US embassy cable - 04PRETORIA4621

UNCLAS SECTION 01 OF 03 PRETORIA 004621 
 
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 
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LONDON FOR GURNEY; PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, ETRD, BEXP, KTDB, PGOV, SF 
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER OCTOBER 15, 
2004 ISSUE 
 
 
1. Summary.  Each week, AMEmbassy 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: 
 -  No change in Interest Rates; 
 -  Tourism Earns More Foreign Exchange than Gold; 
 -  Record South African Expansion Could Last Two Years; 
 -  Housing Prices Continue to Increase; 
 -  Manufacturing Capacity Utilization Increases; 
 -  Carbon Trading to Begin; 
 -  August Manufacturing Production Shows Growth; 
 -  Building Confidence Survey at High Levels; and 
 -  Improved Ranking in World Economic Forum's 
Competitiveness Survey.  End Summary. 
 
 NO CHANGE IN INTEREST RATES 
 --------------------------- 
 
 2.  The South African Reserve Bank's (SARB) Monetary 
 Policy Committee (MPC) kept interest rates unchanged after 
 its October 13-14 meeting, leaving the repurchase rate at 
 7.5 percent.  SARB Governor Tito Mboweni stated that 
 targeted inflation (consumer prices excluding mortgages) 
 should remain well within its boundaries over the next two 
 years, increasing slightly in the near term, but 
 moderating later.  He cited a number of factors 
 responsible for an optimistic inflationary outlook:  (1) a 
 decline in inflationary expectations; (2) fiscal prudence 
 by government; (3) improved outlook for food prices; (4) 
 commitment to contain administered price increases; and 
 (5) lower average global inflation.  Source:  I-Net 
 Bridge, October 14. 
 
 3.  Comment.  Earlier in the week, Mboweni had cited 
 rising oil prices, concerns about low savings rates, 
 rising household debt, and increased consumption rather 
 than investment fueling growth as potential problems 
 facing the South African economy.  Out of 24 economists 
 polled by Reuters on October 13, 22 said they expected 
 interest rates to remain unchanged because of surging oil 
 prices. End comment. 
 
 TOURISM EARNS MORE FOREIGN EXCHANGE THAN GOLD 
 --------------------------------------------- 
 
 4.    Research from Standard Bank indicates that tourism 
 is growing in importance to the South African economy, 
 earning more in foreign exchange in 2003 (R53.9 billion, 
 $8.3 billion, using 6.5 rands per dollar) than net gold 
 exports (R35.3 billion, $5.4 billion).  Standard Bank's 
 research suggests that tourists are more influenced by 
 economic growth in their own countries than the rand's 
 level, which implies that the sector is resilient to the 
 rand's strength, especially when compared to the mining 
 sector.  The report estimated that for every 1 percent 
 increase in a country's GDP, the number of tourists from 
 that country who visit South Africa would increase by 1.73 
 percent.  On the other hand, a 1 percent increase in local 
 currency prices would decrease tourist arrivals by only 
 0.04 percent.  The relatively small impact on prices can 
 be partly explained by the composition of tourists 
 visiting South Africa.  In 2003, more than half of South 
 Africa's tourists came from other African countries, and 
 those tourists from countries whose currency is pegged to 
 the rand (Swaziland, Lesotho, Namibia and Botswana) 
 comprised 20 percent of total foreign tourist spending. 
 For these tourists, their demand would be less sensitive 
 to overall price changes, since the prices they pay are 
 not influenced by the rand exchange rate and their local 
 markets are limited and expensive.  Standard Bank 
 estimates that tourist arrivals could increase 3 percent 
 next year, more than double last year's growth rate of 1.2 
 percent.  Even if the rand remains at current levels, 
 tourist arrivals should grow by more than 2 percent. 
 Source:  Business Day, October 12; Standard Bank Insight, 
 October 11. 
 
 RECORD SOUTH AFRICAN EXPANSION COULD LAST TWO YEARS 
 --------------------------------------------- ------ 
 
 5.  The Credit Guarantee Insurance's (CGI) latest economic 
 and business review suggests that the current five-year 
 South African expansion could last two more years.  Lower 
 structural inflation meant lower interest rates could last 
 into 2005 and beyond, but this depends on oil prices and 
 domestic secondary-round price increases being muted. 
 Despite a 'strong' exchange rate, the manufacturing sector 
 is expanding rapidly and business confidence indicators 
 are at an all-time high.  Luke Doig, senior economist at 
 CGI warned that protectionist policy, a substantially 
 weaker rand, and over-regulation all serve to raise costs 
 and divert attention away from satisfying the real needs 
 of consumers.  CGI is forecasting a 2.8 percent GDP growth 
 rate this year from 1.9 percent last year and expects 
 growth to accelerate to 3.7 percent in 2005.  Source:  I- 
 Net Bridge October 12. 
 
 6.  Comment.  The highest GDP growth rate in post- 
 apartheid South Africa (since the April 27 1994 elections) 
 was 7.7 percent in the second quarter of 1996.  The 
 average GDP growth over the past 10 ten years is 2.8 
 percent.  Now South Africa has recorded 23 consecutive 
 quarters of economic growth, with the previous record for 
 consecutive positive quarterly GDP growth at 44 quarters 
 occurring in the early 1960s.  End comment. 
 
