US embassy cable - 05PRETORIA1304

UNCLAS SECTION 01 OF 03 PRETORIA 001304 
 
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 April 1 2005 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: 
 
 -  South Africa Ranks High as FDI Destination for 
 Transport Equipment Sector; 
 -  IMF Study Points to South Africa's Economic Dominance 
 in Sub-Saharan Africa; 
 -  Telkom's Rates Among Highest in the World; 
 -  Consumer Prices Increase as Expected; 
 -  Strong Domestic Economy with Reduced Savings; and 
 -  And Warning Signs from the International Sector 
 End Summary. 
 
SOUTH AFRICA RANKS HIGH AS FDI DESTINATION FOR TRANSPORT 
EQUIPMENT SECTOR 
--------------------------------------------- ------------ 
 
2.  Global car makers and aerospace companies view South 
Africa as one of the most attractive destinations 
worldwide for foreign direct investment (FDI), according 
to global management consulting firm AT Kearney's 2004 
annual FDI confidence index.  South Africa was ranked as 
the seventh most attractive destination globally for 
investment in the transportation equipment sector. 
According to the survey, the Motor Industry Development 
Program has helped South African car exports to increase 
nine-fold over the past decade and boosted foreign 
confidence.  The South African government is also 
contemplating assistance for the aerospace industry 
similar to that which it gives car makers.  Trade and 
Industry Minister Alec Erwin said as early as 2002 that 
the aerospace industry would get the same kind of state 
support that benefited the motor industry.  Foreign direct 
investment in the South Africa totaled $762 million in 
2003, far behind China's $53.5 billion, Mexico's $10 
billion and even Chile's $3 billion.  AT Kearney expects 
foreign direct investment in SA to have risen to $2 
billion in 2004, however, citing renewed investor interest 
in the country, led by British, Swiss, Italian, French and 
Australian investors.  SA had also moved up to the top 30s 
on the list of countries executives were most likely to 
invest in, with China ranking first, followed by the 
United States and India.  Source:  Business Day, March 30. 
 
IMF STUDY POINTS TO SOUTH AFRICA'S ECONOMIC DOMINANCE IN 
SUB-SAHARAN AFRICA 
--------------------------------------------- ----------- 
 
3.  South Africa is an important engine for Sub-Saharan 
African growth according to a recent IMF working paper 
titled "Implications of South African Economic Growth for 
the Rest of Africa".  The study shows that, on average, 
every one percentage point growth a year in South Africa 
generated between 0.5 and 0.75 of a percentage point 
increase in sub-Saharan growth.  As the data covered the 
period from 1960-99, and only five years since South 
Africa's first democratic elections, which has seen a 
sharp increase in trade, investment, and overall business 
ties with the rest of the continent, it was likely, 
although not proven by the paper, that SA was an 
increasingly powerful engine for growth for the continent. 
Another finding of the study was that trade played a 
relatively small part in South Africa's role in African 
growth.  South Africa's influence came as a result of its 
economic size.  The extent of South Africa's trade with 
the continent had been relatively small, reflecting 
apartheid-era trade patterns.  During 1994-2002, South 
Africa's average share of the rest of Africa's external 
trade rose to three times its 1970-93 average, although it 
was only 2 percent of the rest of sub-Saharan Africa's 
total trade with the outside world.  In 2003, the South 
African economy accounted for 38 percent of the expansion 
of the sub-Saharan African economy measured on the basis 
of market exchange rates.  South Africa's investment in 
other African countries in the period 1998-2002 was 
equivalent to 5 percent of the gross domestic product of 
those countries.  Source:  Business Day, March 30. 
 
TELKOM'S RATES AMONG HIGHEST IN THE WORLD 
----------------------------------------- 
 
4.  A study sponsored by NUS Consulting shows that 
Telcom's rates remain the highest among 14 major 
economies, despite recent announced price cuts for both 
international and national long-distance calls.  The 
survey encompassed the U.K., U.S., Canada, France, Sweden, 
Australia, Belgium, Denmark, Finland, Germany, Italy, the 
Netherlands and Spain.  Although Telkom announced 49 
percent and 10 percent rate cuts for international and 
national long-distance calls, these decreases do not match 
price reductions made in other competitor countries.  The 
survey also shows that South African national long- 
distance calls (more than 320 kilometers) are the highest 
among the countries surveyed, with Spain placed second. 
South Africa's local calls are the second highest after 
Belgium.  The survey shows that 13 of the 14 countries 
evaluated operate in a generally deregulated and 
competitive environment, with the exception being South 
Africa.  The study also shows that South African consumers 
experienced an average rate increase of 4.7 percent in 
cell phone costs last year.  Cell call costs in the UK and 
Australia are the most expensive among the countries 
surveyed, with South Africa being the third most 
expensive.  Source:  Business Day, March 29. 
 
