US embassy cable - 04PRETORIA4529

UNCLAS SECTION 01 OF 03 PRETORIA 004529 
 
SIPDIS 
 
DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/BARBER/WALKER/JEWELL 
USTR FOR COLEMAN 
LONDON FOR GURNEY; PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, ETRD, BEXP, KTDB, PGOV, SF 
SUBJECT:  OCTOBER 8 SOUTH AFRICA ECONOMIC NEWS 
 
REF:  PRETORIA 4503 
 
 SUMMARY 
 ------- 
 
 1. Summary.  Each week, USEmbassy 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 include September Motor 
 Vehicle Sales, Update on Trade Conditions, 
 Residential Property Prices, Increased Funding to 
 Facilitate BEE Finance Charter; Reserve Bank Issues 
 Financial Stability Review; South Africa Drops in 
 Global Investment Rankings; Cabinet Recommends 
 Published Administered Price Index; and July Retail 
 Sales.  End Summary 
 
 SEPTEMBER MOTOR VEHICLES CONTINUE HIGH GROWTH 
 --------------------------------------------- 
 
 
 2.  Encouraged by a 2003 5.5 percent reduction in 
 interest rates and an additional mid-August 2004 0.5 
 percentage point reduction, new car sales should post 
 a record sales year.  According to the National 
 Association of Automobile Manufacturers (NAAMSA), 
 September sales of motor vehicles increased by 22.7 
 percent (y/y), the second highest monthly increase on 
 record.  New car sales increased 21.2 percent in 
 September, with 1,164 new passenger cars being sold 
 per day compared to August's daily average of 1,117 
 and 961 in September 2003.  Compared to September 
 2003, year-to-date sales have been 20 percent higher. 
 Medium and heavy commercial vehicles also posted 
 strong year-to-date growth at 18.9 percent.  Nico 
 Vermeulen, NAAMSA's director, expects that 2004 new 
 vehicle sales should reach an all-time record of 
 455,000 vehicles.  Note Business Report, October 5; 
 Standard Bank Motor Alert, October 4 Endnote 
 
 TRADE CONDITIONS STILL UPBEAT 
 ----------------------------- 
 
 3.    Both the South African Trade Management Indices 
 and the South African Chamber of Commerce business 
 confidence index still indicate positive growth 
 expectations in the near future.  The South African 
 Trade Management Indices, measuring both trade 
 activity and expectations, indicate that September's 
 activity and short-run expectations are roughly the 
 same as August's and still positive.  The trade 
 activity index measures the monthly trading 
 conditions, while the trade expectations describes 
 expected activity in the next six months.  Eight 
 components (sales volumes, new orders, order backlog, 
 supplier deliveries, inventories, selling prices, 
 purchasing prices and employment) make up both the 
 trade activity and expectations indices.  September's 
 total trading activity index registered at the 
 threshold value of 50:  above (below) which trading 
 conditions have improved (deteriorated).  All 
 components but employment improved in September, 
 implying that no new jobs were created in September. 
 Since the beginning of this survey in 2000, the 
 employment sub-component has rarely exceeded 50, 
 confirming the endemic unemployment prevalent in 
 South Africa.  The survey shows that inflation 
 (selling prices) remained neutral (at 51 compared to 
 49 in August); however input purchasing prices keep 
 showing substantial increases (59 compared to 
 August's 57).  Over the next six months, the 
 September trade expectations index supports a 
 continued optimistic sales forecast at 63 (compared 
 to August's 64) with all but one components 
 registering above 50.  Sales volumes and new orders 
 show the highest expectations of increasing over the 
 next six months, in line with increasing economic 
 growth later in 2004.  The South African Chamber of 
 Business's (SACOB) business confidence index 
 increased 3.1 points in September to 130.9 with eight 
 of its 13 components improving in September.  The 
 index reached its highest level in September, with 
 inflation and interest rates relatively low and the 
 rand more stable in September.  Note Business Day, 
 Business Report, October 6; Standard Bank SATMI 
 October 5 Endnote 
 
 RESIDENTIAL PROPERTY PRICES STRONG BUT LEVELING 
 --------------------------------------------- -- 
 
 4.  According to data collected from the Deeds 
 Office, house prices may have slowed in Q2 2004, but 
 this data is often revised substantially and the 
 slowdown in housing prices will need confirmation by 
 other sources.  National housing prices, both nominal 
 and real, are increasing at a record level of over 30 
 percent, as measured using a three-month moving 
 average.  However, recent increases have leveled off. 
 Prices for housing financed by Standard Bank 
 (including mortgages with assessment values up to R1 
 million or $154,000) seem to show the same leveling- 
 off trend, with prices increasing 20 percent over the 
 past three months.  The prices of existing houses 
 have increased substantially more than new homes. 
 The national affordability index, based on 
 installment to income ratio (calculated as mortgage 
 payments using the median national house price and 
 the prime rate, over per capita disposable income), 
 is still relatively low compared to the 1990s.  Note 
 Business Report, October 6; Standard Bank Residential 
 Property Note, October 5 Endnote 
 
