US embassy cable - 04PRETORIA5043

UNCLAS SECTION 01 OF 04 PRETORIA 005043 
 
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:  SOUTH AFRICA ECONOMIC NEWSLETTER NOVEMBER 19, 
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: 
 
 -  Foreign Exchange Reserves Target Published Next Year; 
 -  Street Traders Important to Farming; 
 -  Survey Reveals Informal Sector Importance; 
 -  New Forum Started to Advise SMMEs; 
 -  Local Car Manufacturers Create 1,519 Jobs; 
 -  SA is World's Sixth-largest Wine Producer; 
 -  Holiday Season Expected Best in 20 Years; 
 -  100,000 Mzansi Account Holders; and 
 -  6.5 Percent of GDP Spent on Red Tape. 
End Summary. 
 
FOREIGN EXCHANGE RESERVES TARGET PUBLISHED NEXT YEAR 
--------------------------------------------- ------- 
 
2.  A standing committee will be established to determine 
an appropriate level for South Africa's foreign exchange 
reserves and would publish its recommendations in 2005, 
according to Lesetja Kganyago, the Treasury Director- 
General.  To develop the reserves target, a formula that 
considered current account deficit forecasts as well as 
short-and long-term government debt would be used.  The 
committee, comprised of National Treasury and Reserve Bank 
officials, would also be responsible for coordinating the 
government's debt management strategy with that of 
reserves management.  South Africa has gradually grown its 
gross reserves to $13 billion, prompting Moody's to 
consider upgrading the country's investment grade next 
month.  Compared with emerging market peers such as Turkey 
and the Czech Republic, South Africa's reserves are 
minimal, as both peer countries have gross reserves in 
excess of $20 billion.  The International Monetary Fund 
recommends that a country must hold reserves that can 
cover three months of imports.  From June through August 
2004, South African imports totaled $12.4 billion. 
Source:  Business Report, November 15. 
 
STREET TRADERS IMPORTANT TO FARMING 
----------------------------------- 
 
3.  The latest issue of Farmer's Weekly emphasizes the 
importance of informal traders to the agricultural sector. 
Informal traders buy 43 percent of potatoes and 23 percent 
of all market produce.  While no formal research had been 
completed on the market share of vendors in fresh produce 
markets, Agricultural Business Chamber Chief Executive 
Tobias Doyer estimates a 30 percent share.   The informal 
trader has become such a strong market player in the fresh 
produce distribution network that business training is now 
provided by most markets, including Tshwane's (greater 
Pretoria) Fresh Produce Market, the second largest after 
Johannesburg's market.  Source:  Business Day, November 
16. 
 
SURVEY REVEALS INFORMAL SECTOR IMPORTANCE 
----------------------------------------- 
 
4.  The University of South Africa and the University of 
South Carolina collaborated on a survey of the informal 
retail sector in South Africa and found that these 
informal businesses were more sustainable than previously 
thought.  The survey covered 800 businesses, ranging from 
spaza shops (small retail stores in former township areas) 
to shebeens (bars) and hawkers (street vendors) that did 
not pay value added tax.  The study found that these 
enterprises had an average monthly turnover (a measure of 
sales) of more than R5,300 ($880 using 6 rands per 
dollar).  More than half of the owners of South Africa's 
informal businesses said they would not look for a job in 
the formal sector if they had a choice.  Spaza owners 
ranked soft-drink sales more important than bread in 
contribution to sales and the informal sector generated 
between 40 and 50 percent of Coke's R3 billion ($500 
million) sales in South Africa.  Approximately 35 percent 
of survey respondents were unemployed before starting 
their businesses and 70 percent used savings, 10 percent 
used money from separation packages and 2 percent used 
bank financing to start their businesses.  Most of the 
money earned went to replenishing stock merchandise with 
very little going into capital outlay.  Approximately 40 
percent of respondents had no refrigeration and only 8.2 
percent received formal business training.  Source: 
Business Day, November 16. 
 
