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Cablegate: South African Reserve Bank (Sarb) September

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 004456

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 AFRICAN RESERVE BANK (SARB) SEPTEMBER
2004 QUARTERLY BULLETIN

SUMMARY
-------

1. Summary. The September 2004 South African Reserve
Bank's (SARB) quarterly bulletin reported mostly
positive developments in South Africa's macroeconomic
indicators for the second quarter of 2004. Real
gross domestic product (GDP) growth continued its
over 3 percent growth, reaching 3.9 percent compared
to 3.6 percent in the first quarter 2004. South
Africa's real GDP has now expanded for 23 consecutive
quarters. Real household consumption increased by
4.3 percent. Fixed capital formation grew by 10.4
percent, led by a 53.8 percent increase in public
corporation investment that accounted for 59 percent
of the quarterly change. Private sector investment
also showed strong growth, increasing by 5.4 percent,
led by mining (especially platinum), agricultural and
manufacturing sectors. After 22 years of consecutive
quarterly trade surpluses, South Africa's trade
balance reached a R5.5 billion deficit. As global
growth recovered in the first half of 2004, the
export sector grew 42.3 percent (q/q) after two
consecutive quarters of over 9 percent declines; a
95.3 percent quarterly growth in imports, however,
restrained overall GDP growth. End Summary

INTRODUCTION
------------

2. The September 2004 SARB's quarterly bulletin
includes data and commentary about the South African
economy up to the end of the second quarter 2004.
This cable summarizes bulletin highlights. The full
quarterly bulletin is available at www.resbank.co.za

GDP GROWTH RECOVERS - DOMESTIC EXPENDITURES GROWTH
REMAINS HIGH
--------------------------------------------- --------

3. Real gross domestic product (GDP) growth
continued its over 3 percent growth in the second
quarter 2004, reaching 3.9 percent compared to 3.6
percent in the first quarter 2004. South Africa's
real GDP has now expanded for 23 consecutive
quarters, fueled mainly by a 13 percent increase in
gross domestic expenditures (GDE) and significantly
higher than the 2004 Q1's increase of 2.9 percent. A
13.6 percent increase in inventories, compared to
first quarter's rise of 3.1 percent, explains the
much higher increase in GDE during the second
quarter. Domestic demand (excluding inventories)
remained strong, increasing 5.3 percent, as interest
rates continued their downward trend. Real household
consumption continues to grow higher than GDP, at 4.3
percent compared to last quarter's 4.9 percent. Real
capital formation increased 10.4 percent after first
quarter's growth of 14.6 percent. Capital formation
by public corporations contributed 59 percent of the
second quarter's change, while private investment
accounted for 39 percent. Increased global growth
countered the trade-weighted rand strength resulting
in a 42.3 percent quarterly export growth; however, a
95.5 percent import growth caused the current account
deficit to reach 3.8 percent of GDP.

4. Real household consumption increased by 4.3
percent in the second quarter, slightly lower than
4.9 percent in Q1. Growth in household spending on
durable goods reflected a slowdown in Q2 growth of 9
percent compared to Q1 growth of 12 percent.
Furniture and household appliances experienced the
sharpest slowdown in Q2 growth. Growth in real
disposable income slowed to 3.8 percent growth in the
second quarter, compared to the first quarter's 5
percent growth. Household debt as a percent of
disposable income rose slightly to 54.8 percent
(compared to 54 percent last quarter), as consumer
spending on durable goods was financed by less
expensive credit. Government consumption rose by
3.8 percent in the second quarter, lower than first
quarter's 4.6 percent growth.

5. During Q2, fixed capital formation grew by 10.4
percent, led by a 53.8 percent increase in public
corporation investment that accounted for 59 percent
of the quarterly change. Private sector investment
also showed strong growth, increasing by 5.4 percent,
led by mining (especially platinum), agricultural and
manufacturing sectors. Inventories showed especially
strong growth in the second quarter rising to 13.6
percent compared to first quarter's 3.1 percent
growth, with most of the inventory growth occurring
in the manufacturing sector.

