US embassy cable - 05PRETORIA2701

UNCLAS SECTION 01 OF 03 PRETORIA 002701 
 
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 
          July 8 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: 
 -  Rand, Oil Prices Offset Inflation Good News; 
 -  June Forex Reserves Leap, Helped by FDI; 
 -  Falling Interest Rates Lift Credit Demand to 15-year 
 High; 
 -  Employment Fell in First Quarter 2005; 
 -  COSATU Strike Fails to Halt Rand's March; 
 -  Record Portfolio Inflow in Second Quarter; and 
 -  April Leading Indicator Up 1.8%. 
End Summary. 
 
Rand, Oil Prices Offset Inflation Good News 
------------------------------------------- 
 
2. Consumer inflation came in well below market 
expectations, but with oil prices trending higher and the 
rand weakening, it was unlikely that the Reserve Bank would 
lower interest rates in August.  Figures released by 
Statistics South Africa showed that CPIX (consumer price 
inflation less mortgage costs), the Reserve Bank's targeted 
measure of inflation, rose 3.9% year-on-year in May, and 
0.2% month-on-month.  The main contributors to May's rise in 
consumer inflation were increases in the price indices for 
housing (excluding interest rates on mortgage bonds) and the 
index for transport, which recorded increases of 1.2% and 
1.3%, respectively, during the month.  The better-than- 
expected CPIX figures failed to nudge the rand to firmer 
levels.  The rand fell 1.6% to R6.72 against the dollar, 
from its previous close of R6.62.  Standard Bank economist 
Monica Ambrosi said that although overall inflation 
pressures have been relatively muted for more than a year, 
the transport component has been almost a consistent source 
of upward pressure on the back of a volatile oil price. 
Food prices remain muted, with prices falling 0.1% month-on- 
month, from a 0.1% rise in April.  Core inflation slowed to 
3.3% year-on-year, from 3.4% in April. Source: Business Day, 
June 30. 
 
June Forex Reserves Leap, Helped by FDI 
--------------------------------------- 
 
3. South Africa's net gold and foreign exchange reserves 
jumped by nearly $1.5 billion to $15.2 billion during June, 
boosted in part by inflows of foreign direct investment 
(FDI), the Reserve Bank said.  Gross reserves jumped to 
$18.7 billion from $17.2 billion in May.  Markets speculated 
the forex increase was fuelled in part by transactions 
related to the planned acquisition by Britain's Barclays 
bank of a majority stake in ABSA, but analysts said this was 
unlikely given the deal's timetable.  The settlement date 
for the R33 billion ($5.1 billion) deal has been moved to 
July 27 from July 13.  Other potential inflows that could 
have affected reserves were a payment last month to Kumba 
(the continent's biggest iron ore producer) of R1.2 billion 
($185 million) for the repurchase of Kumba's share of the 
Hope Downs iron mine in Australia or foreign purchases of 
R11.8 billion ($1.8 billion) of equities during June.  The 
Reserve Bank has repeatedly said it would buy dollars 
cautiously, to avoid affecting the value of the rand.  Gold 
reserves rose to $1.74 billion from $1.66 billion at the end 
of May due to higher gold prices.  The surge in reserves 
during June, which followed a $1.2 billion increase in May, 
took the country's import cover to about 4 1/2 months, 
analysts said. Source: Business Day, July 7. 
 
Falling Interest Rates Lift Credit Demand to 15-year High 
--------------------------------------------- ------------ 
 
4. Low inflation and low interest rates fueled demand for 
credit nearly to 15-year highs, strengthening the case 
against a rate cut when the Reserve Bank's monetary policy 
committee meets next month.  Economists said that from an 
inflation point of view, the figures, taken together with 
high oil prices and a weaker rand, should be worrying for 
the Reserve Bank.  Interest rates, at 24-year lows, have 
spurred consumer spending to record levels, as it has become 
more affordable to borrow money to finance purchases. 
Producer price inflation (PPI) also came in above market 
expectations, largely on the back of higher international 
oil prices.  The PPI, which tends to lead consumer inflation 
by a few months, rose sharply to 2.4% year on year in May, 
against a 1.8% rise in April. Economists said the strong 
growth in monetary aggregates counted against further 
monetary stimulus and another interest rate reduction. 
Private sector credit extension and money supply increased 
slightly above market expectations.  Private sector credit 
extension jumped 22.9%, to just more than R1 trillion ($154 
billion) in May, compared with an increase of 20.4% in 
April, spurred mainly by mortgage advances and leasing 
finance.  The broadest measure of money supply, M3, rose to 
16.3% year-on-year in May, or R983 billion ($151 billion), 
from a revised increase of 15.0% in April, driven mainly by 
claims on the private sector.  Standard Bank economist 
Shireen Darmalingam said the revision was also due to the 
reclassification of the Public Investment Corporation (PIC). 
The PIC, which was previously not classified as part of the 
monetary banking sector, will now have its deposit 
liabilities, which contribute about 40% to total government 
deposits, included in the M3. Source: Business Day, July 1. 
 
