US embassy cable - 04PRETORIA5407

UNCLAS SECTION 01 OF 03 PRETORIA 005407 
 
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 DECEMBER 17, 
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: 
 
 -  Third Quarter Bulletin Released; 
 -  AmCham Survey Shows Empowerment Risks; 
 -  Electricity Regulator Limits Price Increase; 
 -  New Micro Finance Fund Started; 
 -  Fraudulent Grant Recipients Can Receive Indemnity Until 
 March; and 
 -  Employment and Earnings Continue Growing. 
 End Summary. 
 
THIRD QUARTER BULLETIN RELEASED 
------------------------------- 
 
2.  The South African Reserve Bank (SARB) released the 
third quarter 2004 Quarterly Bulletin, which gives a 
comprehensive picture of the economy by focusing on demand 
determinants of gross domestic product (GDP) as well as 
financial indicators.  From a demand perspective, the 
composition of GDP and economic growth indicate strong 
growth in the local economy.  In the third quarter, GDP 
increased by 5.6 percent (annualized, q/q), helped by 
strong growth in consumption and the export sector.  Gross 
domestic expenditures, which exclude the foreign trade 
sector, increased by 2.3 percent as household consumption 
and investment continues to show strong growth at 6.7 and 
2.4 percent, respectively.  Investment growth slowed 
substantially in the third quarter compared to 10.4 and 
5.5 percent growth in the first two quarters of 2004.  The 
deceleration in total fixed investment is largely 
attributable to transactions by South Africa Airlines, in 
which aircraft acquired on financial lease contracts 
during the first half of the year were changed into 
operational leases with a non-South African entity.  The 
aircraft had to be recorded as exports and negative 
capital formation in the third quarter after initially 
being recorded as imports and capital formation.  Private 
sector investment increased 13 percent in the third 
quarter, reflecting optimism as shown by recent business 
confidence indices.  Government consumption showed 
stagnant quarterly growth of 0.1 percent, due to large 
government purchases of ships in the second quarter. 
Exports and imports increased 13.9 and 0.7 percent 
respectively, explaining the much higher growth of GDP. 
Most analysts expect GDP to grow above 3.5 percent this 
year, with above 4 percent growth expected for 2005. 
Apart from expenditure data, the Quarterly Bulletin 
provides income, savings and inflation information.  The 
savings data was revised substantially, incorporating 
additional information from a wider variety of sources. 
Over the past three quarters, gross savings as a percent 
of GDP has increased, although household debt increased 
and savings to disposable income has declined, reflecting 
the rise in consumer spending.  South African savings was 
14.7 percent of GDP during the third quarter is 
substantially less than many of its peer countries 
(Malaysia at 42 percent, Thailand at 31 percent, Chile at 
27 percent and Singapore at 45 percent).  The ratio of 
household savings to disposable income has also declined 
from 1.2 in the first quarter 2004 to 0.9 in the third 
quarter.  Inflation expectations continue to remain within 
the targeted range of 3-6 percent for the next two years, 
even though unit labor costs increased for the third 
consecutive quarter.  Source:  Standard Bank QB Crux, 
Investec SARB Quarterly Update, December 10; SARB 
Quarterly Bulletin December 2004; Business Report, 
December 13. 
 
3.  Comment.  Two weeks ago, Stats SA released revised and 
rebased GDP figures from the production side.  SARB 
provides GDP composition from the demand side, showing 
consumption growing faster than previously thought. 
Revised household consumption increased 6.1 and 6.3 
percent in the first and second quarters compared to 
previous growth of 4.9 and 4.3 percent, respectively.  At 
least part of this increased consumer spending was funded 
by credit as reflected by increasing household debt to 
disposable income.  End comment. 
 
AMCHAM SURVEY SHOWS EMPOWERMENT RISKS 
------------------------------------- 
 
4.  A survey of US firms belonging to the American Chamber 
of Commerce in South Africa (AmCham) shows that 74 percent 
of US companies views selling equity as part of black 
empowerment strategy as a negative factor in their 
investment decisions in South Africa.  The survey also 
shows that 50 percent of US firms plan to invest more in 
South Africa next year, while 62 percent said the business 
environment was either good or excellent, up from 50 
percent last year.  Thirty-four percent of AmCham's 177 
members responded to the survey.  Trade and Industry 
Director General Lionel October said the survey reflected 
"a lack of understanding about the implementation of 
empowerment" and acknowledged that the government has to 
explain the empowerment strategy more clearly.  October 
also stated that if a foreign company has a policy not to 
sell shares in its overseas subsidiaries, the government 
would accommodate that company.  Source:  Business Day, 
December 14. 
 
