US embassy cable - 05PRETORIA1980

UNCLAS SECTION 01 OF 03 PRETORIA 001980 
 
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 May 20 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: 
 
 -  ANC to Discuss Relaxation in SA's Labor Market; 
 -  Empowerment Funding Structure Debated; 
 -  Savings Still Low Although Conditions Improved; 
 -  SA Productivity Drives Increase in Global 
 Competitiveness; 
 -  Manufacturing and Retail Sales Show Signs of Slowdown; 
 -  Sub-Saharan African Transport Expensive; and 
 -  2004/05 Budget Deficit Lower. 
End Summary. 
 
ANC TO DISCUSS RELAXATION IN SA'S LABOR MARKET 
--------------------------------------------- - 
 
2.  In preparation for the African National Congress' 
(ANC) general council meeting in June, a plan calling for 
a dual labor market, where young workers would earn less 
and their employers might not meet all the current labor 
regulations, is circulating. The plan is part of a search 
for solutions to South Africa's high unemployment. 
Acknowledging that young people constitute 60 percent of 
South Africa's unemployed, the ANC document says that 
subjecting young people to a more flexible labor relations 
regime would mean waiving the minimum wage and other 
collective bargaining arrangements (including limits on 
overtime work) and make it easier to dismiss poor workers. 
Another proposal is that industrial development zones be 
free of labor laws such as the Labor Relations Act and 
Basic Conditions of Employment Act, encouraging investment 
and employment growth in poorer provinces such as Eastern 
Cape and KwaZulu-Natal.  Initial reactions from trade 
unions were negative with the Congress of South African 
Trade Unions (COSATU) opposing attempts by government to 
"reverse worker rights."  Any change to existing labor 
laws would be unconstitutional.  Officially, COSATU and 
the South African Communist Party would not comment on the 
proposals, saying they had not yet seen the document.  The 
proposal also suggests changing the definition of small 
business, increasing its size from 50 to 200 employees and 
exempting it from parts of existing labor laws.  Source: 
Business Day, May 16. 
 
EMPOWERMENT FUNDING STRUCTURE DEBATED 
------------------------------------- 
 
3.  A discussion document for the African National 
Congress (ANC) national general council meeting criticizes 
the current way of funding empowerment deals.  Currently 
most deals are debt-driven.  Since the money spent is not 
invested productively, these deals represent a drain on 
the economy.  The deals, based on debt-financing, are 
unsustainable.  Other critics say large empowerment deals 
are structured in so that they are unprofitable for long 
periods of time.  Another problem is that empowerment 
partners do not have money for financing proposed 
transactions.  Some argue for more flexibility in the 
funding arrangements of empowerment deals to allow for an 
early exit.  John Kane-Berman, Chief Executive of the 
South African Institute of Race Relations, says the 
fundamental problem is that there are not enough black 
people to purchase large amounts of shares.  He suggests 
that attracting foreign direct investment and combating 
unemployment should be government's primary concerns.  He 
also argues that few empowerment deals generate business; 
they just transfer assets.  Source:  Business Day, May 17. 
 
SAVINGS STILL LOW ALTHOUGH CONDITIONS IMPROVED 
--------------------------------------------- - 
 
4.  South Africans continue to spend their surplus cash 
rather than save it, despite the excellent environment. 
The South African Savings Institute's (SASI) national 
savings barometer for the fourth quarter of 2004 shows 
that the environment for saving improved by 1.98 index 
points to 115.06 in December.  This was the fifth quarter 
in a row that conditions improved.  Despite the 
improvement, gross savings as a percentage of gross 
domestic product (GDP) fell from 15 percent in the third 
quarter 2004 to 13.5 percent in December.  The lower 
savings ratio was mainly attributable to the corporate and 
household sectors, with the government sector's ratio 
practically unchanged.  SASI noted that an increase in 
business confidence, lower producer inflation figures and 
low interest rates have led to an improvement in savings 
conditions for businesses and increases in disposable 
income improved the savings environment for consumers. 
Lower government spending as a percentage of GDP and the 
decrease in government debt as a proportion of GDP were 
among the factors contributing to the improvement in 
government's saving environment in the last quarter of 
2004.  Source:  Business Day, May 16. 
 