 INCREASED FUNDING TO FINANCE BEE FINANCE CHARTER 
 --------------------------------------------- --- 
 
 5.  Banks, life insurers and pensions will commit 
 R122.5 billion (USD19 billion, using 6.5 rands per 
 dollar) over five years to fund black economic 
 empowerment (BEE) in SA.  If accepted at the first 
 charter council meeting next week, finance companies 
 will invest 60 percent more money than the R75 
 billion earmarked when the charter was signed a year 
 ago.  This will also be the largest single investment 
 in empowerment finance, more than the R100 billion 
 committed by mining companies and the R10 billion set 
 aside by government.  This R122.5 billion is 
 allocated into five areas:  (1) R50 billion for black 
 empowerment deals; (2) R42 billion to provide 
 financing for low-cost housing; (3) R25 billion to 
 finance infrastructure projects in rural areas; (4) 
 R4.1 billion for small black business; and (5) R1.4 
 billion for financing black agriculture.  The charter 
 was launched in 2003, but announcements of financial 
 sector targets were delayed because of disagreements 
 between the Banking Council, representing South 
 Africa's banks, and the Association of Black 
 Securities and Investment Professionals.  Companies 
 will be expected to provide a portion of the R122.5 
 billion according to market share of investable 
 assets.  REFTEL PRETORIA 4503 Note Business Day, 
 October 6 Endnote 
 
 RESERVE BANK ISSUES FINANCIAL STABILITY REVIEW 
 --------------------------------------------- - 
 
 6.  The South African Reserve Bank issued its 
 biannual Financial Stability Review, highlighting 
 inflation and financial risks facing South Africa, 
 one week before the Monetary Policy Committee meets 
 (October 14) to decide whether interest rates should 
 be changed.  Increasing oil prices presented the 
 largest risk to inflation and global economic 
 recovery.  A strong rand has cushioned South Africa 
 from much of the effects of higher oil prices, 
 although the rand has depreciated 1.1 percent in 
 September and domestic gasoline prices have risen 37 
 rand cents per liter since August.  The review also 
 highlighted the importance of providing banking 
 services to the two-thirds of South Africans who do 
 not have banking accounts, but urged that the adopted 
 policies be well conceived.  "Unsound policy 
 decisions or financial sector initiatives to broaden 
 access have the potential of posing a threat to the 
 integrity of the formal financial sector."  Note 
 Business Report, Business Day, October 7 Endnote 
 
 SOUTH AFRICA DROPS IN GLOBAL INVESTMENT RANKINGS 
 --------------------------------------------- --- 
 
 7.  The 2004 annual AT Kearney Foreign Policy 
 globalization index ranked South Africa 49th out of 
 62 countries as a destination for foreign investment, 
 a drop of 11 places and behind Botswana, Nigeria and 
 Uganda.  The countries surveyed in 2002 account for 
 96 percent of the world's gross domestic product and 
 84 percent of the population.  South Africa ranked 
 low in the personal contact category, which includes 
 cross-border communications, because of the high cost 
 of international telecommunications and the low 
 levels of remittance and personal transfers. 
 Internet usage is ahead other African countries, but 
 below most other developed countries.  Tourism, 
 political engagement, and technological integration 
 were areas where South Africa ranked between 35 and 
 37 on the scale.  Note This Day, October 7 Endnote 
 
 CABINET RECOMMENTS PUBLISHED ADMINISTERED PRICE INDEX 
 --------------------------------------------- -------- 
 
 8.  The cabinet recommended that Statistics SA 
 (StatsSA) monitor and publish its administered price 
 index on a monthly basis.  StatsSA estimates that 
 increases in prices regulated by the government 
 account for 16 percent of overall consumer prices and 
 18 percent of consumer prices when mortgage payments 
 are omitted.  Prices that are set by the government 
 include water, electricity, paraffin, gasoline, 
 public hospitals charges, freight, telephone calls 
 and postage.  StatsSA has proposed two approaches to 
 compiling the index, one limited to prices actually 
 set by government and the other including VAT and TV 
 license fees.  For the latest monthly price release, 
 StatsSA included administered prices (regulated by 
 both government and state-owned enterprises) and 
 found that they rose by more than the targeted 
 inflation range of 3 to 6 percent.  During August, 
 StatsSA estimated that administered prices using CPIX 
 (excluding mortgages) increased by 6.3 percent while 
 administered prices in overall consumer prices 
 increased 6.8 percent.  The cabinet agreed that price 
 setting should take into account inflation targets, 
 as well as efficiency, equity objectives and long-run 
 demand and supply projections.  Note Business Day, 
 This Day, October 7 Endnote 
 
 JULY RETAIL SALES INCREASE BY 15.5 PERCENT 
 ------------------------------------------ 
 
 9.  On an annual basis, retail sales grew by 15.5 
 percent, showing the underlying strength in consumer 
 demand that is driving South African economic growth. 
 Adjusted for inflation, retail sales increased by 
 11.7 percent in July.  Consumers continued to take on 
 new debt as the private sector credit extension 
 increased by 6 percent in July, in addition to an 
 11.3 percent increase in money supply.  So far, the 
 strong rand has shielded the economy from 
 inflationary pressures, allowing the Reserve Bank to 
 cut interest rates in August.  Whether the Reserve 
 Bank will cut interest rates at next week's Monetary 
 Policy Committee meeting will depend on its view of 
 future oil prices and wage settlements.  Note 
 Standard Bank, Taking Stock, October 7; Business 
 Report, October 8 Endnote 
 
 FRAZER