US embassy cable - 05PRETORIA4450

UNCLAS SECTION 01 OF 03 PRETORIA 004450 
 
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 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, ETRD, BEXP, KTDB, PGOV, SF 
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
           November 4 2005 ISSUE 
 
 
 1. Summary.  Each week, Embassy 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: 
 
 -  Consumer Credit Demand High but Below Expectations; 
 -  Lack of Steady Employment Bars Widespread Bank Account 
 Usage; 
 -  DTI Minister Reiterates Importance of Chinese Trade; 
 -  October Shows Slowing in Manufacturing Sector Growth; 
 -  Labor Department Reviewing UIF Benefits; 
 -  September's Trade Deficit Widens; 
 -  Gasoline Price Reduction Lowers Risk of Increases in 
 Interest Rates; 
 -  Public Works Having Little Impact on Employment; and 
 -  August Retail Sales Jump. 
 End Summary. 
 
 CONSUMER CREDIT DEMAND HIGH BUT BELOW EXPECTATIONS 
 --------------------------------------------- ----- 
 
 2.  Demand for credit rose slightly more than expectations 
 in September, as consumers continued to take advantage of 
 the current low interest-rate environment.  According to 
 figures released by the South African Reserve Bank (SARB), 
 private sector credit extension rose 22.9% year on year in 
 September, compared to 22.7% in August, driven mainly by 
 mortgage advances, which rose R12.6 billion.  M3, the 
 broadest measure of money supply, slowed to 16.7%, from 
 19% in August, due to a decline of R11.18 billion in net 
 claims on the government sector.  A Reuter's poll 
 consensus forecast predicted that private sector credit 
 demand and M3 would rise 22.1% and 17.9%, respectively. 
 Installment sales credit declined R374 million in 
 September, reducing growth in this category to 21.5% y/y 
 compared to August's growth of 23.8%.  Recent statements 
 by the SARB Governor Tito Mboweni about the inflationary 
 risk from high oil prices led many analysts to expect an 
 interest rate hike in December.  However, with September 
 money supply growth slowing down and producer and consumer 
 inflation below market forecasts, December interest rates 
 may remain unchanged.  Source:  Business Day, October 31. 
 
 LACK OF STEADY EMPLOYMENT BARS WIDESPREAD BANK ACCOUNT 
 USAGE 
 --------------------------------------------- --------- 
 
 3.  According to a FinScope 2005 survey, 57% of South 
 Africans polled cite lack of employment as the main reason 
 for not having a bank account, while 43% say it is because 
 they have no regular income, and 15% say it is because 
 they have no money to save.  Because of the large numbers 
 not using financial services, 47% of money received in the 
 country does not go into a bank account.  In addition, 
 roughly 3.6 million South Africans, or 25% of all those 
 with bank accounts, withdraw all the money out of their 
 accounts as soon as it is deposited.  There has been a 
 slight increase in the number of South Africans with a 
 bank account, largely due to the introduction of the low- 
 cost Mzansi account a year ago.  About 550,000 or 4% more 
 accounts were held in June 2005 compared to the previous 
 year, leading to a 1% increase in the number of South 
 Africans participating in the formal financial sector. 
 According to FinScope 2005, 15% of those people who have 
 opened an Mzansi account are not using it; 38% opened an 
 Mzansi account in addition to having another account; and 
 27% opened an Mzansi account to replace another bank 
 account.  Regarding debt, the survey found that 79% 
 thought that taking out loans should be avoided as much as 
 possible.  However, the survey noted that the main reason 
 why black and "coloured" South Africans borrowed money was 
 to buy food when their own money had run out, contrasting 
 with the main reason why white and Asian South Africans 
 borrowed money - which was to buy a car.  Research Surveys 
 conducted 3,885 interviews across South Africa on behalf 
 of FinMark Trust for FinScope 2005 between June and August 
 2005.  Two-thirds of the respondents lived in non- 
 metropolitan areas.  Source:  Business Day, October 31. 
 
 DTI MINISTER REITERATES IMPORTANCE OF CHINESE TRADE 
 --------------------------------------------- ------ 
 
 4.  Citing the overall Chinese trade relationship as more 
 important than any one sector, Department of Trade and 
 Industry Minister Mandisi Mpahlwa said South Africa would 
 not impose quotas on Chinese textile imports.  Mpahlwa 
 said the government must consider the entire trading 
 relationship.  South African import tariffs on textiles 
 are being reviewed, aimed at reducing costs for local 
 clothing manufacturers.  Customs inspection was being 
 improved to reduce illegal or under-invoiced imports.  An 
 increase in cheaper Chinese imports led to a reduction of 
 than 50,000 South African clothing and textile jobs in 
 2005.  Source:  Business Report, October 31. 
 
 OCTOBER SHOWS SLOWING IN MANUFACTURING SECTOR GROWTH 
 --------------------------------------------- ------- 
 
 5.  The seasonally adjusted Investec Purchasing Managers 
 Index (PMI) slowed to 54.1 in October from 55.7 in 
 September.  The decline in the PMI was mainly due to a 
 drop in the activity index to 56.3 from 61.2, while the 
 new orders index fell to 55.7 from 62.1.  The index is 
 still above the critical level of 50, indicating continued 
 growth in the manufacturing sector.  Despite the 
 moderation in the business activity index, the seasonally 
 adjusted employment index increased from 48.1 in September 
 to 53.4 in October.  Increases were also recorded in the 
 sub-indices of inventories and suppliers performance, but 
 they were not enough to prevent the decline in the overall 
 index.  The PMI price index rose further to 62.2 in 
 October from 60.3 in September, indicating increasing cost 
 pressures.  Manufacturers' six-month expectations of 
 business conditions improved marginally in October to 66, 
 compared to the 65.4 recorded in September.  Improvement 
 in business conditions was expected by 43% of the 
 respondents, while 11% anticipate deterioration in 
 conditions.  Source:  I-Net Bridge, November 1. 
 