SA PRODUCTIVITY DRIVES INCREASE IN GLOBAL COMPETITIVENESS 
--------------------------------------------- ------------ 
 
5.  According to the National Productivity Institute 
(NPI), South Africa's rising productivity, growing at more 
than 3 percent per year since 1996, forms the basis for 
South Africa's improved international competitiveness. 
South Africa improved its ranking from 49 to 46 out of 60 
countries according to the latest World Competitiveness 
Report compiled by the Swiss-based Institute for 
Management Development, primarily due to due an improved 
2004 economic performance.  Despite this improvement in 
its rankings, South Africa showed a decline in three of 
the four ranking categories since 2004.  Apart from a 
sharp improvement in economic performance, areas such as 
business efficiency, government efficiency and 
infrastructure development had actually declined in 
comparison with other countries.  The NPI said business 
efficiency was hampered by inadequate skilled labor, the 
brain drain, low employment rate, insufficient finance 
skills, and shortages of competent senior managers and 
entrepreneurs.  South African employers were also not 
keeping pace with other countries in terms of planning and 
supervision of employees.  Source:  Business Day, May 16. 
 
MANUFACTURING AND RETAIL SALES SHOW SIGNS OF SLOWDOWN 
--------------------------------------------- -------- 
 
6.  According to Statistics SA, manufacturing production 
grew by 1.2 percent (y/y) and 0.9 percent growth (m/m) in 
March, continuing its fourth month of slower growth.  On a 
quarterly basis, six out of 10 manufacturing sub-sectors 
reported a decline in output in the period ending in March 
2005, with basic iron and steel and machinery contributing 
most to manufacturing production decline.  The strong 
rand, slower growth in the Euro zone economies, and higher 
oil prices are manufacturers' key concerns.  Retail sales 
also slowed in the first two months of 2005 compared to 
December 2004's growth of 10.2 percent (y/y).  In January 
2005, real retail sales increased by 3.4 percent (y/y), 
showing a monthly decline of 32.6 percent.  February's y/y 
growth was 5.4 percent, while monthly growth (-1.5 
percent) again declined but at a much slower rate.  The 
April 14th 50 basis point reduction in interest rates 
should support additional positive growth in retail sales, 
although sales of motor vehicles show signs of 
deceleration.  Source:  Business Day, May 13; Standard 
Bank, Taking Stock and Manufacturing Unpacked. 
 
SUB-SAHARAN AFRICAN TRANSPORT EXPENSIVE 
--------------------------------------- 
 
7.  Despite the sub-Saharan Africa region owning the 
largest transport infrastructure in Africa, it had the 
highest transport costs on the continent.  Sub-Saharan 
Africa owns 83 percent of all African railways, but 
transport costs as a proportion of import value in the 
region were about 16 percent, compared with an average of 
13 percent in other African countries, according to 
Minister of Transport Jeff Radebe.  Transport costs in 
Africa were considerably higher than the 9 percent average 
in other developing countries and more than double the 
world average.  North Africa had the lowest freight costs 
on the continent, while West Africa was slightly lower 
than the sub-Saharan region at 14 percent.  High transport 
costs are a big concern in South Africa. The country owns 
42 percent of the sub-Saharan railway infrastructure, but 
transport costs come in at about 13 percent of gross 
domestic product.  Maria Ramos, the Chief Executive of 
Transnet (a state-owned transportation enterprise) said 
that the transport utility wants to lower transport costs 
to between 7 percent and 8 percent.  Radebe said South 
Africa had the biggest rolling stock on the continent, 
accounting for about 47 percent of the locomotives in sub- 
Saharan Africa, 32 percent of locomotives in Africa, 62 
percent of freight wagons and carries 71 percent of the 
continent's rail freight and 91 percent of sub-Saharan 
Africa's.  Source:  Business Report, May 17. 
 
2004/05 BUDGET DEFICIT LOWER 
---------------------------- 
 
8.  National Treasury stated that South Africa's national 
budget deficit for the financial year 2004-05 narrowed to 
1.5 percent of gross domestic product (GDP), compared to a 
April estimate of 1.6 percent and a February estimate of 
2.3 percent.  The consolidated deficit, which covers both 
national and provincial expenditures, is now projected at 
1.3 percent compared to February's estimate of 2.5 
percent.  In April, the lower than expected deficit was 
due to almost R10 billion ($1.5 billion, at R6.4 per 
dollar) surplus revenue collected by the South African 
Revenue Service.  Better than expected economic growth, 
led by strong consumer spending, resulted in higher 
collected tax revenues.  Acknowledging concerns about the 
provinces' capabilities of delivering basic services 
quickly, National Treasury stated that the reduced deficit 
should not be viewed as under spending as it represented 
savings, higher tax collections and the non-transfer of 
funds.  Spending by national and provincial governments 
was 97.8 percent of their consolidated adjusted budgets in 
2004/05.  These figures would be revised when national and 
provincial departments had finalized and reconciled 
financial statements for submission to the auditor-general 
by May 31.  Source:  Business Day and Business Report, May 
18. 
 
MILOVANOVIC