NEW FORUM STARTED TO ADVISE SMMES 
--------------------------------- 
 
5.  The Small, Medium and Micro Enterprises (SMME) Forum 
will advise small start-up businesses, aid training and 
lobby government on SMME's behalf.  Originally established 
to encourage small business input into several empowerment 
charters, its efforts are now expanded to provide more 
services to entrepreneurs and to large companies looking 
to procure services from SMMEs as well.  The forum would 
help small enterprises by collecting tender information, 
offering legal advice, providing online training and 
helping to collect unpaid debts.  The forum plans to 
establish a database of small, reliable suppliers by 
economic sector and has a policy that member companies 
cannot remain members forever, as they are expected to 
grow into larger enterprises.  Source:  Business Day, 
November 16. 
 
LOCAL CAR MANUFACTURERS CREATE 1,519 JOBS 
----------------------------------------- 
 
6.  According to the latest quarterly review of business 
conditions released by the National Association of 
Automobile Manufacturers of SA (NAAMSA), a total of 1,519 
jobs were created in the new vehicle manufacturing 
industry in the first nine months of 2004, an improvement 
of 4.9 percent on the corresponding period last year. 
These latest employment trends follow a report on the 
automotive industry released last week by the Trade and 
Industry Department, stating that total automotive 
industry employment, including the assembly, component and 
tire industries and motor trade, increased by 2 percent to 
303,700 in 2003.  Recent developments in the South African 
car market include Volkswagen's contract to produce the 
new Golf A5 for the local and export markets and Toyota's 
Durban plant being named as one of five facilities 
worldwide that will produce a new-generation light 
commercial vehicle.   In addition, Nissan SA was awarded a 
R1 billion ($167 million) contract to export locally 
assembled Hardbody pick-ups to Europe, Singapore, 
Australia and New Zealand, starting in October 2005.  The 
influence of the strong rand and highly competitive global 
market conditions contributed to lower vehicle exports 
during the first nine months of 2004.  From January to 
September, 2004 exports declined 13.3 percent (11,288 
vehicles) compared to the first nine months of 2003. 
Source:  Business Report, November 16. 
 
SA IS WORLD'S SIXTH-LARGEST WINE MANUFACTURER 
--------------------------------------------- 
 
7.  South Africa is the world's sixth-largest wine maker, 
at 2.8 percent of global production and with gross output 
of wine-related firms estimated to be worth R14.6 billion 
($2.4 billion) a year.  In 2001, there were 4,390 primary 
wine producers and 388 cellars, an increase of 15 percent 
since 1999.  About 746 million liters of wine were made 
annually from 314 million vines.  On average, 71 percent 
of production found its way into good wine (for drinking), 
an increase from 65 percent in 1999.  In the late 1990s, 
there was considerable foreign investment in Western Cape 
vineyards, large-scale replanting and quality 
improvements, which led to a boom in exports.  Exports 
grew to 210 million liters in 2002, from 50.7 million 
liters in 1994, and accounted for 33.5 percent of good 
wine production, up from 14.6 percent in 1995, with the 
total export value for wines in 2001 estimated at R4.5 
billion ($750 million).  About 50 percent of bottled wine 
exports were to the United Kingdom, 21 percent to the 
Netherlands, 9 percent to Scandinavia and 6.5 percent to 
Germany.  Markets identified as growth opportunities 
include the United States, India, China and Japan. 
Approximately 43 percent of tourists to South Africa visit 
the vineyards with the wine industry indirectly 
contributing over R3.5 billion a year to tourism. 
Viticulture contributed 30 percent to the Western Cape's 
horticultural income and about 3 percent of its gross 
regional product.  Source:  Business Report, November 16. 
 