5.  Comment.  Last week, the Department of Trade and 
Industry released drafts of three codes of good practice 
providing guidelines on Black Economic Empowerment 
Framework, Equity Ownership and Management.   The Black 
Economic Empowerment Framework introduces a new generic 
scorecard recommending that companies achieve 25.1 percent 
BEE equity levels, 40 percent black management, 50 percent 
procurement from black-owned firms, and 50 percent 
equality in employment.  The Equity Ownership provides 
guidance on different types of ownership and voting rights 
and the Minister will include a Statement on equity 
ownership for multinationals.  A Statement is a formal 
clarifying principle within a Code.  Public comments on 
these codes will be accepted for the next 60 days.  It is 
not known when the Statement on equity ownership for 
multinationals will be released.  End comment. 
 
ELECTRICITY REGULATOR LIMITS PRICE INCREASE 
------------------------------------------- 
 
6.  The National Electricity Regulator (NER) approved an 
average electricity price increase of 4.1 percent for 
2005, lower than the initial 6.4 percent increase it 
initially approved in October, effective January 1.  NER 
spokesman said one of the key determinants of the approved 
tariff increase was the fact that Eskom would be required 
to repay the large returns earned when Eskom sold more 
electricity than expected when the price increases of 8.5 
percent increases were approved.  In 2003, Eskom earned a 
profit of R3.5 billion ($463 million, using 7.56, the 
average exchange rate in 2003) on R32.8 billion ($4.34 
billion) in revenues.  Source:  Business Day, December 14. 
 
NEW MICRO FINANCE FUND STARTED 
------------------------------ 
 
7.  The Department of Trade and Industry announced the 
launch of the South African Micro Finance Apex Fund, which 
will provide small loans to individuals and small 
businesses.  Loans up to R10,000 ($1,750, using 5.7 rands 
per dollar) are available through intermediaries as well 
as financing advice and support, working with cooperatives 
and savings groups.  The fund hopes to improve 
entrepreneurial and financial skills and experience so 
that small enterprises can begin to improve employment and 
income levels.  Source:  Business Day, December 13. 
 
FRAUDULENT GRANT RECIPIENTS CAN RECEIVE INDEMNITY UNTIL MARCH 
--------------------------------------------- ---------------- 
 
8.  People receiving social grants fraudulently have until 
the end of March to apply for indemnity or face possible 
imprisonment.  About 37,000 people are suspected to be 
enjoying state benefits illegally.  Examples include about 
1000 foster-care parents receiving grants for children 
older than the eligible age, and more than 10,000 others 
who are under investigation for receiving old age grants 
before the official retirement age.  "The home affairs 
department has also informed us that there are over 14,400 
cases of children who, according to the (department's) 
records, are indicated as deceased, but people continue to 
collect the child support grant," said Justice Department 
Director General Vusi Pikoli.  Social Development Minister 
Zola Skweyiya said untested information had recently 
revealed that about 50,500 government employees or 
beneficiaries of the government pension fund were also 
receiving social grants.   Government spends about R50 
billion on providing social security to more than 9 
million beneficiaries every year.  Source:  Business Day, 
December 14. 
EMPLOYMENT AND EARNINGS CONTINUE GROWING 
---------------------------------------- 
 
9.  The September Survey of Employment and Earnings (SEE) 
shows the average earnings growth per employee in the 
formal non-agricultural business sector reached 5.4 
percent between the quarter ended September 2003 and 
September 2004 compared to 7.9 percent between the quarter 
ended June 2003 and June 2004.  Employment increased 3.7 
percent in September, showing an increase of 234,000 jobs 
compared to September 2003 and a gain of 112,000 over June 
2004's jobs.  June's survey showed a 2.5 percent increase 
in employment.  The gross earnings paid to employees 
during the quarter ended September 2004 amounted to 136.76 
billion rand, which is an annual increase of 9.3 percent 
compared with the June 2004 quarter's annual increase in 
gross earnings of 10.6 percent.  Since June 2004, the 
highest number of jobs created occurred in the personal 
services sector (66,000 new jobs), followed by wholesale 
and retail trade (15,000), manufacturing (14,000), 
construction (11,000) and the financial sector (7,000). 
Growth in consumption of services, motor vehicles, 
property and durable and non-durable goods have exceeded 
GDP growth over the past year.  Source:  I-Net Bridge, 
Standard Bank, SEE, December 14; Business Day, Business 
Report, December 15. 
 
10.  Comment.  South Africa has three official ways of 
measuring employment statistics:  the population census, 
which surveys all households, completed every five years; 
the labor force survey of a sample of households published 
twice a year; and the Survey of Employment and Earnings, 
which is a sample of firms in the non-agricultural formal 
sector (those firms registered for value-added taxes) and 
published every quarter.  Firm-based surveys, like the 
SEE, generally do not keep up with the changing structure 
of employment without frequent sample revision.  For 
example, the growth of the information technology sector 
in the 1980s and 1990s was not included in the SEE sample 
until 2002.  The SEE has reported employment gains for the 
past two quarters, although some argue that the amount of 
jobs created comes short of halving the current 
unemployment rate of 27.8 percent by 2014.  Roughly 
500,000 additional jobs per year are needed to reach the 
government's goal.  End comment. 
 
FRAZER