 LABOR DEPARTMENT REVIEWING UIF BENEFITS 
 --------------------------------------- 
 
 6.  The Department of Labor plans to review the benefits 
 under the Unemployment Insurance Fund (UIF) because 
 monthly income received at R500 million ($92 million, 
 using 6.5 rands per dollar) far exceeds monthly 
 expenditure at R200 million ($31 million).  Labor Deputy 
 Director-General Les Ketteldas told Parliament's labor 
 portfolio committee that contribution income had increased 
 because higher income earners had been included as 
 contributors and they did not use unemployment benefits as 
 much as low income earners.  According to the UIF's annual 
 report for the year ended March 31, 2005, revenue 
 contributions were over R6 billion ($920 million), up from 
 R5.6 billion ($860 million) in the previous year.  Benefit 
 payment to contributors rose from R2.1 billion ($320 
 million) to R2.5 billion ($385 million) in 2005.  The net 
 surplus for the year rose from R121 million ($18.6 
 million) to R2 billion ($308 million).  Starting November 
 1, recipients of unemployment benefits will be able to 
 receive payments electronically, reducing time spent long 
 lines waiting to receive monthly checks.  Source: 
 Business Report, October 31; Business Day, November 1. 
 
 SEPTEMBER'S TRADE DEFICIT WIDENS 
 -------------------------------- 
 
 7.  For the second month in a row, South Africa's trade 
 deficit widened due to an increase in crude oil imports 
 and a relatively stronger rand.  Figures released by the 
 South African Revenue Service show that the trade deficit 
 increased to R3.7 billion in September, from R3.24 billion 
 in August.  During the month, imports climbed 3.3% to R33 
 billion ($5.1 billion), while exports rose 2% to R29.3 
 billion ($4.5 billion).  Analysts said the steady increase 
 in exports may be an indication that the export sector was 
 adjusting to a stronger rand.  The sector has been under 
 pressure over the past two years, as a strong local 
 currency undermined its competitiveness.  On average, the 
 rand was trading at R6.36 to the dollar, compared with 
 R6.47 in August.  September oil imports, which account for 
 12% of the country's imports, increased by 44%.  Oil 
 imports made up almost a quarter of total imports in 
 September.  For the first nine months of this year, the 
 trade deficit amounted to R15.9 billion, more than double 
 the R6.6 billion deficit recorded over the same period in 
 2004.  In 2003, the trade balance recorded a surplus of 
 R17.4 billion.  Source:  Business Day, November 1. 
 
 GASOLINE PRICE REDUCTIONS LOWERS RISK OF INCREASES IN 
 INTEREST RATES 
 --------------------------------------------- -------- 
 
 8.  November's expected 31 rand cents per liter reduction 
 in the retail gasoline price lowers the risks of a 
 December interest rate increase.  Continuing high oil 
 prices and their possible second-round effects on CPIX 
 inflation were cited as primary inflationary risks in the 
 October Monetary Policy Committee statement.  Recent 
 statements by the South African Reserve Bank Governor 
 Mboweni have continued to warn of possible interest rate 
 hikes due to higher oil prices.  According to T-Sec 
 economist Mike Schussler, however, there was no evidence 
 of second-round inflationary effects.  If transport 
 operating costs, which are mostly fuel, are excluded from 
 CPIX, then inflation rose by 3.5% y/y in September from 
 3.7% y/y in August.  Source:  I-Net Bridge, November 2. 
 
 PUBLIC WORKS HAVING LITTLE IMPACT ON EMPLOYMENT 
 --------------------------------------------- -- 
 
 9.  The South African public works program's impact on 
 jobs creation and development has been limited, according 
 to research by Anna McCord, a research associate at the 
 Southern Africa Labor and Development Research Unit at the 
 University of Cape Town.  McCord's research showed that 
 during 2004/05, 170,000 jobs, lasting four months, were 
 created, making it unlikely that government's employment 
 targets would be met.  The public works program also 
 strained management capacity to handle the temporary 
 workers.  McCord's research showed that only 3% of people 
 benefiting from the public work job program are eligible 
 for internships or apprentice programs in the construction 
 sector.  McCord, the head of the Public Works Research 
 Project, presented her results to Parliament's Committee 
 on Public Works.  Source:  Business Day, November 2. 
 
 AUGUST RETAIL SALES JUMP 
 ------------------------ 
 
 10.  According to Statistics South Africa (StatsSA) latest 
 release of retail sales, August's inflation-adjusted sales 
 growth reached 7.2%, up from July's 5.8% growth.  This 
 boost in retail sales indicates that consumer spending 
 growth may remain high; however, more recent car sales 
 trends may indicate otherwise.  Passenger car sales, a 
 leading indicator for retail sales, recorded particularly 
 strong growth in August at 28% y/y.  Since then, the car 
 sales growth has decelerated, with October's increase 
 coming in at 18.1% y/y.  Overall, analysts expect consumer 
 demand to remain strong, although soften in the coming 
 months.  Insolvencies are at their 18-year low and the 
 percentage of non-performing loans reached its lowest 
 levels in the past four years.  Source:  Taking Stock, 
 Standard Bank, November 2. 
 
HARTLEY