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Cablegate: October 8 South Africa Economic News

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 004529

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: OCTOBER 8 SOUTH AFRICA ECONOMIC NEWS

REF: PRETORIA 4503

SUMMARY
-------

1. Summary. Each week, USEmbassy 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 include September Motor
Vehicle Sales, Update on Trade Conditions,
Residential Property Prices, Increased Funding to
Facilitate BEE Finance Charter; Reserve Bank Issues
Financial Stability Review; South Africa Drops in
Global Investment Rankings; Cabinet Recommends
Published Administered Price Index; and July Retail
Sales. End Summary

SEPTEMBER MOTOR VEHICLES CONTINUE HIGH GROWTH
---------------------------------------------


2. Encouraged by a 2003 5.5 percent reduction in
interest rates and an additional mid-August 2004 0.5
percentage point reduction, new car sales should post
a record sales year. According to the National
Association of Automobile Manufacturers (NAAMSA),
September sales of motor vehicles increased by 22.7
percent (y/y), the second highest monthly increase on
record. New car sales increased 21.2 percent in
September, with 1,164 new passenger cars being sold
per day compared to August's daily average of 1,117
and 961 in September 2003. Compared to September
2003, year-to-date sales have been 20 percent higher.
Medium and heavy commercial vehicles also posted
strong year-to-date growth at 18.9 percent. Nico
Vermeulen, NAAMSA's director, expects that 2004 new
vehicle sales should reach an all-time record of
455,000 vehicles. Note Business Report, October 5;
Standard Bank Motor Alert, October 4 Endnote

TRADE CONDITIONS STILL UPBEAT
-----------------------------

3. Both the South African Trade Management Indices
and the South African Chamber of Commerce business
confidence index still indicate positive growth
expectations in the near future. The South African
Trade Management Indices, measuring both trade
activity and expectations, indicate that September's
activity and short-run expectations are roughly the
same as August's and still positive. The trade
activity index measures the monthly trading
conditions, while the trade expectations describes
expected activity in the next six months. Eight
components (sales volumes, new orders, order backlog,
supplier deliveries, inventories, selling prices,
purchasing prices and employment) make up both the
trade activity and expectations indices. September's
total trading activity index registered at the
threshold value of 50: above (below) which trading
conditions have improved (deteriorated). All
components but employment improved in September,
implying that no new jobs were created in September.
Since the beginning of this survey in 2000, the
employment sub-component has rarely exceeded 50,
confirming the endemic unemployment prevalent in
South Africa. The survey shows that inflation
(selling prices) remained neutral (at 51 compared to
49 in August); however input purchasing prices keep
showing substantial increases (59 compared to
August's 57). Over the next six months, the
September trade expectations index supports a
continued optimistic sales forecast at 63 (compared
to August's 64) with all but one components
registering above 50. Sales volumes and new orders
show the highest expectations of increasing over the
next six months, in line with increasing economic
growth later in 2004. The South African Chamber of
Business's (SACOB) business confidence index
increased 3.1 points in September to 130.9 with eight
of its 13 components improving in September. The
index reached its highest level in September, with
inflation and interest rates relatively low and the
rand more stable in September. Note Business Day,
Business Report, October 6; Standard Bank SATMI
October 5 Endnote

RESIDENTIAL PROPERTY PRICES STRONG BUT LEVELING
--------------------------------------------- --

4. According to data collected from the Deeds
Office, house prices may have slowed in Q2 2004, but
this data is often revised substantially and the
slowdown in housing prices will need confirmation by
other sources. National housing prices, both nominal
and real, are increasing at a record level of over 30
percent, as measured using a three-month moving
average. However, recent increases have leveled off.
Prices for housing financed by Standard Bank
(including mortgages with assessment values up to R1
million or $154,000) seem to show the same leveling-
off trend, with prices increasing 20 percent over the
past three months. The prices of existing houses
have increased substantially more than new homes.
The national affordability index, based on
installment to income ratio (calculated as mortgage
payments using the median national house price and
the prime rate, over per capita disposable income),
is still relatively low compared to the 1990s. Note
Business Report, October 6; Standard Bank Residential
Property Note, October 5 Endnote