 
 HOUSING PRICES CONTINUE TO INCREASE 
 ----------------------------------- 
 
 7.  The ABSA Bank house price index in August continues to 
 show record growth, increasing a nominal 33.7 percent, 
 y/y, its highest in 23 years.  Helped by strong growth in 
 household incomes and low nominal interest rates, property 
 prices reflect increased demand.  As a result of the sharp 
 increase in residential property prices during 2003 and 
 the first nine months of this year, ABSA decided to lift 
 the upper cut-off price for residential properties in the 
 middle market from R1.8 million ($280,000) last year to 
 R2.2 million ($340,000) this year.  The upper cutoff price 
 in the luxury market was increased from R6.5 million ($1 
 million) in 2003 to R8 million ($1.2 million) this year. 
 ABSA's real (adjusted for inflation) housing price index 
 indicated that there was 32.7 percent year-on-year growth 
 in August compared to July's 30.9 percent increase. 
 Source:  Business Day, October 12. 
 
 CAPACITY UTILIZATION INCREASES 
 ------------------------------ 
 
 8.  The capacity utilization for large manufacturers 
 increased to 84.2 percent in May 2004 up from 83.3 percent 
 in February according to Stats SA.  The rise of 1.1 
 percent or 0.9 percentage points was mainly due to higher 
 demand.  The largest rise was reported in food and 
 beverages (up 2.4 percentage points) followed by motor 
 vehicles and parts (up by 2 percentage points).  Source: 
 Business Day, October 12. 
 
 CARBON TRADING TO BEGIN IN SA 
 ----------------------------- 
 
 9.  Subject to approval from South Africa's JSE Securities 
 Exchange, Sterling Waterford Securities will list carbon- 
 trading credits by the end of 2004.  The carbon credits 
 allow companies in developed countries trying to meet 
 stringent carbon controls to buy credits from companies in 
 countries that pollute less than their allotted limits. 
 The draft National Energy Bill, legislation already 
 approved by the cabinet, will establish a designated 
 national authority to handle carbon credits with regard to 
 the Kyoto protocol.  Currently, the price of carbon 
 credits is between $3 and $7 a ton.  Currently, South 
 Africa has the third-highest per capita rate of emissions 
 of greenhouse gases in the world.  Russia is expected to 
 provide most of the carbon credits to the market.  Source: 
 Business Day, October 11. 
 
 MANUFACTURING PRODUCTION SHOWS ROBUST AUGUST GROWTH 
 --------------------------------------------- ------ 
 
 10.  Manufacturing production increased 6.8 percent (y/y) 
 in August, its strongest growth in nearly two years, 
 compared to July's growth of 5.2 percent.  From April 2003 
 until February 2004, manufacturing production slipped into 
 recession, with March being the first month of positive 
 growth.  On a quarterly basis, 8 of the 10 manufacturing 
 industries showed stronger growth, with the fastest growth 
 occurring in the glass, food and beverages, motor 
 vehicles, petroleum and chemical products.  However, there 
 are signs of weakening growth.  When measured monthly on a 
 seasonally adjusted basis, manufacturing production growth 
 and manufacturing sales declined 0.8 percent and 0.3 
 percent respectively between July and August.  The August 
 quarterly growth in manufacturing production reached 2 
 percent, down from July's quarterly growth of 2.5 percent. 
 Source:  Business Day, October 13; Standard Bank 
 Manufacturing Unpacked, October 12, September 7; 
 Statistics South Africa Statistical Release P 3041.2. 
 
 11.  Comment.  The manufacturing sector, accounting for 18 
 percent of gross domestic product, weakened in 2003 due to 
 stagnant global growth and the strong rand.  However, 
 strong domestic demand caused by low interest rates and 
 improving export outlook has boosted manufacturing growth 
 prospects for 2004.  End comment. 
 
 BUILDING CONFIDENCE SURVEY HIGH 
 ------------------------------- 
 
 12.  The Bureau for Economic Research's confidence index 
 for residential building contractors show most building 
 contractors expect activity to improve this quarter. 
 However, 89 percent of those surveyed complained about a 
 shortage of skilled labor.  Confidence of residential 
 contractors scored 87, close to the record high of 90 
 reached in the second quarter 2004 and confidence among 
 nonresidential contractors rose to 74, also close to the 
 second quarter's level of 72.  Skill shortages could lead 
 to an increase in wages for the sector, especially given 
 strong growth in both housing and retail construction. 
 Source:  Business Day, October 13. 
 
 IMPROVED RANKING IN WORLD ECONOMIC FORUM'S COMPETITIVENESS 
 INDEX 
 --------------------------------------------- ------------- 
 
 13.  The latest annual World Economic Forum's (WEF) 
 competitiveness survey ranks South Africa 42 out of 104, 
 an improvement of just one place over last year.  Now, 
 however, South Africa is the most competitive economy in 
 the continent, ahead of Botswana, which dropped nine 
 places.  Ranked highest in Africa, South Africa's ranking 
 is still below many of its competitors, such as Chile, 
 Poland and Estonia.  Ranking 22, Chile was the only South 
 American country to rank above South Africa, with Mexico 
 only 48.  The survey comprised 8,700 business leaders and 
 emphasized macroeconomic environment, the quality of 
 public institutions and technological innovation.  The 
 four components of WEF's Global Competitiveness Index 
 (GCI) show a varied picture for South Africa, with the 
 country ranked 40th on technology, 48th on macroeconomic 
 environment and 35th on public institutions.  South 
 Africa's best performance is in business competitiveness, 
 where it ranked 25th, based on the strength and regulation 
 of its financial markets, corporate governance and 
 "general effectiveness" of government policies.  According 
 to WEF, South Africa's competitive disadvantages include 
 labor market issues, such as ease of hiring foreign labor, 
 hiring and firing practices and flexibility of wages. 
 HIV/Aids and crime are also cited as negatives.  Source: 
 This Day and Business Report, I-Net Bridge October 14.