Employment Fell in First Quarter 2005 
------------------------------------- 
 
5. Employment in the non-agricultural sector fell 
unexpectedly by 136,000 jobs in the first quarter of 2005, 
casting doubt on the success of efforts to reduce the steep 
jobless rate.  An expanded employment survey published by 
Statistics South Africa (Stats SA) showed that employment in 
the formal business sector fell 1.9% in the first three 
months of the year, compared with the last quarter of 2004. 
Patricia Koka, Stats SA's senior statistician said the 
decline in employment from 7,075,000 at December 2004 to 
about 6,939,000 workers in March was probably because of a 
fall-off in the number of seasonal workers employed.  Data 
released earlier this year showed the unemployment rate 
dipped to 26.2% last September from 27.9% in March 2004, 
with 250,000 jobs created.  Employment in the biggest 
sector, financial and real estate, fell sharply in the first 
quarter, dropping by 125,000 jobs, or 8.1%.  Jobs in the 
retail and hotels sector dipped by 2.2%, while there were 
also declines in mining and manufacturing, the areas hit 
hardest by rand strength.  Sectors where jobs increased 
included construction, electricity, gas, and water. Source: 
Business Report, June 29. 
 
COSATU Strike Fails to Halt Rand's March 
---------------------------------------- 
 
6. Nationwide protests by the Congress of South African 
Trade Unions (COSATU) on June 27 in favor of a weaker rand 
failed to move the markets, with the local currency actually 
strengthening against the dollar.  Several major mining 
houses, retailers, and companies in other industries 
reported considerably reduced operations, but analysts said 
it would take time before the full effect of the strike was 
felt.  The strike was organized in part to protest against 
job losses resulting from the currency's strength, largely 
in mining and manufacturing, which together make up 23% of 
gross domestic product (GDP).  Unemployment in South Africa 
is officially estimated at about 26%, but unions say that 
the figure is much higher - closer to 40%.  The production 
side of the economy has shed hundreds of jobs as a result of 
the firm local currency, which has made it difficult for 
exporting companies to remain profitable.  COSATU has 
proposed that retailers stock 75% local goods and cut back 
on imports, and that government pursue local procurement 
policies while reviewing its trade strategy.   It also wants 
local authorities to halt the privatization of basic 
services.  Government dismissed calls for a devaluation, 
with Trade and Industry Minister Mandisi Mpahlwa saying that 
South Africa had to look beyond the value of the rand in 
seeking to boost competitiveness.  Mpahlwa also said that he 
was "not inclined to artificial measures to influence the 
currency."  According to the South African Chamber of 
Business (SACOB), about 10% of the country's workers took 
part in the strike, costing the economy an estimated R500 
million ($77 million). Source: Business Day, June 28. 
 
7. Comment: Finance Minister Trevor Manuel conceded that a 
strong rand was worrying for exporters, but went on to say, 
"I don't control the rand."  Manuel thinks that the unions 
need a "different approach" and that the government should 
work with the unions to develop "a commonality of 
perspectives" to address their concerns. End Comment. 
Record Portfolio Inflow in Second Quarter 
----------------------------------------- 
 
8. Foreigners bought a record net R26.8 billion ($4.1 
billion) worth of South African stocks and bonds in the 
second quarter 2005 after buying only a net R7.9 billion 
($1.2 billion) in the first quarter 2005.  The split between 
bonds and equities was almost equal with a net R12 billion 
($1.8 billion) worth of purchases of bonds after net sales 
of R1.3 billion ($200 million) rand in the first quarter, 
while net equity purchases amounted to R14.8 billion ($2.3 
billion) after net purchases of R9.2 billion ($1.4 billion) 
in the first quarter.  The previous record quarterly 
portfolio inflow into South African financial markets was in 
the fourth quarter 2004, when foreigners bought a net R24.7 
billion ($3.8 billion). Source: I-Net Bridge, July 1. 
 
April Leading Indicator Up 1.8% 
------------------------------- 
 
9. South Africa's April 2005 leading economic indicator, 
which is compiled by the South African Reserve Bank (SARB), 
rose by 1.8% month-on-month (m/m) after a 1.0% m/m increase 
in March, but was still below the December 2004 level.  Of 
the 13 leading indicator components in April, eight were 
positive, three were negative, and two were unavailable. 
The positive factors were average manufacturing hours 
worked, job advertising space, manufacturing orders, 
business confidence, the inventory/sales ratio, the interest 
rate spread between the money market and capital market 
instruments, building plans approved, and real M1 money 
supply.  The negative factors were equity prices, commodity 
prices, and the composite leading indicator of major trading- 
partner countries.  The unavailable data was for 
manufacturing labor productivity and the gross operating 
surplus as a percentage of GDP.  On a year-on-year basis, 
the leading indicator rose 1.5% in April, up from 0.2% in 
March.  The South African economy is currently in its 71st 
month of a record upturn, as the current expansion started 
in September 1999. Source: I-Net Bridge, June 30. 
 
FRAZER