CONSUMER PRICES INCREASE AS EXPECTED 
------------------------------------ 
 
5.  February's consumer prices increased close to market 
expectations, with overall consumer prices (CPI) 
increasing 2.6 percent (y/y) and consumer prices excluding 
mortgage costs (CPIX) at 3.1 percent, compared to 
consensus CPI and CPIX forecasts of 2.6 percent and 3.2 
percent respectively.  February's inflation is close to 
the lower range of the South African Reserve Bank's 
targeted range of 3 to 6 percent, although expected to be 
the year's trough, with higher oil prices and indirect 
taxes impacting prices later in the year.  Medical and 
housing prices contributed the most to February's 
inflation, with food, transport and communication costs 
remaining flat.  Services inflation, chiefly influenced by 
wage increases, increased by 5.9 percent (y/y) and 
accounts for 34 percent of the total CPIX.  Given the 
recent rand weakness and high oil prices, most expect 
interest rates to remain unchanged after the SARB's 
Monetary Policy Committee meeting in April.  Source: 
Standard Bank CPI Alert, March 30. 
 
STRONG DOMESTIC ECONOMY WITH REDUCED SAVINGS 
-------------------------------------------- 
 
6.  The South African Reserve Bank (SARB)'s March 
Quarterly Bulletin shows healthy growth in domestic 
expenditure driving a 2004 3.7 percent GDP growth, 
although warning signs of a higher than expected trade 
deficit and reduced savings point to possible 
vulnerability.  In 2004, domestic demand, now in its 16th 
quarter of expansion, continued its strong growth, with 
real gross fixed capital formation, household and 
government consumption increasing 9.5 percent, 6 percent 
and 7 percent respectively.  Both business and consumer 
confidence remained high as real disposable income 
increased 5.5 percent due to higher wage settlements and 
marginally lower income tax rates.  Wealth effects arising 
from large increases in property and other asset prices in 
2004 contributed to the strong increase in household 
spending.  Households financed part of their increased 
spending by incurring more debt.  Household debt as 
percentage of disposable income increased from 55 percent 
in the third quarter of 2004 to 57 in the fourth quarter 
and annually reached 54.5 percent in 2004 compared with 
2003's debt ratio of 51.5 percent.  Even though debt has 
increased, these ratios are well below the 61 percent 
levels reported in 1996 and 1997.  The 2004 9.5 percent 
growth in real gross fixed capital formation, higher than 
the previous year's 9 percent growth,  was due mainly to 
strong growth in private sector investment although 
slowing in the final quarter.  In the fourth quarter of 
2004, growth in real capital outlays by the private sector 
slowed to 4.5 percent compared to the third quarter's 
growth of 20 percent as agriculture and mining reduced 
their capital spending.  Reduced savings point to possible 
problems for the South African economy to reach its 6 
percent GDP growth target.  The average ratio of gross 
saving (made up of household, government and business 
savings) to GDP declined to 13.4 percent in the final 
quarter of 2004, bringing the 2004 average to 14.4 
percent.  This is the first time since 1960 that the ratio 
has dropped below 15 percent. 
 
AND WARNING SIGNS FROM THE INTERNATIONAL SECTOR 
--------------------------------------------- -- 
 
7.  The high level of domestic expenditures and the 11.7 
appreciation of the trade-weighted rand resulted in much 
higher import growth, leading to a higher than expected 
deficit on current account.  In 2004, real export and 
import growth of 2.9 percent and 13 percent, respectively, 
widened the current account deficit as a percent of GDP to 
3.2 percent from 1.5 percent in 2003.  The current account 
deficit was easily financed through foreign capital 
inflows, although two thirds of the 2004 foreign 
investment into South Africa were classified as portfolio 
and `unrecorded transaction' investments, typically more 
volatile than foreign direct investment.  According to a 
recent IMF paper, foreign direct investment (FDI) made up 
70 percent of capital flows to other emerging markets from 
1994-2003, while for South Africa, only 30 percent of 
capital flows were FDI.  The 3.2 percent current account 
deficit, higher than the 2.3 percent deficit forecasted in 
February's Budget Review, came as a surprise to many South 
African economic analysts.  Source:  Standard Bank, QB 
Crux, March 30; Business Day, Business Report, March 31. 
 
8.  Comment.  The SARB Quarterly Bulletin presents the 
national income and product account from an expenditure 
basis, while Stats SA publishes the composition of GDP and 
growth from a production perspective.  The Quarterly 
Bulletin also compiled employment and earnings data (from 
the Survey of Employment and Earnings) up to September 
2004, showing employment increases in the faster growing 
areas of the economy (construction and trade) although 
manufacturing also posted job gains.  Wage increases 
slowed over the year as well, from 9 percent in the first 
quarter to 6.3 percent in the third.  Over the last 10 
years, South African growth has averaged 3 percent and 
South Africa wants to boost its growth to over 6 percent 
by 2014.  Low savings, skills shortage, inefficient 
infrastructure, HIV/AIDS, and labor market rigidity 
present challenges to achieving substantially higher 
growth.  Inflows of investment are crucial and investment 
showed strong gains in 2004.  End comment. 
 
FRAZER