INCREASED FUNDING TO FINANCE BEE FINANCE CHARTER
--------------------------------------------- ---

5. Banks, life insurers and pensions will commit
R122.5 billion (USD19 billion, using 6.5 rands per
dollar) over five years to fund black economic
empowerment (BEE) in SA. If accepted at the first
charter council meeting next week, finance companies
will invest 60 percent more money than the R75
billion earmarked when the charter was signed a year
ago. This will also be the largest single investment
in empowerment finance, more than the R100 billion
committed by mining companies and the R10 billion set
aside by government. This R122.5 billion is
allocated into five areas: (1) R50 billion for black
empowerment deals; (2) R42 billion to provide
financing for low-cost housing; (3) R25 billion to
finance infrastructure projects in rural areas; (4)
R4.1 billion for small black business; and (5) R1.4
billion for financing black agriculture. The charter
was launched in 2003, but announcements of financial
sector targets were delayed because of disagreements
between the Banking Council, representing South
Africa's banks, and the Association of Black
Securities and Investment Professionals. Companies
will be expected to provide a portion of the R122.5
billion according to market share of investable
assets. REFTEL PRETORIA 4503 Note Business Day,
October 6 Endnote

RESERVE BANK ISSUES FINANCIAL STABILITY REVIEW
--------------------------------------------- -

6. The South African Reserve Bank issued its
biannual Financial Stability Review, highlighting
inflation and financial risks facing South Africa,
one week before the Monetary Policy Committee meets
(October 14) to decide whether interest rates should
be changed. Increasing oil prices presented the
largest risk to inflation and global economic
recovery. A strong rand has cushioned South Africa
from much of the effects of higher oil prices,
although the rand has depreciated 1.1 percent in
September and domestic gasoline prices have risen 37
rand cents per liter since August. The review also
highlighted the importance of providing banking
services to the two-thirds of South Africans who do
not have banking accounts, but urged that the adopted
policies be well conceived. "Unsound policy
decisions or financial sector initiatives to broaden
access have the potential of posing a threat to the
integrity of the formal financial sector." Note
Business Report, Business Day, October 7 Endnote

SOUTH AFRICA DROPS IN GLOBAL INVESTMENT RANKINGS
--------------------------------------------- ---

7. The 2004 annual AT Kearney Foreign Policy
globalization index ranked South Africa 49th out of
62 countries as a destination for foreign investment,
a drop of 11 places and behind Botswana, Nigeria and
Uganda. The countries surveyed in 2002 account for
96 percent of the world's gross domestic product and
84 percent of the population. South Africa ranked
low in the personal contact category, which includes
cross-border communications, because of the high cost
of international telecommunications and the low
levels of remittance and personal transfers.
Internet usage is ahead other African countries, but
below most other developed countries. Tourism,
political engagement, and technological integration
were areas where South Africa ranked between 35 and
37 on the scale. Note This Day, October 7 Endnote

CABINET RECOMMENTS PUBLISHED ADMINISTERED PRICE INDEX
--------------------------------------------- --------

8. The cabinet recommended that Statistics SA
(StatsSA) monitor and publish its administered price
index on a monthly basis. StatsSA estimates that
increases in prices regulated by the government
account for 16 percent of overall consumer prices and
18 percent of consumer prices when mortgage payments
are omitted. Prices that are set by the government
include water, electricity, paraffin, gasoline,
public hospitals charges, freight, telephone calls
and postage. StatsSA has proposed two approaches to
compiling the index, one limited to prices actually
set by government and the other including VAT and TV
license fees. For the latest monthly price release,
StatsSA included administered prices (regulated by
both government and state-owned enterprises) and
found that they rose by more than the targeted
inflation range of 3 to 6 percent. During August,
StatsSA estimated that administered prices using CPIX
(excluding mortgages) increased by 6.3 percent while
administered prices in overall consumer prices
increased 6.8 percent. The cabinet agreed that price
setting should take into account inflation targets,
as well as efficiency, equity objectives and long-run
demand and supply projections. Note Business Day,
This Day, October 7 Endnote

JULY RETAIL SALES INCREASE BY 15.5 PERCENT
------------------------------------------

9. On an annual basis, retail sales grew by 15.5
percent, showing the underlying strength in consumer
demand that is driving South African economic growth.
Adjusted for inflation, retail sales increased by
11.7 percent in July. Consumers continued to take on
new debt as the private sector credit extension
increased by 6 percent in July, in addition to an
11.3 percent increase in money supply. So far, the
strong rand has shielded the economy from
inflationary pressures, allowing the Reserve Bank to
cut interest rates in August. Whether the Reserve
Bank will cut interest rates at next week's Monetary
Policy Committee meeting will depend on its view of
future oil prices and wage settlements. Note
Standard Bank, Taking Stock, October 7; Business
Report, October 8 Endnote

FRAZER

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