SECOND QUARTER TRADE BALANCE TURNS NEGATIVE
-------------------------------------------

6. After 22 years of consecutive quarterly trade
surpluses, South Africa's trade balance reached a
R5.5 billion deficit. (Note: trade balance defined
as merchandise exports plus net gold exports minus
merchandise imports Endnote) The current account
deficit (trade balance adjusted for net service,
income, and current transfer payments) widened to
R49.3 billion, reaching 3.8 percent of GDP. However,
if imports of oil, aircraft and naval ships were
excluded, then the current account deficit would be
closer to 1 percent of GDP. The net inward flow of
capital continued in the second quarter with R25.9
billion, primarily due to large increases in
portfolio investment. Inflows of foreign direct
investment, which had been small but positive since
last year, declined in the second quarter to a
deficit of R1.8 billion compared to first quarter's
surplus of R7.8 billion. The drop in foreign direct
investment was due to the sale of half of its Telkom
shares by foreign equity partner Thintana in June.

EXPORTS IMPROVE BUT IMPORTS OVERWHELM
-------------------------------------

7. As global growth recovered in the first half of
2004, the export sector grew 42.3 percent (q/q) after
two consecutive quarters of over 9 percent declines.
However a 95.3 percent quarterly growth in imports
restrained overall GDP growth. Second quarter real
merchandise exports increased 12.6 percent compared
to a 3.6 percent decline during the first quarter.
However a 20.5 percent increase in real merchandise
imports, due to sharp increases in oil and military
equipment, explains the turnaround in the current
account trade balance. Between March 31 and June 20
2004, the weighted average rand exchange rate,
calculated with reference to a basket of 13
currencies, appreciated 2.4 percent, compared to 5.7
appreciation between December 31 2003 and March 31
2004, and 11 percent appreciation over the first
quarter of 2003. The South African Reserve Bank
continues to build foreign reserves, hoping to reduce
volatility in the rand exchange rate. The country's
net international reserves rose by R12.1 billion
during Q2, following an increase of R13.4 billion in
Q1. The SARB's foreign reserves increased from USD
9.8 billion at the end of March to USD 11.9 at the
end of August.

INFLATION AND MONEY SUPPLY ON COURSE
------------------------------------

8. During the second quarter, money supply (M3)
increased by 13.3 percent, with overall consumer
prices increasing by 2.3 percent. Consumer price
inflation, excluding mortgage costs (CPIX), increased
by 5.4 percent, within the Reserve Bank's target
range of 3 to 6 percent. Falling import prices
caused by the strong rand was the main reason for
consumer prices tracking downwards. Unit labor costs
increased 5.9 percent (q/q) just within the inflation
target. Both average nominal and real wages
increased (9.4 percent and 5.1 percent respectively).
Labor productivity increased 3.3 percent.

COMMENT
-------

9. Strong growth in both domestic investment and
consumption has improved short-term South African
growth. Rising global demand is fueling growth in
manufacturing and mining but the expansion of those
sectors will have to rely on continued global growth
in order to overcome the negative impact of a strong
rand. The latest government forecast for growth is
2.9 percent in 2004 and rising to 3.6 percent in 2005
(note: Budget Review 2004). The 2004 Medium Term
Policy Statement to be presented to Parliament at the
end of October will probably revise government
economic growth forecasts. While most private
economic forecasters expect 2004 growth at 3 percent,
the recent Quarterly Bulletin may point to some
problems in achieving future growth over 3 percent
during the next two quarters. Both investment and
consumption show over 4 percent growth in the second
quarter, though their growth has stabilized. In
order to sustain higher GDP growth, South African
exports should increase in the face of higher world
global demand growth. South Africa has to rely on
strong commodity prices and global demand so that
exports can be the future engine of growth. Recent
improvements in labor productivity can be attributed
to a 1.7 percent decline in employment, not the best
way to increase domestic demand. Second quarter
foreign direct investment outflows will not help in
attaining the government's stated foreign direct
investment inflows of 2 percent of GDP.
Deteriorating current account deficits may put
pressure on the rand to depreciate; combined with
higher oil prices this may lead to higher inflation
and possibly interest rate increases. Inflation
prospects for 2004 will depend on food prices, wage
negotiations, oil prices and the rand. The impact on
targeted inflation will steer the South African
Reserve Bank's actions in setting interest rates.
End comment.

FRAZER

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