US embassy cable - 05PRETORIA4132

UNCLAS SECTION 01 OF 02 PRETORIA 004132 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, ETRD, BEXP, KTDB, PGOV, SF 
SUBJECT:  South African Economic Growth Still Expanding 
 
 1. Summary.  The September 2005 Quarterly Bulletin 
 describes an expanding South African domestic economy, 
 operating at close to its long-term potential.  In the 
 second quarter 2005, real GDP growth reached 4.8%, up from 
 the first quarter's growth of 3.5%.  Domestic demand's 
 growth in the second quarter more than doubled the first 
 quarter's growth, primarily due to a recovery in 
 government consumption expenditures.  Consumer spending 
 remains strong.  Household disposable income showed 5.7% 
 growth in the second quarter.  Rising asset prices, high 
 consumer confidence, low inflation and interest rates also 
 support strong consumer spending.  Increased credit 
 financed consumer spending, with the household debt to 
 disposable income ratio reaching 61.8% in the second 
 quarter, compared to 51.4% six quarters earlier.  If 
 interest rates increase in the future, the high debt may 
 serve as a brake for continued robust consumer spending. 
 End Summary. 
 
 The Domestic Economy Powers On 
 ----------------------------- 
 
 2.  Real domestic demand (excluding the foreign sector), 
 now in its 18th quarter of positive growth, expanded 4.9% 
 in the second quarter 2005 compared to 1.7% in the 
 previous quarter.  A higher growth in government 
 consumption expenditures and inventories explained the 
 second quarter recovery in domestic demand growth.  Fixed 
 capital formation by general government increased as the 
 government boosted spending on infrastructure.  Real 
 spending on capital formation increased 5.7% and 
 inventories more than doubled in the second quarter 2005. 
 The highest real sectoral growth rates came from the 
 agricultural industry, at 10.1%; manufacturing, at 7.3%; 
 transport and communication, at 6.4% and construction 
 posting 6.2% growth. 
 
 Consumption and Investment Still Growing 
 ---------------------------------------- 
 
 3.  Total consumption accounts for over 80% of domestic 
 demand, with households two thirds of consumption 
 spending.  Household spending strengthened slightly in the 
 2nd quarter, growing by 5.9%, although government 
 consumption accounted for most of total consumption's 
 rebound in 2nd quarter growth, reaching 5.7%.  Government 
 consumption expenditures increased by 5.3%, compared to 
 1.2% last quarter, due to higher real compensation of 
 employees and increased spending on intermediate goods and 
 services. 
 
 4.  A substantial part of this increased spending was 
 financed by credit, pushing the household debt to income 
 ratio up to 61.8% in the second quarter 2005 compared to 
 2003 fourth quarter's ratio at 51.4%.  Increased equity 
 prices, low interest rates and inflation (so far), and 
 rising disposable incomes have fueled debt acquisition. 
 Household disposable income increased 5.7 percent in the 
 2nd quarter 2005.  If inflation increases more than 
 anticipated and interest rates rise, households may reduce 
 their debt exposure, providing a possible brake to robust 
 consumer spending. 
 
 5.  Real capital formation increased 5.7% in the second 
 quarter, although down from 1st quarter's growth of 10.1% 
 due to reductions in capital outlays of public 
 corporations.  (Note SAA purchased three aircraft in the 
 first quarter 2005.  Endnote)  Private sector investment 
 increased 4.0%, similar to 1st quarter's growth, with 
 investment in commerce, transport and real estate leading 
 the way. 
 
 Current Account Deficit Narrows 
 ------------------------------- 
 
 6.  Both exports and imports staged second quarter 
 recovery, with both increasing over 20% compared to last 
 quarter's declines of 13% and 17%, respectively.  When 
 measured as a percentage of GDP, the current account 
 improved from 3.8% in the first quarter to 3.4% in the 
 second quarter 2005. 
 
 7.  Total exports from the Euro-zone declined during the 
 second quarter; exports to Asian nations increased by 
 28.6% (compared to 24.5% in the first quarter 2005) and 
 exports to North and South America remained unchanged. 
 During 2nd quarter 2005, merchandise imports increased by 
 6.5% after declining by 4.5% in the first quarter, 
 primarily because of an increase in oil imports. 
 
 8.  Comment.  Indicators point to over 4% GDP growth in 
 2005, although GDP will fall short of 6% growth needed to 
 meet government's goal of halving unemployment and poverty 
 by 2014.  Government's strategies to achieve higher levels 
 of economic growth are focused on raising the levels of 
 investment, improving the skills of the workforce, 
 introducing new technologies, and improving the 
 infrastructure of the transportation, utilities and 
 telecommunication sectors.  A recent IMF report on South 
 Africa emphasized necessary reforms such as highlighted 
 labor market flexibility, increased privatization, and 
 trade liberalization to achieve 5.5 percent growth and 18% 
 unemployment by 2010.  The South African government is 
 exploring ways of achieving 6% growth with task force 
 (made up of the Ministers of the Department of Trade and 
 Industry, Finance, Public Enterprises and the Deputy 
 President) recommendations due later this year.  Higher 
 than expected inflation and subsequent increased interest 
 rates pose possible obstacles to 4% growth in 2005, 
 although most analysts expect interest rates to remain 
 stable over the year.  End comment. 
 
TEITELBAUM