached below 50, indicating a contraction in
manufacturing activity, for the first time since October

2003. The recent strength of the rand explains January's
weakness, although slower manufacturing growth prospects
should not impact overall South African growth, according
to ABSA economist Monale Ratsoma. Consumer spending and
infrastructure spending remains the main drivers for 2006
growth, and over the longer term, manufacturers will
adjust to a strong rand by increased efficiency. The
largest declines in the PMI came from the subindices for
business activity and new sales orders, which together
account for about 45% of the overall index. The business
activity index dropped to 49.2 from 55.5, while new sales
orders also fell, to 47.9 from 53.1. The sector employs
1.2 million people and accounts for more than 16 percent
of gross domestic product. Source: Business Day and
Business Report, February 2.

Job Creation Perceived Essential
--------------


7. In February and July 2005, marketing firm Research
Surveys conducted metropolitan surveys showing that South
Africans thought job creation was very important and the
government had not done a good job in its job creation
policies. Only 29% of the people interviewed in February
agreed that the government had done a good job reducing
unemployment, while 64% disagreed and 7% did not know. By
July, 13% thought the government was creating jobs fast
enough, 81% said jobs were not being created fast enough,
and 6% did not know. The survey sample was 2,000 South
African adults in seven metropolitan areas. Source: Cape
Times, January 30.

Unemployment Remains SA's Biggest Challenge
--------------


8. According to "Projection of Future Economic and
Sociopolitical Trends in SA up to 2025," released by the
Bureau for Market Research (BMR) at the University of
South Africa, unemployment remains South Africa's biggest
challenge, followed by crime, economic growth, skills and

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HIV/AIDS. More than 45% of those surveyed said they
expected only a slight decrease in unemployment by 2007.
Another 25% expected the unemployment level to stay the
same. A panel of 13 economists polled did not expect
employment growth to exceed 1.6% between 2005 and 2010
because of labor market legislative rigidities, a limited
pool of sufficiently skilled workers, and a skewed skills
mix available for employment. The panel of economists
expected that South African growth would reach 3.3%
between 2005 and 2010, with average growth rising to 3.6%
between 2011 and 2025. If rigidities in the economy and
skill deficiencies were eliminated, growth above 5% was
possible. Reduced corruption seemed unlikely, for both
corporations and government. More than 85% of all
participants expected corruption in government to either
stay the same or get worse by 2007, and only 14% of the
panelists saw a decrease in corruption by 2010. Close to
90% expected corporate corruption to either stay the same
or get worse by 2007. The BMR study surveyed 72 South
African chief executive officers and economists. Source:
Business Day and Business Report, January 31.

Continued Provincial Underspending Expected
--------------


9. The National Treasury expects continued provincial
underspending on capital projects during the current
fiscal year (ending March 31). The National Treasury's
figures on provincial expenditure showed provinces spent
71% (R155 billion, $26 billion using 6 rands per dollar)
of their total adjusted budget of R219.2 billion ($37
billion) by end-December 2005, but only 55% (R7.7 billion,
$1.3 billion) of their R13.3 billion ($2.2 billion)
capital budget. The capital expenditure was higher than
the amount spent over the corresponding period in 2004;
however, Treasury expected that provinces would underspend
by the same proportion as in the 2004/05 financial year.
Lack of skilled staff hampers local and provincial
authorities spending, accounting for the poor provision of
services in many rural parts of the country.
Significantly low rates of capital spending were
concentrated in Limpopo (42.7%) and Free State (45.9%)
with the highest being Eastern Cape with 65.6% and
Mpumalanga at 63.7%. Total provincial spending ranged
from the lowest share of 68.3% in Free State and 68.4% in
North West to the highest at 72.2% in Eastern Cape and
71.8% in Mpumalanga and Northern Cape. Source: Business
Day, January 31.

Half of Municipalities Fail to Submit Financial Statements
-------------- --------------


10. Nearly half of South Africa's 284 municipalities did
not submit annual financial statements, according to
Auditor General Shauket Fakie. The Municipal Finance
Management Act requires that all accounting officers must
prepare annual financial statements within two months of
the financial year end. The current financial year was
the first in which the Municipal Finance Management Act of
2003 was implemented and 148 or 52% of all municipalities
met the submission date of August 31, 2005. A total of 35
(12%) submitted statements between September 1 and 30 2005
while a further 101 (36%) had not submitted annual
financial statements by the end of September. The 2005
compliance levels, however, were an improvement over 2004.
At the end of August 2004, only 6% of municipalities had
submitted statements for the 2003/04 year while a further
29% had submitted by the end of September. Altogether, 65%
had not submitted annual financial statements by September

2004. Source: I-Net Bridge, February 2.

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