HOLIDAY SEASON SALES EXPECTED BEST IN 20 YEARS 
--------------------------------------------- - 
 
8.  South Africa's holiday season retail sales in the 
fourth quarter, which covers the Christian Christmas 
season, as well as the Hindu Diwali festival, the Muslim 
Eid festival and the Jewish Hanukkah festival, should be 
the best in at least 20 years, according to the Ernest & 
Young Festive Season Retail Trends survey covering 500 
retailers by the Bureau for Economic Research (BER) at the 
University of Stellenbosch.  Retail sales are expected to 
grow by 17.4 percent (y/y) during the holiday season, the 
highest increase since 1987, compared to 10.2 percent 
(y/y) growth during 2003.   Increases in both prices and 
volume of goods sold should fuel the expected growth in 
retail sales.  Volumes of goods sold should increase by 
11.7 percent and prices should increase by 5.1 percent. 
During last year's holiday season, units of goods sold 
increased by 8 percent while prices increased by 2.1 
percent.  Income for both high and low-income individuals 
should increase.  The BER survey defines high-income 
individuals as those earning R4500 ($750) per month or 
higher.  Investment income, tax rates, and interest rates 
impact high-income earners.  Low-income earners benefit 
more from higher wages, social grants and low food costs. 
While wage earnings as a proportion of personal disposable 
income has declined over time, from 81 percent in 1990 to 
72 percent in 2003, the importance of social grants and 
investment income has increased.  Social grants accounted 
for 7 percent of disposable income in 2003, compared to 5 
percent in 1990.  In 2003, investment income's share of 
disposable income was 35 percent compared to 27 percent in 
1990.  The study also estimates that black adults comprise 
1.8 million of the 4.5 million high-income earners in 
South Africa this year.  Source:  I-Net Bridge, November 
16; Business Day and Business Report, November 17. 
 
9.  Comment.  Previously, Statistics South Africa reported 
real retail sales 9.1 percent for the first half of 2004, 
and increases in monthly retail sales of over 10 percent 
for July and August.  Real wholesale trade sales for the 
first half of 2004 increased by 7.2 percent.  Given 
expectations of continued strong retail sales growth, 2004 
GDP growth should be much higher than 2003's 1.9 percent. 
End comment. 
 
100,000 MZANSI ACCOUNT HOLDERS 
------------------------------ 
 
10.  Since the October 25 Mzansi account launch, more than 
100,000 people have opened the new bank account aimed at 
low-income customers.  Although these accounts are aimed 
at lower income individuals, estimates suggest that nearly 
R30 million ($5 million) have been deposited.  Eight banks 
are offering these accounts to the estimated 13-16 million 
eligible South Africans without accounts, with ABSA and 
Standard Bank leading by opening 30,000 accounts each, 
Nedbank and PostBank opening 10,000 and 15,000, 
respectively.  Spokesmen from both Standard Bank and 
Nedbank could not estimate how many of the new Mzansi 
accounts were switched from existing accounts and stated 
that additional study is needed.  Source:  Business Day, 
November 17. 
 
6.5 PERCENT OF GDP SPENT ON RED TAPE 
------------------------------------ 
 
11.  SBP, a non-profit independent private sector research 
company (originally Small Business Project), developed a 
survey of 1,800 firms that examines the cost of regulatory 
compliance to South African firms.   The survey covered 
most economic sectors including firms in manufacturing, 
mining, construction, trade, agriculture, and services 
sectors.  Among the key findings include:  (1) total cost 
to business of complying with regulations is R79 billion 
($1.3 billion) in 2004, 6.5 percent of GDP; (2) 34 percent 
of businesses believe that regulations inhibit business 
growth; (3) 20 percent of employers say that labor law and 
government regulations constrain increases in employment; 
(4) businesses report that the most troublesome and time 
consuming regulations are VAT, other aspects of tax 
administration, labor laws, SETA/RSC taxes (SETA is fee 
paid by business for labor training and RSC is a regional 
services council tax), in that order; (5) 76 percent of 
respondents say that compliance costs have increased in 
the past two years; (6) large firms pay the most in 
absolute terms, but regulatory compliance costs weigh more 
heavily on smaller enterprises--compliance costs represent 
8.3 percent of turnover (a measure of sales for restocking 
purposes) for firms with turnover of less than 1 million 
rand a year, and 0.2 percent of turnover for corporations 
that turnover 1 billion rand or more a year; and (6) the 
impact of red tape is greatest in transport, services and 
tourism and least in retailing and wholesaling.  The SBP 
survey looks at two kinds of regulatory costs faced by the 
private sector - efficiency costs and compliance costs. 
Efficiency costs occur when regulations distort the 
market, such as when labor market legislation affects 
employment and output, or when a business decides to limit 
sales in order to stay below the VAT threshold. 
Compliance costs are purely the costs of red tape, 
including management time, interacting with authorities, 
paperwork and professional services and consultants' fees. 
They do not include tax payments or levies.  Source:  I- 
Net Bridge, November 17. 
 
FRAZER